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Financial Literacy - Emergency fund
MONEY MAKEOVER
Paving the way to future security
This single mom needs to direct her savings more efficiently to investments that better serve her needs.
Creating an emergency fund
 
Profile: Elizabeth Bryant
The problem:
Savings are scattered; investments are over-diversified.
The plan:
Pay off high-interest debt first; then build up emergency fund.
 
 The plan in 5 steps
 Establish college savings accounts for the children

Divert freed-up funds into college savings accounts.
After car is paid off, make payments to your retirement fund and children's college funds.
Also channel tax refunds, bonuses toward these goals.
Tip: How much do you need to save for college?
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  The plan

Elizabeth needs an adequate emergency savings cushion and needs to boost her retirement savings. But one thing she can take care of right now is to reallocate her 401(k).

Put 401(k) money into one diversified fund
She currently has her account balance spread among nearly every option available in her plan. Diversification is a key ingredient to investment success, but this is overkill. Her current contributions also need an adjustment, as 70 percent is presently going to international investments. Instead, she should allocate her current balance and ongoing contributions to the 2035 target retirement fund, the year in which she will turn 66.

Get rid of high-interest debt
At present, Elizabeth has $2,800 in savings accounts and roughly $1,700 in credit card debt. It doesn't make sense to be putting money into savings yielding 5 percent when she is carrying credit card balances at rates well into the double digits. Because of her saving discipline, she should tap the savings account to pay off her credit card debt, pronto! This will still leave her with over $1,100 available for emergency expenses.

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Keys to success

Budget and live within your means
Accumulate an emergency savings account of 3-6 months' expenses
Eliminate and avoid high interest rate debt
Save at least 10 percent of income for retirement
Proper asset allocation is the primary driver of investment returns




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