Mistake 1: Not creating an emergency fund
I know you’ve read in the pages of this magazine about the importance of an emergency fund to handle unexpected expenses such as car repairs or a furnace breakdown. But this is one smart move that can’t be overemphasized. Without this safety net, you’ll likely wind up paying for emergencies with a high-interest credit card. In fact, 66% of those with credit card debt report having difficulty saving, according to a survey by credit rating agency Experian and America Saves, a national campaign managed by the nonprofit Consumer Federation of America. Setting clear financial goals is the first step toward saving for a rainy day, says Ken McDonnell, the director of the American Savings Education Council, which works to make saving a priority for Americans. Here’s how to increase your odds of success:
Strive to save an amount equal to six or more months’ of expenses. While it may take you a couple of years to get there, six months’ worth of living expenses can provide a cushion for unplanned events such as major home repairs or short-term unemployment, McDonnell says. Have a portion of your paycheck—10% or more—automatically transferred to your rainy day fund.
Have a specific amount in mind. Calculate to the penny six months’ of living expenses. “If you don’t know how much you need to save, how are you saving?” says McDonnell. Once you’ve achieved that goal, focus on a different financial priority, such as investing.
Put convenience over return. If you don’t have an emergency fund, you shouldn’t spend too much time seeking high returns. Even though the average money market account yielded only 0.55% in October, according to Bankrate.com, “the purpose of emergency savings is to get cash now if an emergency arises,” says McDonnell. “It’s not to get an investment return.”
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