Friday, August 3, 2007

Why do you need savings?

I've recently had a lot of reminders of why it's good to have a savings account (cat with cancer, child with many doctor appointments, car repairs, prescription bills, gift giving, etc). Interestingly enough, I also ran into a bunch of articles about savings. I'm going to post some excerpts from those articles here, to remind everyone what things you might run into that could cause you to need extra money.

Keep in mind, as well, that "I'll just use a credit card" isn't a replacement for savings. If you charge it to a credit card and pay interest, you'll just end up paying more in the end, not to mention having it hanging over your head for a long time. Here is a great calculator that illustrates my point.

How your savings can save you (original article):

1. Your car breaks down
It always happens when you least expect it. Your car requires routine maintenance, and those costs are bad enough. But even if you give it TLC, you can count on occasional mechanical disruptions. Plan for it.

2. You're terminated
Losing a job is painful on many levels. Unless you're a VIP with a big severance package, you'll need reserve savings. If you tap your 401(k) to cover expenses or pay debt, you'll pay taxes as well as penalties and jeopardize your retirement plans. Create your own severance package by funding a savings account.

3. You need shelter
Unless you plan to erect a cardboard home under a bridge, you need a roof over your head. If you want to rent an apartment (either your first place or a nicer one), you'll have to come up with first and last month's rent plus security deposit -- that's several thousand dollars. Get it together with an emergency fund.

4. You face foreclosure
Many subprime borrowers as well as those with exotic mortgages face big problems today, particularly if they put no money down or wrapped closing costs into the loan amount. Some homeowners with adjustable rate mortgages are sitting ducks for big payment increases. An adequate savings account could have funded a modest down payment, upfront closing costs and higher payments for a period of time until the home is refinanced or sold.

5. Insurance bills are killing you
Insurance is supposed to cover big risks that would otherwise mean financial ruin. But you don't want to overprotect yourself from nickel-and-dime calamities. You can control premium costs by opting for higher deductibles. Or you can choose low deductibles and enrich the insurance company by paying higher premiums on an ongoing basis. Pay yourself instead by using an emergency fund to save for deductibles in the event of a serious disaster.

6. Credit cards go out of control
Living paycheck to paycheck means robbing Peter to pay Paul. This can lead to using one credit card to pay another, paying bills late and juggling obligations in an effort to get caught up. Late payments trigger fees, higher interest rates and drag down your credit rating. Pay those cards off and enjoy financial freedom.

7. You miss opportunities
Your best friend from college asks you to be in his wedding. An emergency savings account could absorb the expenses of appropriate wedding attire and airfare if necessary. That's better than getting deeper in debt or bypassing the opportunity altogether.

8. Stress levels reach new highs
It may be intangible, but the worry and stress of how to pay the bills every month to meet unplanned expenses or stay current under less than ideal circumstances is taxing. And stress can cause a host of physical ailments. An emergency saving account brings peace of mind and fewer visits to the doctor.

Here is a great article about ways to start up an emergency fund and "find" more money to put into it.

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