Fear factor: Americans have stashed cash for the unexpected

By FOXBusiness

An overwhelming majority of readers who responded to a joint MSN Money/MoneyRates.com online poll say they have prepared for unanticipated twists in the economy by creating emergency funds.

The online poll, which ran from Feb. 8-11 and drew 26,409 responses, asked how long readers could live on their emergency funds if they lost their jobs today. Forty percent said they could last more than a year, followed by 11 percent at a single year, 15 percent at six months, 12 percent at three months and 8 percent at a single month. Only 14 percent said they had no emergency savings.

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One of the basics of sound financial planning is establishing a fund for unforeseen expenses. Financial planners typically recommend an emergency fund equal to between three and six months of normal expenses.

The poll response reflects the fear and anxiety people feel over the prolonged recession. With unemployment high and many people still losing homes to foreclosure, it's easy to understand the importance of saving for emergencies, says Thad Pugmire, CFP, of Financial Planning Consultants in San Diego.

"People have had a difficult education," he says. "They are learning to be a little more conservative. Sometimes adversity is a good teacher." The generation that was raised during the Great Depression--the parents of the Baby Boomers--emerged with sound understanding of the need for saving, he explains.

Ideally, an emergency fund is liquid and accessible on short notice. The idea is to avoid having to sell equities and bonds during an economic downturn. Although the purpose is not financial growth, some people worry about the low returns available from even the best savings accounts, money market accounts and checking accounts.

Chad Nehring, CFP, of Conceptual Financial Planning in Appleton, Wis., recommends "laddering" a CD portfolio to keep some money available for emergencies while maximizing your return. For example, if you buy a one-year, a two-year and a three-year CD, you are never more than 12 months away from part of your funds. The longer the CD terms, the higher the interest rates. As each CD matures, you can roll it over into a new one, giving you access to the best CD rates.

Not everyone thinks consumers should rely heavily on emergency funds. Carolyn Taylor, CFP, of Weatherly Asset Management in Del Mar, Calif., says rather than tying up six months' worth of expenses, some people may be better off relying on limited use of credit cards with low interest rates. Taylor also advises clients who need to reduce their expenses to check out mortgage refinance rates. Current mortgage rates remain at historic lows.

People who create a large financial cushion may decide to tap into it to pay down debt or increase retirement savings. Kelley C. Long, CPA, a financial coach in Chicago, cautions clients to first make sure they are paying all of their bills on time. If there is a shortfall between earnings and expenses, she recommends temporarily decreasing retirement savings. "It takes much longer to recover from a black mark on a credit report than it does to do some catch-up savings, once income increases," she says.

The original article can be found at Money-Rates.com:"Fear factor: Americans have stashed cash for the unexpected"

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