In this week’s Today.com video I explain to a viewer why it’s a good idea to have separate accounts for emergencies, buying and repairing your cars, and other investment purposes.
Check out my 6 tips for setting up emergency accounts:
1) KEEP YOUR EMERGENCY ACCOUNT SEPARATE FROM OTHER ACCOUNTS. This means you want to put your emergency cash cushion of at least three months’ of expenses into an account that is NOT your regular checking account, but one set up specifically for this purpose. Once you set an account up I suggest you make your emergency fund automatic. That means every single time your paycheck is deposited, your checking account is set up to automatically sweep money into a separate savings account you’ve set up for your rainy-day fund. I suggest you start by moving 5% of each paycheck to your emergency account until you reach the goal you set for yourself.
2) DO NOT HAVE A CHECKING ACCOUNT OR ATM CARD ATTACHED TO THIS ACCOUNT. Why do I say this? If you don’t have an ATM card or a checking account attached to your money you will be more likely to leave the money alone, so you actually use it for what it’s meant for—an emergency. What’s a real emergency? It’s not just having to buy a new dress for that special party. Or finding an amazing set of wheels for your car at a once-in-a-lifetime price. A real emergency is something that threatens your survival, not just your desire to be comfortable. So unless your family is about to go hungry or be thrown out into the street, you shouldn’t be dipping into your emergency fund.
3) SET UP SEPARATE ACCOUNTS FOR OTHER INVESTMENTS. If you are trying to save for a large purchase like a car or household appliances make sure you save for these in separate accounts, not your rainy-day fund.
4) USE A MONEY MARKET ACCOUNT FOR SAVING YOUR MONEY. Once you’ve made the commitment to funding a rainy-day account, the next decision you have to make is where to park it. I used to emphasize the importance of finding a place that would give you a reasonable return on your money. But these days, I’d focus less on the kind of return you’re getting and more on making sure your emergency money is safe and accessible.
A money market account is one of the simplest, most secure choices for someone who wants to put aside cash and earn a decent return. When you deposit in a money market, you’re actually buying shares in a mutual fund that invests in short-term government bonds and highly rated corporate bonds—the safest investments around.
5) SEARCH FOR MONEY MARKET ACCOUNTS AT BANKRATE.COM. Today there are thousands of money market accounts out there, and the cost and quality vary widely. So just like you’d shop around for a car, shop around for a money market rate. Ask questions and don’t be afraid to play competitors against each other.
6) CHOOSE A REPUTABLE BANK WITH FDIC INSURANCE ON THE ACCOUNT. If you find a bank with a rate that you’re interested in. Check to see if it displays the official sign of the Federal Deposit Insurance Corporation. As its name indicates, the job of the FDIC is to insure deposits—and thus allow banks to tell nervous customers that even if the bank fails, their money (or at least a good chunk of it) will be safe. So make sure your money is safe by checking to make sure the bank is FDIC approved.
BONUS TIP: I didn’t mention this in the video but you can also let the Government help you save for a rainy day. The U.S. government has made it really easy to buy bonds online, and if you’re looking for a safe investment that’s guaranteed by the full faith and credit of the U.S. government, consider U.S. savings bonds. TreasuryDirect.gov is a terrific Web site that lets you quickly and easily invest as little as $25 a month in two types of U.S. savings bonds: I-Bonds and EE Bonds.
The fact is that without a cash cushion, we are only one job loss or one emergency medical expense away from disaster. I hope my tips help you with your emergency account. And if you do not have one yet, I urge you to set one up today. As my Grandma Rose Bach used to tell me, “David, when the going gets tough, the tough have cash.” Cash is king. Cash is security.