On this week's Money Monday on WNWO Today, we discussed emergency reserve funds. How much should you have in cash as a reserve in the event there is a loss of income? Some of the traditional estimates of how much you should have in reserve has changed with what has happened during the most recent recession. And with interest rates so low, how can you justify having that much cash not working for you?
As David Seeger explains, life can and does throw unexpected circumstances at you and you need to be prepared financially. A cash emergency fund is a necessity. In the words of Gail Cunningham of the National Foundation for Credit Counseling, "You cannot afford not to save."
Most families do not have sufficient funds in their savings to cover such an emergency. It is estimated that 36% of families have less that $1000 in savings, 46% have less than $5000, and 1 in 4 families have more credit card debt than they do cash in savings.
The standard rule of thumb has been is that you need anywhere from 3 to 6 months of income set aside should you loose your job or become disabled. If the family with children has a single income, then the target should be closer to 6 months. And if the family has two incomes, it may be OK to target closer to the 3 month target.
Now, with the experience of the past recession, financial experts are looking at the above standards differently and feel the way of looking at the adequacy of an emergency fund needs to change given the fact that 5.5 million Americans have been unemployed for 27 weeks or longer. Now, the target has shifted to 9 to 12 months of income in an emergency fund reserve. Susie Orman, noted financial advisor, agrees and now is saying at least 8 months of income reserves should be the target. So, there is becoming general consensus that these target ranges need to be revised upward, given the experience of the last recession.
Further, another way of looking at how much should be in the emergency fund is not to look at lost income as a target, but rather what are your expenses and shoot for that target? That should be lower than the income target and may be easier to attain and more realistic. Most people have a tendency to underestimate what their actual expenses are. They think of maybe a mortgage and car payment, but really, there are things like food, utilities, gas, insurance, child care, etc, that must be taken into consideration.
So, how do you start? Seeger suggests that you start buy saving $100 per month or 10% of income, whichever is larger, in a fund that you designate as your cash emergency fund. Pay down your credit card debt, which would help you handle a loss of revenue should that be the case. And, be disciplined and do not touch the fund unless a true emergency exists.
Visit this website to determine what dollar amount is needed for your emergency fund:http://www.practicalmoneyskills.com/calculators/calculate/emergencyFund.php?calcCategory=budget
For more information, contact David Seeger at www.glcu.com.