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Where to Stash Your Cash

Creating an emergency fund is one of the basic tenets of financial planning.  Having six to nine months of living expenses is important to prevent surprises from derailing your financial health.   If you lose your job, have a medical emergency, need to make immediate car repairs or have any other problems that may creep up and become a major expense, it’s important to have money set aside so that you do not have to use your credit card or other high interest debt to meet your needs.

Generally, people have difficulty accumulating the funds for their emergency fund.  Saving that much money requires discipline and hard work and is often derailed by the very emergencies that you are saving for.  So I was surprised when I met a gentleman who had accumulated his six to nine months of living expenses.  His difficulty came in another important area.

The gentleman had informed me that he had about$10,000 saved up in his emergency fund but when I looked at his bank statements, it appeared that he had significantly less money than that. 

I posed a very simple question to him.  “Didn’t you say that you have $10,000 saved?  Your most recent bank statement says that you have less than $1,000 in your savings account.  Where is the money?”

The gentleman looked at me, smiled and said to me with utmost confidence, “Stocks.”

Stocks.  I was speechless.  As a financial planner, this answer makes my skin crawl.  Stocks are the last place a person should store their emergency savings.

One of the key characteristics of an emergency fund is that the funds be available with no delays and at no cost.  Please don’t forget this fact.  I knew a great deal about this gentleman’s situation and I knew that he would need this money soon.  Not having immediate access to it and having to pay what ever fees were necessary to access his funds put him at an extreme disadvantage.  Your emergency fund is your get out of jail card and if you can’t access those funds, you are doing yourself a great disservice.    

Please consider the following when setting up an emergency fund:

  1. An emergency fund should be placed in an institution that is backed by the Federal Deposit Insurance Corporation (FDIC).  Stocks are not backed by the FDIC.  So if your investment doesn’t perform well and you lose that money, you many never get that money back.  Deposits at FDIC insured institutions are insured up to at least $250,000 per depositor until December 31, 2013.   Make sure your money is there when you need it.
  2. An emergency fund should be placed in an account that offers high return so that it may keep pace with inflation.  Good options can be found in the “Savings” section on Bankrate.com. 
  3. Don’t become discouraged by the idea of saving six months of expenses.  Start with the goal of saving enough to cover one month.  Do this by putting savings on automatic.  Have an amount of money taken from each pay check and directed to a savings account.  This will making saving a little less painful and often times, you won’t even notice the money is gone. 
Categories: Saving
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