After decades of getting by on borrowed dimes, Americans
suddenly have gotten serious about saving. The about-face has
been abrupt: The national savings rate has swung from an
anemic 0.57% in 2007 to a downright robust 6.9% in May,
according to the Bureau of Economic Analysis.
Economists are quick to point out that our newfound
frugality has a dark side, given that consumer spending makes
up a whopping 70% of gross domestic product. And so we begin
to see the "paradox of thrift" -- the more we save, the
longer it'll take the nation to recover.
Bummer, eh? Yes, it is. But what it's
notis an excuse to take it upon yourself to grease
the wheels of capitalism and splurge. If you've begun
following the herd of money hoarders, keep it up. But of
course, that leads us to the inflation-adjusted
million-dollar question ...
How much is enough?
You've probably heard the rule of thumb about keeping
enough money to cover three months of living expenses in your
account at all times. That's sound soundbite advice, but in
practice you need to apply a little more thought to
personalize that dollar figure.
To come up with your ideal savings number, ask
yourself:
Do you have dependents? How many warm
bodies rely on your ability to earn a regular paycheck? The
fewer people who depend on your income, the less you can
safely get by with.
How safe is your job? Do you work in a
niche industry? Is your company's business in high demand
or on the demise? Do you have specialized skills that
transcend industries, or are you so specialized that
finding the right fit will take a while? Evaluate your
marketability, and if you find it lacking, beef up by
taking classes or even paying for training on your
own.
Can you make money on your own? If company
layoffs occur, could you work on contract for your former
employer? Could you freelance? Are you willing to sling
burgers or take in a renter to get by for a while? Your
flexibility -- e.g., being willing and able to move to a
new locale for work -- should be factored in to your
savings equation.
Do you have access to credit? If you've got
it, keep it -- and keep it in good shape, too. Covering
emergency expenses with plastic (or a home equity loan) is
not an ideal solution. Still, this is a lifeline you should
preserve, should worse come to worst.
By answering these questions, you should have a much
better idea of how much in emergency savings is enough for
you.
And remember: When we talk about an emergency fund, we're
talking
actualemergencies, not "emergency vacations" or
"emergency wardrobe augmentation."
Related links:
Financial Uh-Oh? No Problem
Sweat the Big Stuff and Save $26,000
Where to Park Your Cash
This article was originally published as
How Much Emergency Savings Is Enough?on
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