Ratchet up your rainy day fund

ATLANTA (8/11/08)--High gas and food prices are yet another reason to beef up your emergency fund. Without one, you are financially vulnerable if you're handed a pink slip, major repair bill, or medical crisis (CNNMoney.com Aug. 7).

More than one-third of Americans--roughly 76 million adults--don't have any non-retirement savings at all, according to the National Foundation for Credit Counseling's 2008 Financial Literacy Survey results, released in April. And of those who do have a cash fund, 57% don't have enough in it.

Having sufficient cash on hand translates to having a special form of insurance policy against financial calamity. Take steps to protect yourself and gain peace of mind:

Track spending. Ideally, write down every expense for three months, or one month at a minimum. This gives you a fairly good estimate of average monthly expenditures for housing, utilities, gasoline, groceries, and dining out. For periodic fixed expenses such as insurance, vehicle registration, or property taxes (if not included in your mortgage payment), calculate the monthly cost and include that in your calculations.

Identify spending leaks. After tracking where your money goes, identify expenditures you could cut out--or cut back--to boost emergency savings. Some examples may include daily lattes, online shopping, or dining out. Freeing up found money can boost your savings in the short run.

Calculate desired reserve. The general rule of thumb--three to six months of living expenses--may not be right for you. Consider how stable your income is, whether you have another salary in the household to fall back on, whether you must rely heavily on bonuses or commissions, and the age of your vehicle and major appliances. If you hear rumblings of a merger or downsizing, cut back sooner rather than later to cushion a possible blow to your income.

Keep it safe--and liquid. Remember that beating inflation isn't the main objective here, so don't expect a high yield on liquid savings. Your goal is to have ready access to cash so you don't have to lean on credit to get through a financial hardship. Professionals at the credit union can help you choose an account that's right for you.

Bite the bullet to beef it up. To build a reserve quickly, cut back--or temporarily halt--your retirement savings just down to the level of getting your employer's full 401(k) match. (Remember that this will temporarily raise your income taxes.) Stop making extra payments on low-interest loans for a while, and redirect spending leaks to your emergency fund.

Resist temptation to raid it. Use the funds only for unbudgeted necessary expenses, and keep feeding the fund regularly.

For more information, listen to "Struggling Americans Use Plastic to Stay Afloat" in Home & Family Resource Center.

courtesy of cuna.org