Personal finance experts crow on and on about how crucial it is to save up a reserve fund to help you survive a job loss or financial disaster. Deciding exactly how much to set aside, however, is a matter of philosophies and resources.
If you’re struggling to make ends meet, it’s understandable to half-joke that your credit cards act as your emergency fund. But if you can save and choose not to, content that credit will rescue you from any trouble that arises, you’re only tempting fate.
Money mavens always harp on you to stash some money away to stave off disasters such as layoffs or having to blow $1,000 on a pair of tickets to see the Giants play in the World Series for the first time in forever.
In Suze Orman‘s most recent book, “2009 Action Plan,” she urges people with credit card debt to pay off their balances as quickly as possible using the high interest first method. “The fact that you pay just the minimum is a huge warning signal to your credit card company,” she writes, “that you may already be on shaky ground.” Now she’s changed her mind and says you should just pay the monthly minimum and put the rest of your money toward building an emergency cash stash. Based on the way credit card companies have been behaving, we think she has a point.
Whatever happened to developing an emergency fund to cover rainy day expenses? Apparently many Americans haven’t heard of this practice (or at least aren’t applying it) and now with the economy in the tanker, their financial lives are hanging by a thread. US News reports that half of Americans are two paychecks away from hardship.
You’re fired! Now what? It’s the nightmare scenario, and you can prepare for it by conducting a financial drill. Take a moment and pretend you have no income. Ask how you would pay pay for rent and food, and what lifestyle changes you could make on two week’s notice. To guide your planning, the New York Times has a few unorthodox and downright scary suggestions that are worth considering in a worst case scenario.
Besides losing your job, another argument for building an emergency fund, an on-hand reserve of several months pay, is “budget breakdown.”