The priority of emergency savings

Source: FISCALLY FIT By TERRI CULLEN
When it rains (financially), it pours
July 12, 2007

Financial planners generally recommend 3 to 6 months of household income for emergency reserve.

Part of the reason planners push clients to have such a large stash of emergency cash is because most workers don't have enough disability insurance. Almost three in 10 of today's 20-year-olds will become disabled before age 67. But less than a third of workers at private companies have disability insurance. Workers whose companies do provide disability insurance, meanwhile, may not realize how much of their income wouldn't be replaced in the event of injury or illness.

It took the author about a decade to put together her rainy day fund. But is it reasonable to expect that everyone should have three months -- let alone six -- of income saved?

Of course not. Depending on where you are in life, other savings accounts (and debts) take priority. Younger workers often put off saving entirely because they're struggling with student-loan and credit-card debt, while older workers may have college bills and retirement accounts at the top of their saving-priority list.

That said, having little or no emergency savings is a recipe for disaster.

Relying solely on home-equity loans or lines of credit - or worse, credit cards - to pull yourself out of a serious financial jam can devastate your finances for years to come, particularly at times when interest rates are heading higher.

So instead of focusing on the seemingly insurmountable goal of amassing three months' salary, take baby steps toward improving your financial-security net.

Open a high-yielding savings account and have a portion of your paycheck (say, $100) automatically deposited into your account. If money's really tight, start smaller. Once your savings is large enough to invest, open a Roth IRA and have your automatic deposits moved there. Just be sure your deposits remain within the contribution limits -- the limit for 2007 is $4,000 (or $5,000 for those age 50 and older).