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Financial Literacy - Emergency fund
MONEY MAKEOVER
Building an emergency cushion
This single mom's a good saver, but savings are scattered and too diversified. Her finances need more focus.
Creating an emergency fund
  The problem

Overview

The family car is eight years old and the remaining loan balance of $2,800 is scheduled to be paid off in July 2008. Elizabeth says she plans to keep the car "until I can't drive it anymore."

As far as retirement savings, Elizabeth does not have an IRA but does participate in her 401(k), saving 10 percent of her income. Her account balance is approximately $27,000 and she is fully vested. There isn't an employer match, but they often contribute 5 percent of her salary at year end. However, Elizabeth's 401(k) balance is over-diversified as it is spread among nearly every investment option in the plan. She also has 70 percent of current contributions going into international investments.

Family considerations
Though she expects all three of her children to attend college, she does not have any college accounts for the kids. 

Elizabeth receives $906 monthly in Social Security disability payments for the children on behalf of her ex-husband, who is disabled. This is in lieu of child support and alimony. Her only child care costs are incurred during the summer months when her kids are at camp. She has three different high-yield savings accounts for the kids and deposits $30 per month into each. This is often used for summer camp and has recently been depleted for this expense.

Elizabeth has health insurance through her employer that covers her and the kids, as well as disability insurance coverage. She has a term life insurance policy for $500,000 and an additional policy through her employer equal to one year's salary.

She pays for her transit costs on a pretax basis, but doesn't incur much for medical or prescription costs, so a medical flexible spending account isn't beneficial. Elizabeth claims the maximum number of tax deductions and typically gets a tax refund of between $600 and $1,000.

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-- Posted: July 23, 2007
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