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orlandosentinel.com
Set big money aside: You might need it
If the financial meltdown-turned-recession hasn't made you start saving more money for a rainy day, you should have your head -- and your bank account -- examined.
An emergency-cash account, which should be enough for three to six months of living expenses, is a keystone of getting your financial house in order. And it is even more urgent now with millions more jobs in jeopardy amid the down economy.
"People have to save more money. That's the bottom line," said Philip van Doorn, an analyst for TheStreet .com Ratings. "Do you really need fancy cable services, the latest Xbox game, Guitar Hero, dining out four nights a week? Question everything, cut back and put it in savings. If it doesn't hurt, you're not saving enough."
But that's far easier said than done for many people in an era of rising housing costs, insurance premiums, health-care expenses and other living costs. How many people can really afford to sock away a lot of money?
Not Marcia Bexley, an independent marketing consultant in Orlando who works contract to contract and client to client.
"Emergency cash? Well, I've always tried to keep a cushion, and I'm pretty careful with my money," she said. "But I can't say I have anywhere near three to six months' worth. I might have one month in reserve."
Overall, the nation's personal-savings rate has hit the skids this decade. People saved an average of 1.5 percent of their income -- not including retirement accounts -- in 2008, compared with more than 4 percent 10 years ago and 7 percent 20 years ago, according to the Department of Commerce.
Still, a 2007 survey by Bankrate.com showed that 46 percent of consumers claimed to have as much as six months of emergency savings -- a figure that raised some eyebrows.
"I think those numbers are very high," said Greg McBride, senior financial analyst for Bankrate.com. "I'm skeptical that many people actually have that much socked away for emergencies."
Some may have considered 401(k) accounts or home-equity lines as emergency money. But the market crash and housing meltdown wiped out a massive chunk of those resources.
Besides, experts have never encouraged people to borrow from their retirement nest egg -- a risky gambit that often can backfire. It is even more risky with the huge losses most 401(k) accounts took in the market crash.
And home equity -- well, there's still not a lot of that available. Real-estate values continue to fall, many credit scores are suffering and banks are tightening their grip on the till.
Make cash hard to access
So the onus falls back on individuals to take initiative.
"Keep in mind, you should first be meeting your basic expenses before you begin contributing to an emergency fund," said Denise Kovach, a financial planner with Certified Financial Group in Maitland. "But getting started can be as simple as depositing $100 in an interest-bearing account, then following up with $50 or more per month thereafter."
Don't tie emergency money to easy access such as a debit card, she said.
It's also a good idea to set up an automatic deposit from each paycheck.
"A good day to have the draft occur is the day after you get paid," said Andrew Orr, president of OrrGroup Financial in Orlando. "So the draft to savings is first in line."
If you make the effort to build a rainy-day fund, you might never end up in Anne-Marie Bowen's office.
The Orlando bankruptcy lawyer said most of her clients never had emergency reserves.
"It's definitely a smart idea to have it, because it might get them through a period of unemployment," Bowen said. "But by the time I see these clients, they're so overwhelmed with debt, they've liquidated any savings and retirement money they ever had."
Richard Burnett can be reached at 407-420-5256 or rburnett@orlandosentinel.com.
Saving for emergencies Track what you spend: Tally your basic expenses versus discretionary "wants." Identify areas to cut back and flag as potential savings.
Lock it in: Calculate at least three months of expenses and make that your emergency-fund goal. Determine what you can afford to save from each paycheck and set up an automatic bank draft to your emergency savings account.
Do some homework: Check out Internet-based money-tracking services such as mint.com, geezeo.com, Quicken Online and Mvelopes.com. Some are free; others offer a 30-day free trial, then charge for a subscription.
The final word: "Pay yourself first by a direct deposit. Increase that contribution with every raise, tax refund, windfall or debt that gets paid off. Most importantly, cut your expenses. That's where the really tough decisions have to be made," says Greg McBride of Bankrate.com.
-- SOURCES: Bankrate.com, OrrGroup Financial, Sentinel |
