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This year, with some very difficult investment decisions, I'm paying of my credit card balance again. Last year at this time, I had the the balance down to zero, and planned to keep it that way. What happened?

First, my wife's car needed new brakes, not just shoes, but wheel cylinders, rotors, etc. One day she was driving, and the brake light went on and the brakes started to go. We had to have the stupid thing towed, and repaired in a shop. That was about $600. Then the Foolmobile (225,000 miles) had to have the radiator and heater core replaced. Then its brakes went, again the whole shooting match, went out while I was driving (fun). Refrigerator died... You get the picture.

Once you start charging, and can't pay off the balance, which I could not do with a couple thousand on the cars in a month, the cash flow goes down. Then, you have to charge other things. It keeps getting worse, and next thing you know, you are in mucho debt again.

The lesson is the importance of a cash reserve for emergencies (and not keeping old cars that have unplanned repairs, and can be dangerous). I am going to take a hit tax wise and other costs in cashing in investments, but it calculated to be better than leaving the debt on the card. If I had built up a cash reserve, and dumped the stupid cars before they were so unreliable, this wouldn't have happened. Don't get emotional about a car enough to give it a name like I did.

I used to sneer at the rule of thumb about a 3 to 6 months salary cash reserve. I don't anymore. If not 3 to 6 months salary, you still need a cash reserve to cover the usual unplanned expenses.
George
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Just a few related random thoughts. Know the feeling on brakes I had a car like that. It needed a $600 brake job every three years the second time it needed it the car looked like a trade-in if I ever saw one. Too bad I didn't know how a fool buys a car at that time. I paid too much for the current car, live and learn.

I agree that you must have a cash reserve. All my major appliances belong to the same union and went on strike over the space of a year.

I have a question regarding which element of personal finance should have the highest priority. Faced with plastic debt and an insufficent cash reserve (read as 2 weeks salary). Which should have priority retireing debt or building the cash reserve for the next unplaned expense. The current plan has been a little to the cash reserve and a lot to debt retirement combined with a strict policy of NO NEW DEBT.

My favorite cash reserve instrument is EE Bonds purchased with payroll deduction. They are almost as liquid as cash since they have all different issue dates you just can't get a hold of ones issued in the last 6 monthes. They have a higher interest rate than a savings account. Like the ice cube method mentioned awhile back ago, since it takes effort to cash the bonds there is time to think do we really want to do this. oh, the advantage of payroll deduction it is real easy to save if you never see the money it just gets automaticly saved for you.

~~paul
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I agree George. While I do have several investments, I currently started stashing away 50$ a month through Transamerica cash reserve. Their current rate is 5.50 if you're interested. I kinda started out a little backwards, I started investing through drips first. But now I am paying off my debt and building up my emergency fund. Then I will be ready for some serious
investing.
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<<I agree George. While I do have several investments, I currently started stashing away 50$ a month through Transamerica cash reserve. Their current rate is 5.50 if you're interested. I kinda started out a little backwards, I started investing through drips first. But now I am paying off my debt and building up my emergency fund. Then I will be ready for some serious
investing.>>

Well folks,
I did it today. I got the checks in for my cashed in investments. One was an annuity, you can imagine the tax bite for that. The capital gains and penalties will hurt, but it still calculated as cheaper than all the interest I was paying. Anyway, I sent the check for the balance to MasterCard. It's over.

I still owe on the rug here in the basement, that's not a whole lot, and I'm still in the "interest free period". I've got to calculate what my expenses are until the next payday to see how much of that I want to pay off. I'll probably just bite the bullet and pay for it too.

I can't emphasize enough the problem that credit card debt plays on your cash flow. When you are forced to make monthly payments on a large balance, you have no cash in reserve to pay for unexpected items. Unfortunately, life is full of unexpected items. This forces you to charge those things, adding again to your balance. Also, I think for me using the credit card makes me cross a psycological threshold, making it "OK" to run up debt.

For January, I have no gasoline charges coming in, no credit charges except the $19.95 for my ISP (which I plan to have put on my debit card). A nice way to start the New Year!

My big investment for this year will be the USAA Cash Reserves, which gives about 5.5% interest. I will NEVER sneer at the idea of a cash reserve again!

Foolishly and have a Happy New Year,
George
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. While I do have several investments, I currently started stashing away 50$ a month through Transamerica cash reserve. Their current rate is 5.50 if you're interested.


I too am interested in building up my cash reserves, but have been unable to find anything that equals Transamerica's 5.50 rate. Do you have a web address or phone number to reach them??

Thanks in advance.

Geri

Happy Holidays
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<<I too am interested in building up my cash reserves, but have been unable to find anything that equals Transamerica's 5.50 rate. Do you have a web address or phone number to reach them??>>

Hey, Geri!

I'm not personally familiar with this company, but in answer to your question, you can find more about it at

http://www.transamerica.com/

Hope this helps!

Tony
...but I still am...

Off2Aruba
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<< While I do have several investments, I currently started stashing away 50$ a month through
Transamerica cash reserve. Their current rate is 5.50 if you're interested.


I too am interested in building up my cash reserves, but have been unable to find anything that
equals Transamerica's 5.50 rate. Do you have a web address or phone number to reach them??

Thanks in advance.>>

Most of the money management magazines (money, kiplingers, etc) have a page devoted to bank CD and money market funds in every issue. They list the highest rates and the numbers to call.

The New York Times (and probably any paper with a good business section) lists the yield of all the major money market funds open to individual investors every Sun, but do not tell how to get a hold of them.

Personally, I keep my reserves in a short term bond fund. The yield is about 1-2% higher, at the cost of a small amount of fluctiation and the paperwork for capital gains.

Crazyfred
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pwyles wrote:
<<Which should have priority retireing [credit card] debt or building the cash reserve for the next unplaned expense>>

The big thing here is that if you have low balances on your plastic, you probably don't _need_ a cash reserve. [I'd still _want_ one, though.] You can most likely charge emergency expenses, and meanwhile you're getting a better return from paying things down than having the money around.

Note that I'm thinking in 3-6 months cash reserve terms, here. If your cash reserve is under a month's worth, then that's clearly more important. Some things, like rent, just can't be charged, and you definitely don't want to be using those "convenience" checks to get it on the plastic.

Later,
shess
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Money magazine maintains a list of the best rates for money market accounts, CDs, credit cards, etc. at

http://www.pathfinder.com/money/rates/savings/bestsave.html

They also have 800 numbers
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