Savings Help Prevent Debt

Many people are not adequately prepared to handle a financial emergency. A large percentage of the population is able to pay their bills each month but they don't have a proper reserve of money set aside to cover unforeseen needs that may arise. Consequently, if they lose their jobs or they incur a major expense (i.e. their basement floods) this often leads to an increased reliance on credit and higher levels of debt. The affects can be even more disastrous for those individuals and families that are living from paycheck to paycheck. The bottom line is that a reserve of available money is an important component of an individual's financial health.

Click Here for a Free Debt Consolidation Quote!
Reduce Your Credit Card Debt by up to 60%!

How Much Savings is Enough?

Once you have determined to create an emergency savings plan you must decide how much to accumulate. There is no magic number that can be applied to everyone. However, a good rule of thumb is that a minimum level of savings should be able to cover 3 to 6 months of living expenses. This amount helps ensure that an individual who is looking for new employment or recovering from a short term disability will be able to meet all of his expenses. Additionally, if the car breaks down or the furnace quits working there will be adequate money available to meet these needs. To determine a more specific amount of savings other factors need to be considered, such as, an individuals needs and planned expenses. For example, if a person would like to pay cash for a new boat in 3 years then this amount needs to be factored into the savings. The ability to pay these expenses in cash eliminates the need for credit and therefore debt is avoided.

Short Term Saving Options

The final decision is determining where you would like place your savings. Once again there is not one right answer to this question. It really depends on a couple of factors. How much risk is an individual willing to take? Higher risks can bring higher rewards but they also present a greater possibility of loss. How liquid does an individual require the funds to be? High liquidity is equivalent to immediate availability. A fund that has low liquidity may not be convertible to cash for an extended period of time. Let. s take a look at some of the short term saving options.

Traditional savings account. This is a very safe and liquid alternative that presents no danger of losing money. Savings accounts provide a low return on investment.
Money market savings accounts. Offers a higher rate of return than traditional savings and is also very safe. Offers a minimal number of free monthly withdrawals.

Certificates of Deposit (CDs): This investment vehicle is also very safe but is not as liquid. An individual must agree to leave the funds in the investment for anywhere from several days to several years. The benefit of this investment vehicle is a higher rate of return.

~~~~~~~~~
About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.