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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
 
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.
 
  Profile
Elizabeth Bryant

Elizabeth Bryant, 38, of New Jersey is a single mother with three children -- a 12-year-old daughter and two sons, ages 15 and 9. She works full time as a legal secretary and has been with the same firm for the past five years. Elizabeth is a renter, but would like to eventually purchase a home.

Elizabeth lists her financial goals as saving three to six months' expenses in a liquid account and perhaps eventually purchasing a home, though that isn't a high priority. She also wants to know, "Am I on track?"

 
  The problem

Overview

Elizabeth has been rebuilding her credit from a previous bankruptcy in 2005. As a result, her car loan and most of her credit cards carry high interest rates. She has a total of six credit cards, four of which have balances at interest rates as high as 23.99 percent. On three of the cards, the balances are $500 or less, but one card carries a $1,500 balance at 14.9 percent. She must be particularly careful to resist the lure of credit cards as she had accumulated $60,000 in credit card debt before filing bankruptcy.

The balance sheet, assets and liabilities
Elizabeth keeps close track of household income and expenses, with monthly household expenses averaging $3,700. Her current emergency savings of $2,800 is spread between two high-yield savings accounts, and she contributes a total of $230 per month to these accounts. She also has $1,300 in T. Rowe Price Spectrum Growth fund, a fund of funds focusing on large company stocks, and is contributing an additional $50 per month to that.

Read More  


Greg Mcbride
This report was prepared by Bankrate Senior Financial Analyst Greg McBride, CFA.

Key issues

Insufficient emergency savings
Carrying credit card debt, all at above-average interest rates due to previous bankruptcy
No IRA
No college savings accounts for the kids
401(k) balance is over-diversified
Jump these money hurdles


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