One CafeMom wants to know how to figure out how much money a family should have in an emergency savings fund.
Here's what Jean had to say on this financial topic.
Question: How do you figure out the amount of money to have as your emergency fund, and how many month's worth should one save? I know it is not as simple as saving equal to the earnings for those months, or even for the fixed expenditures.
Is there a formula or can you offer some guidelines for saving for emergencies?
Answer: Emergency funds are and always have been a necessity. When you don’t have an emergency savings account and something goes wrong -- the car breaks down, you lose your job -- you typically fall back on a credit card. Pay the card back, with interest, and you'll be out of pocket much more than the emergency would likely have cost you in the first place. Add to that the fact that credit lines, in recent history, have been reduced. Without an emergency fund, you're without a lifeline.
But how much is enough? Two income families should have three to six months worth of living expenses, easily accessible in a savings or money market account. Single income families should have six to nine months. Why the gap? Because if a dual income family loses an income, they'll have another to fall back on. Singles only have themselves. But understand: when I say living expenses, I’m talking about the money that you need to spend each month. This is your rent, groceries, the car payment for the car that gets you back and forth to work and the gas you need to make it run. It is not nights on the town, theater tickets, or new clothes.
Many people panic at the big number this three to six to nine months of funds represents. Don't. The key is to break it down into manageable bite-sized chunks. New research from Old Dominion University shows that setting manageable goals is the answer to saving successfully. Once you’ve put aside $25 in weeks one and two, up your target to $50 the two weeks after that. If that number is equally palatable, raise the bar again. When you see your fund start to grow, you’ll get the good feelings that come along with attaining financial stability — and that will inspire you to save more. It’s a little bit like going on a diet. You lose a pound or two and all of a sudden there’s an instant confidence boost that propels you to boost the needle to five, ten, and beyond.
Finally, you'll want a few saving strategies: Stash your cash in an account that’s not linked to your debit card to eliminate the temptation to spend. Pay your bills as they come in, rather than all at once. Studies have shown that people who do it this way have more in savings, less in debt and -- bonus! — are happier. And track your spending to see where your money is actually going today. Having that information gives you the ability to make conscious choices that will supercharge your way to your savings goals.
Got a money question for Jean Chatzky? Leave your question in the comments below, and Jean will be back soon with an answer for one lucky reader.