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You may need to tap savings in hard times

Financial advisers typically recommend setting aside at least three months' worth of living expenses in a safe, liquid account in case of prolonged unemployment, sudden medical emergency or other unforeseen financial demands. This is called your "financial cushion."

Yet in today's economic climate, is it really practical?

With the proverbial "rainy day" now closer than ever, you may be tempted to dip into your savings, not add to them. So under what circumstances is it OK to spend your reserves? Are there better sources of ready cash to keep you afloat?

Saving during recession
"Don't expect to maintain your current standard of living," says David Hefty, CEO and co-founder of Cornerstone Wealth Management in Auburn, Ind. "If you have children, use this as an opportunity to teach them about sacrifice ... Use this horrible economic downturn as a positive and don't be a victim."

Tapping your savings
  • Saving during recession.
  • Spending during recession.
  • When to borrow.
  • Asking loved ones.
  • Money to avoid.
To be sure, there's no single, simple formula for not becoming a victim. What's right for one person might not be right for another.

"There's no cookie-cutter or off-the-shelf answer to the question of what to do about your nest egg in hard times," says Rob Barmen, executive vice president at BPU Investment Management, a financial advisory firm in Pittsburgh. "It really depends on your situation."

Ironically, despite these recessionary times, Americans are suddenly managing to put away more money, not less. In early March, the U.S. Commerce Department announced that personal savings as a percentage of disposable personal income surged to 5 percent in January this year, the highest level since March 1995.

"Consumers are fearful right now," says Michael M. Eisenberg, a certified public accountant and personal financial specialist in Los Angeles. "If they have a job, they're afraid they might lose it. In a way, that's the silver lining of this crisis. It's showing people they can and must save."

Spending during recession
Naturally, there are times when you can't save. There may be times when you're tempted to spend your savings. That's fine, if you're prudent.

Job losses or urgent medical needs and other emergencies are valid grounds for withdrawing from a rainy-day fund, Eisenberg says, but a sale at Bloomingdale's doesn't count.

"The emergency fund is there to get you through unanticipated crises," Eisenberg says. "You can tap into it for spontaneous, one-time events, such as an urgent car repair or, if you've just lost your job, to make your next property-tax payment, that kind of stuff."

At other times, though, it can be better to borrow money than spend your savings. Interest rates are enticingly low at the moment, except on credit cards. If you can borrow at a lower rate than you earn from your savings, it might be a wiser option. However, if owing money keeps you awake at night, it's probably not a smart move.

Next: "Another choice is to ask friends or family for money. ..."
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