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How Much to Save, Why and Where – Tips To Stay Safe In a Money Emergency

Category: Financial News

How much to save to make sure you can live decently when emergencies arise? Why do you need to save, in fact; and where do you put your life savings?

When the ship sinks you better have a line to hang on. Sadly, many of us will drown in the uncharted waters of tomorrow.

According to the 2012 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) which tracks pension trends, only 14% said they have enough to live out on retirement, much less live off a healthy life.

Life savings does not only keep your head above water during emergencies. It gives you the safety net for regular health checkups, eating healthy food, keeping your gym membership and generally keeping you and your family living in a less stressful home.

Bless your grandparents and parents they had it going good for a long time: job secured by the union, easy housing, affordable health insurance, lower living costs… practically life was easy when the world revolved around the United States.

Not anymore. It turns out we need to revolve along with everyone else these days.

5 REASONS WHY YOU NEED TO SAVE

Yes, America still has one of the best economies in the world to raise a family or grow old, but the game has changed if not altogether shifted to favor a few and put the rest of us at a higher risk of buying on food stamps.

There are many ways to start building your life savings, but, first, let’s find out why you need to save.

1. Job loss

life savings 2Job security is the cog that makes life go round until your sunset age and the screws are loosening up. Job losses occur at an alarming regularity and they cut across industries and positions.

Blue-collar jobs may be hardest hit, thanks to the manufacturing migration to the emerging markets, mostly China, but white-collar jobs are just as vulnerable these days.

Dan, in his late twenties, worked as a “code cleaner” for one of the top game developers in the world that has employed 1,300 at its height. As with many major tech companies, the perks were good: above-industry salary with quarterly bonuses, free specialty coffee, meals and gym membership. Being single and living it off in a well-furnished San Francisco flat, Dan’s usual worry was whether to get a frap or a hot latte, both his favorite, for his daily coffee treat. Life was good.

But in as short as two years, his company’s flagship game fell from being a “hot” social app to a relic as gamers move from web to mobile platform.

To keep the business afloat, the company has to shut down offices in key cities and move its operations in one core headquarters. Dan, along with hundreds of co-workers, found himself wondering beyond the frap and latte and into his future prospects as they were “leveraged off” and shown the exit door.

It’s a CEO nightmare—and yours, too—when a sudden market shift makes a company fall flat on its face. Think of General Motors, Ford and Chevrolet in the eighties when they were fiercely outcompeted by smaller cars from Toyota, Honda and Nissan. Think of Yahoo! now, Friendster and MySpace, all goliaths of their time but are struggling today, if not gone.

Working even in the hottest companies today backed by a white-collar training doesn’t bring a long-term guarantee. You are either “leveraged off” or, simply put, cut off, because the market demands other things that your company cannot meet.

Our economy, while still the biggest, is now tied up to a lot of other factors, such as our trillion-dollar debt to other countries, diminishing manufacturing base, widening trade deficits brought by strong competition from emerging markets, and outsourcing and streamlining to make businesses more efficient and competitive.

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2. Accidents

Nearly 40 per 100,000 population died of unintentional injury or accident, according to a 2010 survey by the Centers for Disease Control and Prevention. Causes of death include accidental fall, motoring accidents, unintentional poisoning and unintentional injury.

When you look at it, these causes are all part of our daily routine. We shudder at the thought, but that could be any of us or our family. You wouldn’t believe how many chances you can die or meet an accident or witness one in a day by simply living your life.

How would Bob know that one early morning while driving down the neighborhood, a kid would jump out of the street to go after his wayward baseball and into the path of his speeding car?

And that guy who just had a trivial drunk argument with a commuter in a New York sub found himself suddenly scurrying off the tracks and for life after being shoved off balance by the irritated commuter.

The scene can never be more trivial as in your room. Marie, 65 years old, was just planning to replace a bulb in her room when the stepladder slid off because it wasn’t locked properly.

These are real scenarios that can stretch your wallet to bankruptcy if you’re not prepared.

The awful truth is that about one-fourth of Americans cannot even raise $2,000 in a month outside their salary based on the findings of the National Bureau of Economics Research.

When not confronted with a medical emergency, we have to deal with car breakdowns, housing maintenance, appliance repairs and other nuances of modern living.

Your computer is hacked and it shuts you out from important documents. Your phone is stolen and you cannot function without one. The roof is leaking and the carpet is spoiled. The kid short-circuited the flat tv. Life truly is made for surprises.

