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This Is How Much You Should Save In Your Emergency Fund

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You might say Matt Matheson is the perfect picture of stability.

As a full-time educator, he enjoys great benefits and job security. He also runs a successful freelance writing and blogging business. He’s married with two healthy children, “one who’s potty training right now, which is the biggest ‘emergency’ I typically have to face on a daily basis,” he said. And yet, Matheson is no stranger to financial disasters.

Over the last seven years, Matheson estimates his family has averaged one $1,000 emergency every year. “One time it was the water heater, and another it was an unfortunate incident involving our laptop and some piping hot coffee (it didn’t end well for the laptop),” he said. “We’ve had unexpected deaths in the family requiring expensive flights, car repairs that went way beyond what we had budgeted for and an iPhone die an untimely death in a mug of hot tea.”

The one thing that saved his family’s finances each time? An emergency fund.

Matheson said having emergency cash on hand made covering these expenses way less stressful. “It also gave me a sense of financial empowerment and pride knowing that I had planned and executed a strategy to protect my family from financial hardships,” he said.

But despite the many benefits of having an emergency fund, many people don’t. In fact, nearly a quarter of Americans have no emergency savings at all and only 39 percent could cover an emergency of $1,000.

“It’s not a question of if you’ll have an emergency, it’s a question of when.”

– Rachel Cruze

Maybe that includes you. If so, don’t worry ― it’s never too late to build up an emergency savings account. Here’s how much you should aim to save.

What’s the right amount for an emergency fund?

Depending on whom you ask, the “perfect” emergency fund can come in different sizes. But one thing all experts agree on is that you need something set aside for unexpected expenses. “It’s not a question of if you’ll have an emergency, it’s a question of when,” said Rachel Cruze, a New York Times best-selling author and personal finance expert. “It’s important to build an emergency fund so that you’re not tempted to rely on debt when life happens. And trust me, it will happen!”

The generally accepted principle for an emergency fund is three to six months of after-tax living expenses, according to Mike D’Andrea, a financial planner and chartered financial consultant. He also said those funds should be saved in a stable, liquid interest-bearing account. That means you shouldn’t tie up your emergency savings in the stock market or illiquid assets like property; it should be readily available in a savings account that still lets you earn a bit of interest, too.

And although three to six months of expenses is the general standard, that might not be the right amount for everyone. Often, the size of your emergency fund should be based on your particular lifestyle and financial situation.

Here’s a look at how much you should have socked away if you fall into one of these circumstances.

How much to save if…

Digging yourself out of debt can be a vicious cycle. You put every dollar you have available toward paying it off, and just when you’re about to become debt-free, a major expense hits. Now you have to borrow money again to cover the cost.

That’s why you should focus on building a small emergency fund before you think about tackling your debt. “If you have debt, the first thing you need to do is build a $1,000 starter emergency fund,” Cruze said. “Having this emergency fund in place will help to avoid the temptation to go further into debt to cover any surprise expenses.” Once you’re truly debt-free, you can go back to focusing on fully funding your emergency fund.

You’re the sole earner

If you have a partner or family member who contributes to the household income, financial emergencies can be easier to manage. But if you’re the sole breadwinner, “that income is more vulnerable,” D’Andrea said. “Six months would be the ideal minimum liquidity reserve in this situation.”

Your income is inconsistent

If you work seasonally, on commission, a contract or freelance basis, or rely on bonuses for compensation, your income likely fluctuates month to month. It can be harder to predict your income and expenses. In this case, it’s a good idea to have a bit more set aside for emergencies. “Some of those individuals may feel more comfortable with six to 12 months of accessible funds,” D’Andrea said.

You’re self-employed

“The benefits of self-employment are vast and for another letter, but one of the benefits that are typically lacking are, well, benefits,” D’Andrea said. Working for yourself can make it more difficult and expensive to get the same benefits you would under a group plan, such as disability insurance and life insurance. “Also, you are likely to be responsible for other people’s income and may have to forgo paying yourself to pay staff.” For these reasons, D’Andrea recommends setting aside at least six months’ worth of living expenses so you have more flexibility and peace of mind while running your business.

How to get your emergency fund started

Building up an emergency fund from scratch might seem overwhelming at first. But if you focus on taking small steps, your fund will grow over time. After all, the longer you wait, the longer it will take. Here are a few things you can do to get started right away.

1. Follow a zero-based budget. According to Cruze, the easiest way to build up your emergency fund is by having a solid budget. “I recommend doing a zero-based budget, which means that your income minus your expenses equals zero each month,” she said. “Tell every dollar where to go.” By following this method, you’ll quickly see the areas where you’re overspending and could be doing something better with your money, like building an emergency fund. Cruze uses an app called EveryDollar to manage her budget; you can also try others such as Mint, YNAB or Mvelopes.

2. Increase your income. There’s only so much scrimping and saving you can do, but there’s no cap on how much you can increase your income. “Maybe you work a little overtime, pick up a part-time job or start a side-hustle,” Cruze said. “There are probably household items you don’t need that you could sell for some quick cash, too!” Remember that you don’t have to hustle forever. The situation can be temporary as you work to build up your fund.

3. Create a separate account. Cruze said it’s important to separate your emergency fund from your day-to-day checking and savings accounts. “You’ll be tempted to spend it for non-emergencies and take a little bit here and there.” Instead, she recommends setting up a completely different savings or money market account. “That way it’s accessible, but not so accessible that you’re tempted to dip into it when you don’t really need to,” Cruze said.

4. Automate your savings. The physical act of transferring money from your checking account to your emergency savings account can be mentally painful. So painful that you might be tempted to skip a transfer when money is looking tight. But if you automate the process, either by setting up a direct deposit from your paycheck to your savings or an automatic transfer between bank accounts, you won’t have to watch it happen. In fact, you may not even miss the money.

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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