Are You Prepared for a Rainy Day? - For What It's Worth - Comcast.net Finance

With job losses mounting, it's more important than ever that we all prepare for a financial emergency. But short of knowing that we should be "saving for a rainy day," few Americans have a solid game plan. That's the bad news.

The good news is that the most basic of financial emergency planning is about as straightforward as it gets. It all starts with your Emergency Fund.

Even better, setting up such a Fund is easier than you think. The only rule is that the assets in the account should be liquid. In short, that means cold, hard cash. Not cash in your mattress (though that is better than nothing), but a simple savings or money-market account will do.

I know what you're thinking: Why would I want to waste my time with a simple savings account that earns 1 percent interest... or less? But the sole goal for your Emergency Fund is to be just that: an Emergency Fund. This is not the money you're setting aside for retirement; it's not Junior's college fund, and it's not your long-term capital-appreciation investment money.

The $64,000 Question

Think of your Emergency Fund as a replacement for your biweekly paycheck, should you lose your job. It should be enough to act as your source of "income" for the duration of the financial emergency.

Which brings us to the big question: How much is "enough"? This is where things get a little tricky.

Browse the Web and you'll find no shortage of financial experts and journalists weighing in on this topic.

Dave Ramsey says 3-6 months of your personal expenses will do, though you can start smaller than that with just $1,000. Laura Bruce of Bankrate.com agrees.

Anna Prior of The Wall Street Journal advises that you set aside 6-12 months' worth of living costs.

And The Motley Fool suggests you may even want to prepare for a long, cold winter… and spring… and summer… and fall -- many times over -- with a 5-year emergency fund.

Plus there are plenty of other opinions where these came from.

Must You Acquit?

The reality is that there's no right answer to this question. Financial planning is not a one-size-fits-all or even a one-size-fits-most subject. It's more like a tailored suit than it is a free sweatshirt. I'd much rather know that you're heading to the tailor for alterations than hear that the ugliness of the sweatshirt scared you off completely.

So the closest thing to a right answer in today's uncertain economic environment then is that whatever your target savings goal amount is, this Emergency Fund should be financial priority No. 1 in American households.

This means that if you feel like your Fund is short of where it needs to be to make you comfortable, you need to make sure it gets there -- and fast. Until it does, put your other major financial plans on hold.

Much as it pains me to say it, this may be the time to pare back any debt repayment, retirement savings, mortgage-principal paydown, college savings, or other long-term investing you've undertaken. You needn't (and shouldn't) stop these other wise financial practices altogether.

Continue to take advantage of your employer's 401(k) match, pay at least a little more than the minimum on any revolving credit balances and lest there be any confusion, stay current on your mortgage. But until your Emergency Fund is up to snuff, reroute a substantial amount of your disposable income in that direction.

Hopefully the financial storm will soon give way to sunny skies. But don't let that kind of wishful thinking cloud your judgment. If you continue to save for a rainy day... you'll stay dry in the end either way.

Is your Emergency Fund balance where it needs to be? How much do you have saved? Share your story.

Message Edited by Anthony_Catalano on 03-11-2009 09:46 AM