By KARA McGUIRE
Minneapolis-St. Paul Star Tribune
13-JUL-06
Emergency savings. Rainy-day fund. Cash cushion. Whatever you want to call it, having money set aside in case you need it is nice. And elusive.
The rule commonly marched out by financial experts is that the account must equal three to six months of living expenses.
But what good is a rule if everyone ignores it? "People just tune you out," said Cassaundra Adler, a financial counselor at LSS Financial Services. They figure that if they can't come close to hitting that three- to six-month target, they might as well not try.
It's no wonder that a new telephone poll of 1,000 adults commissioned by Bankrate (www.bankrate.com) found that fewer than two in five Americans have an emergency savings account stocked with three months' savings.
Just one in every five low-income Americans has a "just-in-case" account. The same goes for people 18 to 24 years old.
But the news isn't nearly as gloomy as it sounds.
More than 70 percent of people have some money set aside in CDs, money market accounts or plain-vanilla savings accounts _ great places to tap because they're easy to access and have few penalties or none.
But the Bankrate poll doesn't define such accounts as emergency savings _ not unless they contain at least three months' income.
What good is this "all or nothing" attitude about emergency funds? Isn't any amount of money set aside for disaster better than none at all?
Here are a few cash stash tactics:
Instead of fixating on a total, pick a weekly amount. Go for $20 a week _ the price of a CD and a latte, a movie date or a couple of large pizzas. Start this week and you'll have close to $600 saved by year's end. If $20 is too much, try $10.
I don't know about you, but there's no way I'll peel myself off a lawn chair in July to run to the bank. So I've automated my emergency savings.
Contact your human resources or payroll department for help filling out forms so the money's taken from your paycheck and deposited into savings before you see it. Or set it up so your emergency account siphons money off the top of your bank account weekly. Both methods mean the cash never enters _ or leaves _ your wallet.
When you're trying to make a small sum go a long way, you must make smart choices about where to save.
The Bankrate poll found that a third of emergency savings accounts earn less than 3 percent _ the historical rate of inflation.
That's just plain stupid. The hope is emergency savings will sit untouched for a very long time. But if the money isn't earning at or above the rate of inflation, then your purchasing power is shrinking as the overall cost of goods and services rise.
Fortunately, there are plenty of online savings accounts earning between 4 and 5.5 percent, thanks to bank competition and rising interest rates. Banks of all sizes are at work enticing customers with such deals, many without minimums or fees.
It's foolish and unnecessary these days to settle for lousy interest rates. If you're going to the trouble of starting an emergency fund, you might as well get the biggest bang for your buck. If your existing fund is earning just 1 or 2 percent interest, open a high-yield savings account yesterday.
And let's hope you won't need to land on your cash cushion anytime soon.
(E-mail Kara McGuire at kara@startribune.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
