UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35272  
Subject: Bond and F-I FAQs: Part 2 C Date: 2/14/2007 2:21 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 9
##################################################
What are the best options for an “Emergency Fund”?
##################################################

• There are really two kinds of “Emergency Funds”:
---An unplanned expenses fund, with a few thousand dollars in it, to cover car repairs, the plumber, the dead refrigerator, travel to funerals or to visit sick relatives, etc.;
---A contingency fund to cover living expenses during periods of unemployment—losing a job, going back to school, illness and disability, caring for a relative, deciding to stay home with the kids, etc.
---Optimists think 3-6 months of living expenses is enough for a contingency fund.
---Pessimists think 3 years of living expenses is a minimum, including being able to cover your own health insurance.

• For unplanned expenses, liquidity is essential.
---This limits the options to Money Markets, Savings Accounts, and perhaps, a ladder of short term Treasury Bills (4-week, 3-month) or 3-month CDs.
---Those whose paychecks significantly exceed regular monthly expenses may prefer to use credit cards for unplanned expenses and pay them off quickly with the excess cash flow.
---Over time, if you have built up savings with easy liquidity (Savings Bonds after 5 years, a tight CD-ladder), there is probably no need for an unplanned expenses fund, as distinct from a contingency fund.

• For a contingency fund, the trick is to maximize the interest you receive, while still keeping your principal safe and liquid enough you can use it if needed.
---The hope is this money will end up contributing to your long-term savings goals, if none of these contingencies ever happens.
---Savings Bonds, after the first year, have been a favorite for contingency funds, with just a 3-month interest penalty up to 5 years. The problem of the first year is solved by building the contingency fund gradually, with other emergency money kept in a money market or savings account until there is enough in Savings Bonds.
---Unfortunately, over the last few years, with the new, low fixed-rate EE-bonds and I-bonds with non-competitive fixed rates, the Savings Bond option is less appealing than it was. Nonetheless, with the tax advantages and the small denominations, this may still be the best choice for many. At least an I-bond, with a 1%-1.5% fixed rate, will keep you ahead of inflation (as measured by the CPI-U).
---CDs, or a CD-ladder, can work as a contingency fund, if you make sure the penalties for cashing in early are manageable. Some CDs allow you to cash in only part of the CD and pay the penalty on that. And, over the years, a penalty of 2%-3% may be worth it, if you have been receiving 1% or more every year above more liquid alternatives.
---Money Markets, Savings Accounts, and short-term Treasury Bills are also an option. This is fine when the yield curve is flat or inverted, since you are earning as much interest as with longer maturities. With a steep yield curve, these instruments lose out to 5-year CDs, even with a penalty.
---A short-term bond fund is worth considering. Short-term bond funds are safer than other bond funds, and the losses you might sustain if interest rates go up may be comparable to paying a penalty on a CD or may be compensated for by higher yields than those of Savings Bonds.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

2013 Feste Award Voting Begins!
Who will win the 2013 Feste Award? Vote now for the Fool that most exemplifies the Fool Community mission of Learning Together!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Tax Strategies

TMFPMarti-Feeling Good
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement