Saving for a Rainy Day
The economic downturn has made the need to save for a rainy day more important then ever. One thing that remains constant in turbulent economic times is uncertainty of what tomorrow may bring financially.
Although it is difficult to set money aside for savings, it can be a life saver in the event of a job loss or layoff in the future. According to financial experts, you should have 3 to 6 months worth of living expenses to fall back on in savings so if you are faced with a job loss in the future, you’ll be able to survive.
Your emergency funds should be tapped into for only true emergencies, not for day to day wants. Where you keep your funds should be safe, readily available and with a decent interest rate. Traditional savings accounts are the most commonly used for this purpose. C.D.s can be used for emergency funds if they are set up in a “ladder” with staggering maturity rates at different times.
This way funds are available to you as the varying maturity rates come due. If you draw out of these funds before they mature, you’ll be charged a penalty. C.D.s are considered safe as the FDIC insures them up to $250,000 per person per institution. Money market funds are another way to store your emergency funds. They remain a safe place to store cash for the future. Interest rates pay, on average, 2 to 2.21 percent.
Establishing a home equity line of credit can help in the event of future personal calamity. The idea behind this method is to leave other investments that have a good yield untapped. However, with falling values of real estate, many home equity lines of credit have been cut.
Given a choice, if disaster strikes, first tap into your home equity line of credit rather than cashing in C.D.s prematurely and paying penalties. Try to keep something in reserve in your savings accounts and money markets for further future emergencies. When looking for ways to save for the future, look for safe growth even if it is slower. The possibly higher yields hold with them higher risk for potential loss. The purpose of an emergency fund is a guaranteed backup plan.
