Start setting aside money for life’s emergencies

NEW YORK – One of the best new year’s resolutions you can make is to set up a savings account for emergencies.

“If you have a situation with a need for cash – a job loss, an unexpected illness or having to replace a major appliance in your home – it can throw you off,” said Sophie Beckmann, a financial planner with A.G. Edwards &Sons Inc. in St. Louis. “An emergency fund can get you through the rough period.”

Setting up a rainy day account may seem like a logical thing to do, but a surprisingly large number of consumers haven’t done so.

In a recent survey conducted for A.G. Edwards, nearly three-quarters of consumers said their top concern was not having enough cash on hand to deal with an emergency. Yet, when asked about their financial holdings, they mentioned retirement accounts and insurance – but not emergency funds.

“There’s a disconnect there,” Beckmann said. “They’re concerned, but not doing much about it.”

She blames it in part on a failure to plan and said that acknowledging the need for an emergency fund “needs to be followed by action, which will help people become more disciplined in the process of dealing with their money.”

Most consumer experts suggest consumers set aside enough cash to cover three to six months of living expenses, including food, housing, clothing and medicine.

However, Ric Edelman, a financial planner in Fairfax, Va., believes that “the lesson of 9-11, which left many people without jobs for a sustained period, is that you may need to cover 12 months of spending.”

That may seem like a daunting amount to try to save, but as Edelman put it: “How do you eat an elephant? One bite at a time.”

The key is to start setting aside some money from every paycheck until you’ve reached your goal.

Many consumers argue that they can’t get going because of credit card debt. But Edelman counters that consumers who don’t prepare for emergencies end up even deeper in credit card debt.

“The car is going to break down, the roof is going to leak, your son is going to fall and break an elbow,” he said. “You’re either prepared to write that check or not. If not, you’re going to fork out a credit card.”

Edelman, author of “The Truth About Money,” believes people need to make lifestyle changes that involve sharp cutbacks in spending to free up money so they can pay off their debts and begin to save.

Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla., said people shouldn’t be scared off by the total they need to set aside for emergencies.

“The important thing is to start saving,” he said. “Any cushion is better than no cushion at all.”

He suggests consumers begin by estimating what their monthly expenses are, then earmarking a certain amount to set aside every month “so it becomes a habit.”

Where should consumers put their money?

All of the experts emphasize that emergency funds should be in safe place and readily available if needed.

That means consumers should consider opening savings accounts such as money market deposit accounts at local banks or credit unions. McBride added that the best interest rates often are available at online banks such as ING Direct, ingdirect.com.

“If you’re someone who is easily tempted, you want to put it somewhere that makes it somewhat difficult to get at it from an ATM or discourages you from writing checks for small amounts,” he said.

Money market mutual funds are also a possibility, but they often have minimum deposit requirements and minimum withdrawals.