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Ahorros Ayudan Asegurar su Futuro

Savings Help Secure Your Future

by Allison Kane

No one would dispute the wisdom of saving to tide you over an emergency. But this practice isn't merely another "should" in life, like getting an annual physical exam or flossing daily, it's a "would" in life.

How would you get by financially if you lost your job tomorrow, or faced a medical emergency that left you owing thousands of dollars? You could ask your family to rescue you. You could live off plastic, paying high interest rates on a balance you may have to carry for months, even years. Or you could rely on your financial reserves until you're back on your feet. Most people prefer the latter scenario, but few take steps to make it happen.

Standard advice is to accumulate emergency savings equal to three to six months of living expenses. That means you must know what your monthly living expenses are. Sit down and add up what you need for housing, food, car payments, utilities, insurance, and other essentials.

Where should you save your money?

While advisers agree it's critical to save for emergencies, opinions vary on where to build those funds. Each option has trade-offs.

A regular savings account provides liquidity-meaning ready access to your money-and your funds are insured. However they are also very accessible; they're easy to raid. "For most people," she says, "when they get a little short, the first place they start tapping out is their savings. It's too accessible."

A better choice is to stash emergency funds in certificates, even though these are less liquid. Short-term certificates (say, three months or less) won't tie up your money for long and may earn a little higher interest than regular savings or money market accounts.

Another approach to building emergency reserves comes from Paul Sutherland, a certified financial planner in Traverse City, Mich., and author of "Zenvesting: The Art of Abundance & Managing Money."  Too many people, he contends, believe they have to build a liquid savings account before they can start funding their 401(k) and IRAs. But they repeatedly deplete that savings account for non-emergencies-new furniture, a new car, and so on.

 "That account never grows," Sutherland says, "so they never put money in their IRA and 401(k) ... They end up at 50 never having saved anything."

Thus, don't get hung up on a separate emergency fund, Sutherland advises. Instead, focus on building your net worth by making maximum contributions to a 401(k) and IRAs and building home equity. If an emergency strikes, borrow from your 401(k), cash in an IRA, or tap your home equity.

Visit your local credit union to decide what strategy would be best for you.

Published 8-22-2011

 

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