DOLLARS AND CENTS
Money Matters
by J. Lynn Davidson, CFR CLU . Contributing Writer
Financial holiday recovery
The holidays are over. Like many people, this
may be that time of year when you feel the most
“tapped out,” from spending more money in the
weeks leading up to Christmas season than you
do most other times of the year. It is also the time
when you are most susceptible to financial fallout
if a short-term cash emergency should occur.
During this time, it is most important to
have extra cash on hand. You might need some
cash to pay off extra credit card charges that
you rang up during your shopping trips. Or,
you may just need it as protection against an
unexpected expense that will be harder to pay
with your regular income given the higher-
than-average expenses you recently generated.
When you need it, you need it
The phrase “save it for a rainy day” is almost
as old as the concept of money itself. It is not
difficult to understand the logic behind the idea
of having cash reserves in case of an emer
gency. These days, too many people wrongly
assume that outlets ranging from “payday loan”
shops to credit cards to home equity loans can,
in effect, serve as an emergency cash reserve.
The problem is that anytime you have to
borrow money to pay for an emergency need,
the cost of that product or service (a new fur
nace or paying somebody to have your furnace
repaired) is even higher. What’s more, too many
people find it easy to repay loans with only
minimum payments, carrying short-term debt
over an
extended
period of
time, ulti
mately suf
fering
finance charges.
A recommended option is to make sure
you have money put away in your own “rainy
day fund,” so you can avoid having to borrow
for a sudden emergency.
How much is enou^?
A general rule of thumb is that you should
have enough money in reserve to cover three-
to-six months of living expenses. In other
words, multiply your current monthly out-of-
pocket expenses by at least three and try to
have that much money held in reserve.
Is three months really enough for most
people? Think about the possible difficulty
you will have replacing income in case of ill
ness or disability. Also consider how suscepti
ble you are to having your income interrupted
based on the type of job you have. The more
stable and reliable your position, the less risk
you face of an extended financial shortfall. On
the other hand, if you are in a position where a
layoff is a greater possibility, or you are self-
employed with a less predictable income, a
larger cash reserve may be a better option.
This is especially true given the unpre
dictable nature of today’s economy. Any num
ber of factors could create a short-term finan
cial crunch, including;
• Upward adjustments to mortgage payments
based on interest rate trends and mortgage
“reset” conditions in certain contracts
• Less job stability and challenges finding a
replacement position
• The increasing likelihood that you may face
out-of-pocket medical expenses
Aside finm possible short-term credit
crunches, a cash reserve fund can play a critical
role in preparing'' for unexpected circumstances.
Whether it beyour automobile breaking down, a
refngerator going on the fiitz or an unforeseen
medical expense. In a sense, it is your own insur
ance policy to carry you through a difficult time.
These days, that could even indude finding
yourself out of work when you least expect it.
How to start saving
Ideally it is recommended to stock away 25
percent of your pay each month. If you achieve
this, you would have three months worth of
income set aside in a year. Even if you save a
smaller amount, it can help you manage a
short-term financial challenge.
As for putting the money to work, a good rule
of thumb is to k^ it “short and safe.”Make sure
the money is kept in an account that is fully liq
uid, so you can access the funds when you need
to without paying a penalty for early withdrawal.
Keep in mind that your primary goal is to
have the money available when you need it.
While it is beneficial to look for a competitive
interest rate, you may need it in short order. A
financial advisor may help identify savings
goals as well. I
This information is provided for informational
purposes only and is intended to be generic in
nature and should not be applied or relied upon
in any particular situation without the advice
of your tax, legal and/or yourfinancial advisor.
info: 704-987-9794 . email: lynn.j.davidson@ampf.com
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