Raising A Millionaire: Weekly Digest
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Raising A Millionaire: Quote of the Week

"If a problem has no solution, it may not be a problem, but a fact - not to be solved, but to be coped with over time."

  -Shimon Peres

Raising A Millionaire: Article of the Week
Emergency Funds

Stuff happens, and it usually costs money. If you don't have an emergency fund equal to three to six months worth of basic living expenses, you're living on the edge. There's no time like the present to get started.

Your success in building your emergency fund depends on your consistency in socking away money on a regular basis, and your ability to resist digging into your emergency fund for non-emergencies.

Why You Need an Emergency Fund
Emergency funds are an absolute necessity for financial security because they give you funds to fall back on if you become ill or disabled and can't work, or if you or your spouse lose your job, incur large medical bills, or have an unexpected large bill such as a major car or home repair.

Without an emergency fund, you may be forced to incur credit card debt that could take you many years to pay off and end up costing you much more in the long run.

You never want to be in the position where you have to buy daily necessities like food, transportation, and housing on credit. Imagine still making payments on groceries you bought (and ate) three years ago, at 10-18% interest. Pretty depressing.

How Much You Need in Your Emergency Fund
The minimum amount in your emergency fund should be three to six months worth of basic living expenses. Singles who don't have dependents who rely on them may be able to get by with three months' worth (although it makes me cringe to say so), but couples or anyone with dependents should definitely shoot for six months worth. The more people you support, the more likely you are to have unexpected or unplanned costs.

If you don't have short- and long-term disability insurance that will pay a portion of your salary if you're unable to work, it's a good idea to have more than the minimum in your emergency fund.

Your goal should also take into account the degree of difficulty you'd have in finding a new job if you lost yours. For example, if you're a nurse and nurses are in demand, you probably wouldn't be unemployed for as long as a wildlife rehabilitator or someone with skills that are not in as great demand, so wouldn't need to fall back on your emergency fund for as long.

It's best to keep your emergency funds separate from a savings account that you use for large planned purposes, like vacations, home improvements, a wedding, a new car, or a downpayment on a house. Keeping it separate makes it easier to leave it alone.

Where To Keep Your Emergency Fund
While you wouldn't want to keep your retirements funds in these types of accounts, checking accounts, saving accounts, money market accounts, certificates of deposit, money market funds, and short-term bonds are all good places to stash the cash you may need on short notice. These are the most liquid investments.

Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. Stocks are somewhat more liquid than real estate, but you can lose money on stocks if you're forced to sell at a time when the market for your stock is less than favorable. Even though interest on liquid investments may barely keep up with inflation, the lower risk is worth the lower return when you may need the money quickly.

Checking accounts pay infamously low interest and may come with monthly service charges, so these are not the first choice for emergency funds. Another reason to avoid mingling your emergency fund with your regular checking account is that money in your checking account is too easily spent.

Savings accounts usually pay somewhat higher interest and segregate your savings from the money that covers your living expenses. They're less likely to have monthly fees.

Money market accounts offered by banks (not to be confused with money market funds) may pay a little higher interest than either checking or savings accounts but limit the number of transactions you can make without a fee.

Money market funds, offered by brokerage houses and mutual fund companies, are NOT FDIC-insured like money market accounts are, so they're not as safe.

Certificates of Deposit (CDs) are funds you lend to the bank for a specific period of time in return for a guaranteed, pre-determined interest rate. They come in different maturities, such as three months, six months, one year, five years, etc., and cashing them in early will result in a penalty, so they are not quite as liquid as the other investments mentioned. However, if you ladder your CDs you can avoid this problem.

Raising A Millionaire: Other Articles

How Much Do I Need to Save? - A lot of people have heard about the "three to six months of living expenses" rule, but do you know about the exceptions?

Saving Options - Learn about your options: money market accounts, certificates of deposits, Treasuries, bonds, and more.

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