Are you saving enough? Most people arenít

May 05, 2000
The economy is booming, unemployment is low, and times are good. So why arenít more people saving? The numbers are startling. Half of all U.S. households have less than $1,000 in accessible savings, according to a recent study cosponsored by the Consumer Federation of America. And the personal savings rate of Americans has fallen steadily over the past several years. In 1999, we saved only about 2 percent of our disposable household income - down from 8 percent as recently as 1992.This downward savings spiral is not good news. Adequate savings are a vital part of financial security. If you donít have about six monthsí worth of living expenses saved up, then you may need to dip into your investments to pay for emergencies or unexpected situations. And when youíre forced to tap into your investments, youíre hurting their ability to grow for the future - which means less money for your long-term goals, such as retirement.To make sure you have the savings you need, try ďpaying yourself first.Ē From every paycheck, put away a designated amount of money into a savings vehicle that offers safety and accessibility. To make it easier on yourself, have your bank deposit the money directly. You can, of course, put your emergency savings in a passbook account, but you may want to consider money market funds instead. These funds are highly liquid, and they pay a better rate of return than a basic passbook savings account. Furthermore, rising interest rates over the past several months have resulted in higher yields for money market funds.If you are ever forced to reach into your investments to provide emergency funds, do so as carefully as possible. For example, you may be tempted to take out a loan from your 401(k). You can typically get the money quickly, and youíll be paying yourself back, with interest. Making this move usually isnít ideal, because youíre probably better off leaving the money in your 401(k), where it will grow on a tax-deferred basis. On the other hand, taking out a 401(k) loan may make more sense than liquidating a growth-oriented mutual fund. This move can be especially harmful if your fundís value happens to be temporarily down. As a general rule, you donít want to sell mutual fund shares when the price has fallen sharply.
You may also be able to get emergency funds from other investment vehicles. Some types of insurance policies have loan provisions, and you can make tax-free, penalty-free withdrawals from your Roth IRA under certain circumstances.All things considered, however, youíll always be better off if you can avoid using your long-term investments or retirement plans to pay for short-term cash emergencies. So do whatever you can to build a cushion for yourself. And the best time to start saving for that ďrainy dayĒ is when the sun is shining.

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