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II. How Much Should You Have in Emergency Savings? The Savings Safety Net. Regardless of your financial circumstances, a savings account is fundamentally important to your financial health. Living life without a savings account is like walking a tightrope 20 stories high with no safety net. You may make it across unscathed, but if you don’t, it’s likely to be a disaster. Losing a job is just one reason to build a safety net. There are plenty of other potential financial crises: illness, home repairs, car repairs, vet bills, legal troubles, and more. The first and foremost purpose of a savings account is a fund for financial emergencies . Liquidity. The point of an emergency savings account is that it’s liquid . We’re not talking about water. In the context of money management, liquidity means that it’s easy to convert the thing to cash . Imagine, for example, that you have a financial emergency. You have no cash, but you do have a pretty sweet and valuable collection of vintage Yu-Gi-Oh! action figures. That’s great, but it could take days, even weeks to find a buyer for your collection. And who knows how much you’d actually get? Most financial emergencies are time-sensitive, so liquidity is essential for dealing with immediate cash needs. Savings accounts are, of course, highly liquid and easy to access. Emergency savings should never be placed in accounts that can’t be accessed without incurring taxes or penalties. For example, a retirement account or CD should never be used to hold emergency funds. Having a stash of cash in an emergency savings account avoids having to turn to credit cards or pay day loans to cover a financial emergency. How much is enough? Experts recommend three to six months of living expenses for the average person. Emergency living expenses do not include luxuries like a weekend at the spa. Emergency savings are for costs associated with needs only : housing, utilities, transportation, food, health care, interest payments on debt, and a small amount for personal expenses . An emergency fund should be dollar-exact, so the account has a specific balance at all times . Each time the account is used, it should be replenished to the correct balance. Here are a few things to consider when determining how to fund an emergency savings account: Job security. Freelancers and workers who rely on a commission, or those with sketchy job security should sock away more than three to six months of living expenses. PRODUCT PREVIEW Cash Cramp! In 1861, when the U.S. first issued paper currency, each note had to be signed by hand by representatives of the Treasury. Source: Savewealth.com Fin Lit Trivia Fin Lit Trivia Fin Lit
Dependents. It’s hard to imagine now, but one day you will probably have a couple of little yous. Children can be cute, but they’re also expensive. The more people you’re fending for, the greater the probability of a financial emergency, so the more you’ll need to sock away. Include in your emergency reserves kid-related expenses such as child care and medical and dental costs not covered by insurance. Also keep in mind, that many of your generation may have to provide financial support to a parent. As your life changes and financial responsibilities increase, reassess and increase your emergency fund.
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The Cost of Kids
Little darlings are expensive! The average cost of raising a child up to age 18 for a middle- income family in the U.S. is approximately $245,340 not including college tuition or inflation. Source: U.S. Dept. of Agriculture
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 137
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