From MSN Money with Liz Puliam Weston
For the complete article go to: http://moneycentral.msn.com/content/savinganddebt/learntobudget/p58710.asp
Not Enough Emergency Cash
More than 40% of American households have less than $1,000 in liquid, non-retirement savings accounts, according to an SMR Research study of Census Bureau data.
These paycheck-to-paycheck families are incredibly vulnerable to financial setbacks, credit counselors and bankruptcy attorneys say. A lost job, a car breakdown or any unexpectedly large bill can quickly become a financial crisis. Many of these households use their credit cards as a substitute for an emergency fund, but that works only until theyve maxed out their cards or fallen behind on their payments. Then their card issuers jack up their interest rates and assess penalties, making the balances even harder to pay off. Some even lower credit limits, increasing the odds that customers will rack up over-limit fees.
These days, it only takes one late payment or maxed out card to wind up with higher interest rates on all your cards. Thats because issuers scan their customers credit reports, looking for evidence of financial trouble. A high balance or delinquency on one card is enough to induce the other credit card issuers to boost their rates.
A better solution is to start building an emergency fund now. Set up an automatic transfer so some of your paycheck winds up in a savings or money market account. Deposit any windfalls or tax refund checks until the balance is over $1,000. Once youve paid off any credit card debt, continue building your emergency fund until you have three to six months worth of expenses saved. It can mean the difference between surviving a financial disaster and going under.