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Crises happen, so save for them

By HELEN HUNTLEY
Published September 10, 2006

Although I grew up without air conditioning here in the Tampa Bay area, you’ll never find me pining for the good old days of sweat-soaked nights.

I knew we were in big trouble a few weeks ago when the thermostat in our house registered 90 degrees before the system shut down.

My first reaction was annoyance at two days of serious discomfort and the big expense of a new condenser. It had to be hoisted by crane to the roof of our townhouse. What bad luck to lose our AC in August, I thought.
My second reaction was relief that the problem could be fixed relatively quickly and that we had the money to pay for it stashed in our emergency fund.

When most of us think of financial emergencies, we think of the big ones like losing your spouse, your job or your ability to work. Then, being optimistic Americans, we assume those bad things won’t happen to us, so there’s no need for an emergency fund.

Some of us will get hit by those big problems, but all of us have to beware the frequent small crises that can flatten our finances. Cars break down, roofs leak, refrigerators give up the ghost and teeth require root canals whether or not we’re prepared.

If you don’t have an emergency fund, the cumulative effect of small emergencies like those is deadly debt. Rather than live without air conditioning or a car, we charge it, with no plan for paying it off any time soon. It’s no wonder many people carry $15,000 or more in credit card debt.

While it is not easy to build an emergency fund, it is worth the sacrifice. If you want to shore up your savings, the way to do it is to start by trimming expenses wherever you can so you’re living well below your means. Depending on your situation, that might mean giving up the fancy cable or the cell phone, making your meals or pushing up the thermostat (you’d be surprised how nice 81 degrees feels after you’ve suffered through 90-plus.)

Payroll deduction is the best tool for building savings. If that’s not available to you, an option is to write a check to your savings account as though it were another bill. These days you can even earn a decent rate of interest through high-yield money-market and savings accounts.

The long-term goal is to accumulate enough to cover three to six months of living expenses, but every dollar counts. It’s a dollar you won’t have to borrow the next time a crisis comes your way.

We are trying to find the best CD rate in the country for a CD coming due, but we are confused because the high rates published in the St. Petersburg Times and the high rates posted on Bankrate.com are not always the same even though Bankrate.com is the source for both. Why is this?

It’s a pretty dynamic environment from an interest rate standpoint,” said Bankrate.com analyst Greg McBride. “As their needs change, banks are repricing.” He said the information on the Bankrate.com Web site should be the most up-to-date. It contains far more listings. But banks’ needs for deposits vary, and McBride said some remove their Web listings once they have attracted the deposits they sought. Before mailing a check, it’s a good idea to verify the rate by calling the bank’s toll-free number.

Where can I get more information on giving my IRA to charity after age 70½?

Just hang tight. IRA custodians (such as banks and brokerages) have not come up with procedures for handling these requests. When they do, I’ll be writing about it and you most likely will receive a mailing about it from your IRA custodian.

Saving consistently pays off

For workers who had 401(k) accounts throughout the six years ending in December, the average account grew 50 percent and had an ending balance of $102,014, according to the Employee Benefit Research Institute. As you might expect, there were some big differences by age: $24,169 was the average for workers in their 20s, $91,848 for workers in their 40s and $127,766 for workers in their 50s. Those numbers show the benefits of investing steadily even when stocks are slumping.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money.

[Last modified September 10, 2006, 08:06:47]