3. Relationship breakups

life savings 4It’s hardly talked about between couples, but when the knot is untied, can your existing salary pay for the expenses?

It is said that 50% of marriages in the U.S. end up in divorce. The emotional strain aside, costs are involved. Attorney or mediator fees can set you back between $7,000 to $50,000 depending on the severity, or lack of, of the case.

But the real long-term cost of divorce, especially if you have children, is supporting two households.

Rodney’s $40,000 income was enough to buy his family a middle-class lifestyle. Two cars. A four-bedroom house. The kids off to high school. But when his marriage broke down and his stay-at-home wife filed for a divorce for his infidelity, he suddenly found himself renting a flat, while abiding by a court order to continue paying for his housing amortizations.

As a moral call, he also fills in the balance of utility bills, food and school expenses as his ex-wife struggles to find a decent job to co-raise the kids. The ex-wife is in a worse situation; her health coverage as a dependent to Rodney’s insurance is now out of the window. She may have to file for Medicaid.

The bills are suddenly twice over in the face of a divorce. Meantime, Rodney finds himself sliding off to the bottom end of the middle class bracket, living from paycheck to paycheck just to meet his daily expenses.

4. Retirement

life savings 1Nothing is sadder than to see old people reduced to begging the state, if not their children, for support. Americans are not saving enough for retirement, pointed out by the EBRI 2012 survey.

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Planning for retirement may even be worse for small business owners, who have no clear deadline when to hang up the work clothes.

Greg and Sally used to run a neighborhood pizzeria. It was a routine business that paid off enough to raise three kids in a suburban community. The restaurant was a favorite hangout by employees from nearby factories. For nearly twenty years, they had it going smoothly… until the factories were moved out.

Losing its clientele and closing shop was not the worst part. Greg and Sally didn’t have enough savings. Now in his late sixties and the kids on their own, the couple needed to put the house on mortgage for Sally’s deteriorating health. Greg still works for another restaurant to keep things afloat.

The government works hard to ensure retirees are protected and covered, but it is still a sad sight to see the elderly lining up for food stamps and health dole-outs. Do you see yourself in a social welfare office forty years from now?

It is simplistic to blame lack of enough money for not saving for retirement. In fact, even among college-educated and highly skilled Americans with disposable income, saving can be an after-thought.

We are driven by psychological reason, that adversity to delayed gratification. Remember the Stanford University marshmallow test among kids in the sixties? How many of us can wait for fifteen minutes for the second marshmallow?

Likewise, social pressures of “keeping up with the Joneses” make us crave to buy stuff today, even if it means foregoing savings or, worse, going in debt.

5. Getting out of the rut

Nothing reflects upward mobility better than the American dream, where, supposedly, poverty is not a cause to remain poor in your lifetime. Immigrants play this card very well. The first generation would build a life out of labor, while the second generation, reaping the benefit of higher learning, would start their lives as middle-class professionals.

Is the American dream dying among, well, Americans? Not really, but the pace is slowing down.

A Pew Economic Mobility Project documented that fewer poor Americans today become even upper middle class. The study found that 42% of men with fathers at the bottom of income brackets also stay there in their lifetime. Poignantly, rarely a poor person gets rich as a rich person gets poor in a generation.

Saving is not only for the rainy day; it is also for brighter days ahead.

After Peter finished high school, he took a grocery job making sure supplies in the stock room are in first-in, first-out order. He knew his parents, a runaway father who solders car doors in an assembly plant and a mother with a clerical pay, couldn’t afford college. So he saved a portion of his salary to educate himself.

No, his cash couldn’t even match a semester of college. He saved up to buy a computer, get a good Internet connection and started to work on web programming. With good analytical skills and focus to learn server-side and front-end applications, he moved up to the company’s I.T. department manning the online store, a higher skilled job with a higher pay.

Peter knew it’s only a start as he has more money now to save for a college degree in software engineering, his gate to a professional life with middle class assets.

Sadly, Peter may be an exception.

We either hunker down or buckle up for tough times ahead, but it doesn’t hurt if we have some life savings as a buttress.

By Jenny Chang

Senior writer at FinancesOnline who writes about a wide range of SaaS and B2B products, including trends and issues on e-commerce, accounting and customer service software. She’s also covered a wide range of topics in business, science, and technology for websites in the U.S., Australia and Singapore, keeping tabs on edge tech like 3D printed health monitoring tattoos and SpaceX’s exploration plans.

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