Kicking Murphy Out

[DieMonkeys]

Hi, my name is Murphy, but you can just call me trouble. I enjoy making life miserable for you. I may visit you from time to time, doing anything from wrecking your car to making you lose your job. Occasionally, I'll see that you get hurt so you'll be out of work for a while, or I may just make your roof start leaking. In any case, I have fun sending your life into a financial tailspin and I can visit any time I like. Make sure to keep the spare bedroom open for me.

Does this sound familiar? Remember Murphy's saying; if it can go wrong, it will. Many of us have seen Murphy and are not too fond of him, so let's kick Murphy out. Let's establish an emergency fund!

A recent study found that 55 percent of Americans don't have an adequate emergency fund in place (three to six months of expenses). Of those surveyed, 17 percent said they could not even cover expenses for one week if something bad happened. Many Americans are sending out an engraved invitation for Murphy!

A good, old-fashioned Grandma's rainy-day fund will keep you from going into debt when life hits you. Money Magazine says that 78 percent of Americans will have a major negative event in any given 10-year period. If one is headed your way, be ready for it.

Generally speaking, Dave says that the more risky your situation, the more you should have in savings. For example, someone who earns commission-only or is self-employed should lean toward the six-month rule.

Also remember, those are just tendencies. Someone who has worked for a company for 20 years may think he or she has security, but there can still be a layoff or illness. The reason you have the emergency fund is to prepare for the unexpected. If the unexpected happens, you will sleep better at night and not sweat it during the day. Why? Because you will be ready.

Remember, the emergency fund is designed to cover expenses, not replace income. If you are laid off from your job, you need to cut your lifestyle until you find work again. This can actually make your emergency fund dollars go farther, since you won't be spending money on luxuries while your cash flow is less.

It is crucial that you keep your emergency fund liquid. It should be very easy to get to in an emergency. If you have a car wreck and need some money to get a new car, that is something that you need to make happen quickly. Don't put an emergency fund in a certificate of deposit or a mutual fund. If you do, it will take a lot of hassle and penalties to get the money out. If you go outside and it starts to rain, you won't keep your umbrella locked in a safe in the trunk of your car, so why would you keep your emergency fund in a place where it is a hassle to get to when disaster strikes?

You should shop around for the best interest rate so that you earn a little something on it, but don't put your money into a complicated investment where it will be difficult to get it out. Put your money into a money market fund with a good interest rate (again, one that is easy to get to when Murphy visits) and has check writing privileges.

Something fun about an emergency fund is that not only is it Murphy repellant, but it's a simple way to see how compounding interest works. As it earns interest, it grows more.

Start your emergency fund and kick Murphy out!

Source: USA Today