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Writer describes “Why you need $500 in the bank”

Posted by Stephen on June 6, 2007

Having a few hundred bucks at the right times in your life can make all the difference. Here’s how to tuck away money for emergencies, even if you don’t have much.

By Liz Pulliam Weston

A reader asked me for help after racking up more than $2,000 in bounced-check fees.Another owed thousands to a payday lender.A third despaired of ever paying down his credit card debt. Every time he started to make some progress, his car would break down or he’d encounter another unexpected expense that wound up charged to the cards.These three are a fairly typical sample of the money woes that land in my e-mail box every week. But they had something else in common: All three would benefit greatly from the simple solution of getting — and maintaining — a $500 cushion in the bank.Most of the talk about financial cushions centers on the importance of an emergency fund, that stash of cash that’s supposed to equal three to six months’ worth of expenses. As I wrote in “The $0 emergency fund,” though, that’s an awfully tough standard for most families to meet.A $500 pad, by contrast, is something that just about everyone can scrape together with enough determination. And it can make a real difference.

3 steps to a $500 cushion

Start by keeping an extra $100 in your checking account. If you maintain this pad and resist the urge to spend it, you’ll greatly reduce your chances of bouncing a check. (You also should sign up for overdraft protection, to minimize the damage if you do accidentally write a check that’s too big for your balance.) Some posters on the Your Money message board — the ones who actually balance their checkbooks — write themselves a phony check for their “pad” amount to keep them from spending it. If you keep track of your balance online or via an ATM, you’ll have to mentally deduct the $100.

Then funnel $400 into your savings account. It may not seem like much, but $400 will cover a good chunk of the real emergencies that come your way, from car repairs to insurance deductibles to replacing an appliance that breaks down. Even if the unexpected expense is higher than $400, you’ll at least reduce the amount you need to scrape up from other sources.

Then leave it alone unless you’re facing a real emergency. If you’re in credit card debt or owe money to payday lenders, you must get out of the habit of looking for a quick “fix” when you encounter unexpected expenses. The pain of taking money out of savings may help you look for alternatives to spending the cash. If the spending is absolutely necessary, you’re better off paying cash than paying interest on money borrowed from credit cards or payday lenders. Then you can concentrate on rebuilding your cushion as soon as possible.

U.S. households with less than $500 in the bank        
Age group       Percent
Under 35        34.5%  
35-44   25.1%  
45-54   22.1%  
55-64   19.0%  
65-74   18.8%  
75+     14.9%  
Source: Federal Reserve Board’s 2004 Survey of Consumer Finances 

The first $500 is the hardest Eventually, you should try to build your pad of cash into a real emergency fund. But that can come after you’ve taken care of more-pressing financial needs, such as paying off high-rate debt and saving for retirement. Here are some ideas for scraping up the initial $500:·      

Use your tax refund. The typical refund check is more than $2,000, so most people will have enough to fund their cushion in one fell swoop. If you’re not getting a refund or it’s already spent, though, you still have plenty of options. ·      

Try a “buy nothing” month. Several dozen posters on the Your Money message board are trying this experiment right now, and many are surprised at the amounts of cash they’re saving by buying only necessities for a single month. If you don’t eat out, bring your lunch and snacks to work and avoid shopping for 30 days, you may find you can make a good deal of progress toward your $500 goal. ·      

 Sell stuff. Try yard sales, consignment stores and online auction sites such as eBay or classified sites like Craigslist. Sell your books on Half.com or Amazon.com. Make sure the cash you raise gets put into savings immediately, or it will get spent. ·      

Save your change. Several readers tell of saving hundreds over the course of a year, even making a game of it with their children. ·      

Review your bills. If you haven’t already, go through your regular bills and see what you can trim. Dropping premium TV channels, or doing without pay TV entirely for a while, could produce significant savings. Phone bills also are often rife with extras that can be cut, including call waiting or pricey voice-mail systems. If you have high-speed Internet access, consider switching to an Internet calling service like Vonage or Skype to save even more. (You can find other ideas at MSN Money’s Save Money Decision Center.) Once you’ve trimmed, channel the extra savings into your bank account. If you save $10 on your phone bill, for example, put that much into savings each month. For best results: ·      

Make it automatic. Setting up a regular electronic transfer from your checking to your savings account is much better than making the transfers manually. If you have to make the decision to save every month, you’ll probably decide to do something else with the money. If the decision is made for you, it’s more likely to stick.

But is it an emergency?

If you’ve been living paycheck to paycheck for a while, you may be unclear about what constitutes a true emergency. Essentially, it’s an event that puts your livelihood or your family’s safety at risk.

The television dying, for example, is not an emergency. The furnace dying is.

Liz Pulliam Weston is author of “Deal with your Debt” and finance columnist for MSN Money.

Opinions expressed by oped writers do not necessarily reflect those of management of Conservative Viewpoints.

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