One of the more significant trends of the past two years has been the struggle of American households to save money, according to Informa Research Services. With a steady decline of disposable income due to rising mortgage costs and inability to save, hard-pressed households are finding it difficult to meet day-to-day living expenses. Most are turning to competitive Home Equity Lines of Credit (HELOC) or low credit card rates to pay off their existing debts.
Nearly half of the U.S. workforce with children under the age of eighteen manages their monthly bills by living paycheck-to-paycheck. This has turned the payday loan industry into a thriving $4.2 billion annual business. Based on a survey conducted last year by Harris Interactive, nearly 45% of adult households did not have enough in liquid savings to cover at least three months of living expenses in case of an emergency.
So you won't be caught off-guard, here are six tips you can follow to set-up your "rainy-day" emergency fund:
- Organize your expenses - Before you can determine how much to save, you need to assess your current spending habits. Start by categorizing your monthly living expenses (e.g., mortgage, utilities, credit cards, auto loan, etc.). Next add-in your periodic costs (e.g., property taxes, homeowner or renter's insurance, annual renewal fees, etc.). Review where your spending is going and see if cuts can be made. Use Credit Karma to track your expenses all in one place. Or check to see if your bank offers a Bill Pay program to help you better manage your scheduled payments and spending, automatically.
- Pay-off your existing credit cards - Paying off your credit cards should be your top priority before starting any savings program. The money you can save in interest payments alone far outweighs the return of any savings investment. Pay-down your highest yielding interest credit cards first. Then consolidate your more expensive loans into one card which offers a low- to zero-interest balance transfer.
- Develop a savings goal - Determine how much you need to save each month to cover at least three to six months in living expenses. If your goal is to save 10% of your gross savings each month, and you only have 8% left over after expenses, then look at creative ways you can cut costs to make up the difference.
- Open a liquid savings account - Keep your emergency fund separate from your regular savings or checking account. Comparison shop for a liquid savings account that offers you a competitive rate of return, like a high-yield interest savings or money market account. Some can be opened with a low minimum balance, offer additional deposits in any increment, have check writing privileges and debit card access and more.
- Set-up automatic deposits - While funds can be added to an account at any time, consider setting up some form of automatic or systematic deposit. You determine the amount and frequency of the funds transferred, either through payroll deductions or direct transfer from another account
- Store away additional cash -Make it a habit to deposit any unforeseen windfalls into your emergency fund. For instance, learn to put away that tax refund, company bonus or lottery winnings. Should you need to access your emergency funds, set up a repayment schedule by budgeting for the amount you've withdrawn.
Your success in building your emergency fund will come from your discipline in developing good savings habits without tapping into your fund for non-emergencies. Good luck!
Source: Informa Research Services
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