01.24.2011 / Smart Spots to Stash Emergency Cash
You have listened to all the experts and wisely accumulated a solid emergency fund that could cover six months to a years worth of bills. You feel secure knowing that if one of those unexpected moments hits, you have financially prepared. Just one question: Now that you have the funds, where should you put them so it is safe, accessible and still working for you when you do not need it?
"Did you know that 50% of Americans have less than one months expenses saved."
There are four factors to consider:
What is your risk tolerance? In general, when investing emergency cash your main objective is principle preservation – and that typically means a low-risk solution. But some people are comfortable moving into a slightly higher risk category in exchange for potentially greater gains.
How accessible do you want your funds? Are you willing to have them tied up for a month or several years, and pay fees if you need to make an early withdrawal, in exchange for a better interest rate? Or do you want the freedom to withdraw your funds, penalty-free, at any time?
What are the tax implications? It’s always a good idea to consult with a tax advisor, so you can understand how different investment options might impact your tax picture – for instance, if you’ll have tax liabilities tied to interest or dividend income.*
What are the account requirements? Be sure to compare account characteristics such as minimum deposit and minimum balance requirements, transaction options and restrictions, and fees
With these considerations in mind, here are some of the solutions most often recommended by financial experts:
Savings accounts. This option is virtually risk-free, and many accounts have low or no minimum balance, few fees, and immediate, easy access via bank branches and ATMs. However, interest rates are relatively low.
Interest-bearing checking accounts. Also essentially risk-free, this solution adds checking-writing privileges and may offer additional perks, as well. However, these accounts usually require a moderate minimum deposit (often $100 or more) and charge fees if you don’t maintain a minimum average daily balance.
Money market accounts. This choice typically offers higher interest rates than savings or checking accounts, while still presenting a very low risk profile. Many accounts come with check-writing privileges, but some require several days’ advance notice for withdrawal. Minimum deposit requirement are often similar to interest-bearing checking accounts, and fees may apply if you don’t meet minimum daily balance requirements.
Certificates of Deposit (CDs). CDs give you a fixed interest rate that’s compounded daily for the term of the CD, which can range from about a month to five years. The longer the term, the better rates you’ll generally get. You’ll pay penalties if you cash out before the maturity date, though, and CDs usually have somewhat higher minimum deposit requirements (often $500 or more).
Mutual funds. These are professionally managed investments that can net you higher gains – but also carry more risk. You can choose from a variety of fund profiles to find one that best sites your needs and risk tolerance. Minimum deposits may be high as $1,000.
For many people, the right choice is splitting up emergency cash to invest in tow or more types of accounts. If you’d like expert help in making your decision, remember that First National Bank is here for you – just call or visit your local branch.
Did you know that 50% of Americans have less than one month’s expenses saved. And 28% have less than two weeks’ worth.**
Do you have any emergency cash savings tips that you have found to be helpful? Please post your comment now.
*Consult your tax adviser regarding the deductibility of interest and potential tax liability.
** Source: 2009 MetLife “American Dream”Survey as reported in “It’s Your Money,” mdmproofing.com.