There's nothing sexy about putting money in a savings account.
But especially given today's tough job market and the uncertain
health of the global economy, it's more important than ever to
have financial resources behind you in case the worst
Unfortunately, having emergency funds available is a luxury
that many American households don't have right now. According to
a report from the University of Michigan, almost a quarter of all
families haven't saved any money at all, while a fifth have more
debt from sources including student loans, medical bills, and
credit cards than they have in savings.
It's not too hard to understand why so many people don't have
the financial safety net they need. Throughout the housing boom,
freely available home equity loans and lines of credit made it
easy to tap real estate gains to finance all sorts of spending.
Huge mortgage financers
) as well as smaller banks around the country had every incentive
to close cash-out refinanced mortgages to pocket servicing fees.
At the same time, the better job market kept wages up and gave
most people a reasonable standard of living.
Now, though, extended periods of unemployment have forced many
people not just to use whatever emergency funds they had but also
to tap longer-term investments like retirement accounts. Millions
of homeowners are underwater on their mortgages, and even after a
$25 billion settlement related to mortgages serviced by big banks
Bank of America
) as well as Citi and Chase, borrowers are finding it hard to
refinance even if they're eligible for government help or have
equity in their homes. Moreover, even with relatively low
interest rates on many kinds of debt, the sheer amount of student
loans and other outstanding balances can make it very difficult
to get back on your feet even once you
find a job.
The news from the report isn't all bad. Nearly half of the
families surveyed say they don't have any unsecured debt at all.
Moreover, almost 15% have at least $50,000 set aside in readily
But even that statistic could mean problems down the road. For
some households, big cash balances represent scared investors
who've moved their investments out of risky assets like stocks
and put their money in the bank. With most banks paying less than
1% on savings accounts -- in many case, far less -- savers aren't
even getting enough income to make up for inflation and taxes,
let alone give them any true return on their money.
The standard rule of thumb says that setting aside enough
money to get you through three to six months should handle the
worst of emergencies. That figure is based on an assumption,
though: that you'll be able to get a new job and restore most of
your previous income within that time frame.
For some workers, that's a realistic assumption even in a bad
economy. High-demand jobs like nursing have constant turnover and
extensive job openings, making it easy to switch. But for many
workers, it can be very difficult to find new employment after a
layoff, suggesting that having more savings set aside isn't a bad
Emergency funds don't
have to be stuck in cash. Many people find that having readily
available credit sources to tap works just as well. The trap,
though, is that if you use debt sources as part of an emergency
emergency can leave you stuck with that debt longer than you
might expect. It's therefore very important to use the
lowest-cost debt you can find -- avoiding high-rate credit cards
in favor of lower rates on home equity credit lines, for
Given how exciting investing is, it's hard to wait until you
have an emergency fund set up. But if the worst
happen, then you'll be glad you did.
Once you have your emergency fund set up,
you'll want to turn your attention to making smart investments.
The Motley Fool's
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is never convinced he's prepared for everything. He doesn't own
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