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Lesson from the shutdown: You need an emergency fund

By Joseph Pisani
Associated Press

NEW YORK Let the government shutdown serve as a wake-up call: You need an emergency fund.

Thousands of government workers were out of work for more than two weeks, causing many of them to fall behind on their bills. Although they will receive back pay, the event highlights how quickly, and unexpectedly, financial situations can change.

The shutdown also showed that no jobs are safe, even government positions normally thought of as the safest.

Most financial advisers say you should be prepared to go without a paycheck for several months, not several weeks. Here’s what you need to know about building that safety fund:

Figure out expenses: Start by adding up your expenses for necessities, such as rent, health insurance, groceries and utilities, says Mackey McNeill, a certified public accountant and president of Mackey Advisors in Bellevue, Ky. It wouldn’t hurt also to add in discretionary spending, like going to the movies or eating out. “Should you cut out Starbucks? Probably,” McNeill says, “but a lot of people don’t change their behavior.”

Determine how much you need: You need to have at least three months in expenses saved up, says Anna Behnam, a financial adviser at Ameriprise in Rockville, Md. But if you’re nervous about the security of your job, you should save more. Think at least six months, especially if you’ve been laid off or furloughed before. “There’s a chance it might happen again,” Behnam says.

If you’ve never saved for an emergency fund before, start small. “Try saving $100 a month,” McNeill says. “Don’t overreach.” It may take longer to save up, but Putting away more than you can afford can lead to failure, and you may just quit. And don’t ever take the money out.

Make sure it's accessible: Always keep your emergency fund in a bank account that’s easily accessible. The stock market’s recent record highs may be hard to resist, but you always want to keep the fund out of stocks and in cash. “It should be in the most boring account you can find,” McNeill says. That means savings accounts, even though most banks offer interest rates that are close to zero.

Behnam says if interest rates on your bank’s certificate of deposits are more attractive, leave one month’s worth of expenses in a savings account and the rest in a no-penalty CD. That means you can withdraw money from it at any time without paying a fee.

The account should be separate from your checking account and the accounts you are using to save to purchase a home or vacation. If you decide to go with an online savings account, make sure it’s linked to your primary checking account so you can make easier transfers, Behnam says.

Ask for help: If you lose your job or find yourself furloughed for a short time and don’t have enough in an emergency fund, call the companies you owe. “Most creditors want to hear from you if you’re not paying bills on time,” says Hugh Anderson, a Las Vegas-based managing director at financial services company HighTower. Call landlords, mortgage providers, credit cards, student loan companies and anyone you may owe.

“I think most creditors are willing to help,” Anderson says.

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