Savings often crucial in crisis; Emergency: Many of the people who think they can't afford to put aside money for a rainy day are exactly those who can't afford not to.; DOLLARS & SENSE


Her parents raised her right. They are the ones who taught her to save money for a rainy day.

When that rainy day arrived in 1994, it was her parents who needed her help.

"My father became very ill and was not able to work," said the 41-year-old woman, who asked not to be named. "He had maxed out his disability. I didn't have a lot of savings and drained what I had. They would not have been able to make it if I couldn't have helped them."

The Annapolis office manager learned then the importance of saving money for emergencies, a lesson many people learn the hard way when a health crisis, accident, job loss or other unexpected event strips them of their savings or income. And she learned how fast you can burn through what you've got.

Experts say it's a good rule of thumb to have three to six months' worth of expenses put away for emergencies in a money market account where it can easily be withdrawn. You can figure out the minimum you should save by totaling your necessary monthly expenses and multiplying that amount by three. If you can save six months' of expenses, that's even better; beyond that, money should be invested for higher returns.

"You never know what's going to happen," said Verena Smith, education director for Consumer Credit Counseling Service of Southeast Maryland, a nonprofit group that gives free budget counseling and sets up debt-management plans.

When her father got sick, the office manager said she spent all of her savings -- nearly $5,000, almost three months' worth of expenses -- in about six weeks. The expense put her behind in her personal finances, eventually forcing her to seek help at Consumer Credit Counseling Service in order to get back on track.

Now, she said, she forces herself to save money through payroll deductions. She then puts her money in an account at a different bank across town where it is not readily accessible through an ATM or checking.

For some people, unexpected expenses put them so far into debt that it is nearly impossible to overcome.

Baltimore bankruptcy attorney Rob Goldman said he has seen many people in dire financial circumstances because they did not have savings.

"People who don't have anything to fall back on sometimes have to find recourse in filing bankruptcy," he said. "A great many people file because they lose their jobs and have to find lower-paying jobs. Then they are not able to pay bills as they used to. Having a nest egg would help them ride out the rough times."

Smith said she realizes that three to six months of expenses is a lot of money to save, especially for those with lower incomes who live paycheck to paycheck.

"Even if they can muster just a few dollars to put away, we tell them to do it," she said.

Smith said she recommends people try to put 10 percent of their income aside to build up savings. Another way to build up funds is to put away any windfalls, like a tax refund.

William I. Kissinger, an accountant with Kissinger Financial Services of Timonium, said while it is important to build up emergency savings, there are other financial considerations that should come first.

Kissinger recommends paying off high-interest credit-card debt first. Then, you should put money aside in a tax-deferred retirement plan like a 401(k) plan or begin saving for your children's college education. An emergency fund should be the next priority, before paying off your mortgage.

"It's very tough to build up reserves," he said. "It's tough for many people to live within their means, but that's the only way you are going to build an emergency fund," he said.

Pub Date: 10/10/99

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