Series: Managing Finances in Tough Times
Contact: J. Michael Collins, 608-262-0369, firstname.lastname@example.org
An emergency fund, or savings account, can be key to keeping your financial situation stable in difficult times says a University of Wisconsin-Extension financial expert.
“Having a rainy day fund or emergency savings account is the critical difference between people who hold their own in a recession and those who slide backwards financially,” says J. Michael Collins, family and consumer economics specialist with the UW-Extension’s Family Living Programs. “Unexpected expenses can create new debt and threaten your financial security.”
Emergency savings consist of money set aside that you can access quickly if needed without fear of losing principle or interest, or of paying large penalties. Set a specific goal for yourself, defining the amount of money you would like to have in your emergency savings. A general guideline is to save four to six months of income.
Saving money means not spending, and not spending can be a challenge. Some people see spending money as a sign of success and a way to create good feelings. It is also difficult to see the immediate results of saving, while buying something offers immediate gratification.
“The first step to saving money is to write down what you are spending and then set specific savings goals for every month,” says Collins. “Make savings automatic and limit your ability to not save.” Research by The Consumer Federation of America suggests people are two times more likely to be successful savers if they have a specific goal.
For consumers with debt, the question is: Should I save my money or pay off my debt? The answer depends on the debt. High-cost consumer loans, credit cards and revolving debt with high interest rates are usually the best bet to pay off first. Then build up a savings account to decrease the need for to take on more debt when unexpected financial expenses occur. Some debt, especially low-cost mortgage or student loans, is best to maintain. Keep in mind that running up more debt can hurt your future credit rating and increase your interest costs.
Other tips for saving include:
–Pay yourself first. Think of your savings as another one of your monthly expenses, just like any other bill.
–Use automatic deposit. Have money taken right out of your paycheck and automatically put into savings.
–Make it hard to spend. Open a no-fee savings account in a different location than your checking account. This makes it harder to transfer balances out of savings.
–Save any unexpected income, such as your tax rebate, gifts, awards, or returned escrow or other accounts.
Emergency savings buy you time and security if your income shifts unexpectedly. Emergency savings can be stored in FDIC-insured saving accounts or certificates of deposit (CDs), or savings bonds. CDs and bonds pay higher interest rates but also may incur modest penalties if you need the money in a hurry. These funds can help pay for unexpected household or auto repairs, medical deductibles, or other unplanned expenses.
When your rainy-day fund savings is established, continue to build your financial security with additional investment options, such as taxable mutual funds, educational savings accounts or individual retirement accounts. Taxable accounts can fund mid-term goals, such as home repairs. Look into an employer-based retirement plan such as a 401(k) or 403(b) plan at work, or setting up an individual IRA or Roth IRA if your employer lacks a plan.
Remember that saving relieves personal stress and can improve relationships. Studies suggest that disagreement over finances is a major reason for marital conflict and divorce. Financial stress is not necessarily due to a lack of income; rather, it’s the result of unsustainable spending, saving, and investing patterns.
Your county UW-Extension office is a good source of financial management education programs and services. For more information about financial management, contact your county UW-Extension office.