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Plan Well, Retire Well

Saving and investing your money

Is there a bankruptcy in your future?

Years and years ago when I was a little kid, my father read a newspaper article with a series of financial questions that indicated whether you were in danger of bankruptcy. My father commented that we were"right in the middle of it." That sobering statement made quite an impact on me.

We never filed bankruptcy. I have no idea whether we were truly at risk or not. But last week's article on titled Eight Signs You're Flirting with Financial Ruin brought back those memories.

The article focuses on financial behaviors that indicate you're already on the slippery slope, things like not paying bills on time, repeatedly overdrawing your checking account, or using home equity or your 401(k) like an emergency fund as signals that you're heading toward financial disaster.

I agree that these would indicate you're likely headed for (or already in) serious financial trouble. But I think there's an early warning signal that you can see before these things happen: whether or not the person has accessible savings - an emergency fund.

If you don't have an emergency fund, what happens when the brakes go out on the car? Or when your kid is sick? Or when the cost of heating your home is twice what you expected? You either go into debt, or you do one of the things described by

A participant in one of my debtor education classes (required of bankruptcy filers) a few years ago made a statement that stopped everyone in their tracks. She said simply, "If you can't afford to save, you can't afford to spend." For her, the consequence of not realizing that truth was eventually filing bankruptcy.

A small emergency fund won't be sufficient protection if you lose your job, have a serious illness, or lose your household's breadwinner through death or divorce. (And according to The Fragile Middle Class: Americans in Debt, a well-researched book by Teresa A. Sullivan, Elizabeth Warren, and Jay Westbrook published in 2001, the vast majority of bankruptcy filers have suffered a job loss, medical crisis, or divorce.) But it might keep you from starting on that path of paying one bill late because you had to use that $75 for an emergency, which leads to a late fee, which leads to being late on more bills, and so on and so on.

So I'd like to invoke another thing I learned from my father. Never spend your last dollar. Today, maybe that should be $10. But you get the point. Don't ever be completely broke. Always keep something in reserve. You might need it more tomorrow than you do today.

Save that dollar, or $10. Next week or next month, save another $10. Put it somewhere that you could get it in an emergency, but not too easily. Some people can't have cash around the house because they'll spend it. Others will spend every penny that's in their checking account. Figure out what works for your personality, where you can accumulate some savings without being tempted to use it. And start building up your emergency fund.

And when you start to think that you just don't have enough money to save any, remember what the bankruptcy filer said: If you don't have enough money to save, you don't have enough to spend.

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