Wes Moss: Emergency fund trumps all other money matters

Wes_Moss-for-Web-smaller-fi Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest blog will appear here every Monday.

What does your CASH BUCKET look like?

September is National Emergency Preparedness Month. While the government is urging families to get ready for natural or man-made disasters, I’d like to talk about preparing for a more likely scenario – a financial emergency.

Establishing an emergency fund of readily accessible cash is the most important first step in achieving financial security.  I refer to an emergency fund as your CASH BUCKET on my radio show, “Money Matters.” Families without such a cushion are absolutely living on the edge. In the event of job loss or unexpected expense, they face a terrible fall into credit card debt, the loss of a home, or worse.  On the flip side, families that have built a viable emergency fund are able to SWAN – Sleep Well At Night.

In order to provide real peace of mind and security, your emergency fund should have enough cash to cover between six and twelve months of essential living expenses – housing, food, utilities, medicines, and transportation.  This is a larger fund than what is traditionally recommended, but I believe that in these highly uncertain economic times, where finding a job can take a year or more, you need more insulation than a $1000 bucks!

A family earning $50,000 — and living within its means — should be able to get by on about $2,000 per month.  So, at minimum, their emergency fund should be $12,000.  That’s a lot of money.  But this isn’t an option; it’s a must-do that may require you to re-think your family budget and spending.  The first time I tried to establish an emergency fund, it took me several years to hit my goal.  The reason: I spent too much, and never really committed to making it happen.

When I finally got serious, I went into what I call personal “economic shut down.” I cut ALL my non-essential spending – restaurants, clothes, movie rentals, vacations!, et cetera – and poured that money into my emergency fund.  It was painful, but it worked; and it showed me that I have the ability to actually achieve my financial goals…all it took was a little (or a lot of) discipline!

Now, even if you are in serious credit card debt, the emergency fund still needs to be tackled even before getting completely out of debt.  You and I both know that paying off a high interest rate credit card is a no-brainer, but you’ll get to that as soon as you build your family’s six to 12 month cushion!  If your debt and interest payments are high, it’s fine to keep the emergency fund closer to six months, then get to eliminating debt.  Why do this first?  Credit cards can get maxed out, credit lines can get unexpectedly reduced, and credit lines can be shut down.  That’s why plastic shouldn’t be used as an “emergency fund!”  Only cash, CDs, or money market can pay the bills if you lose your job, your roof starts to leak and your car blows up all in the same month.

So, no matter what your current financial situation is, start plowing away your emergency fund, or CASH BUCKET.  Yes, it would be nice to have started yesterday, but today is much better than tomorrow.

Wes Moss is a certified financial planner and is the Chief Investment Strategist at Capital Investment Advisors in Atlanta. Moss is also the host of “Money Matters” on AM 750 and now 95.5 FM News Talk WSB on Sundays from 9 a.m.-11 a.m. An author, “Apprentice” alumni, husband and father, Moss is committed to helping Atlanta’s citizens with financial health.

Follow me on Twitter @atlbargains or on Facebook at AJC Atlanta Bargain Hunter

19 comments Add your comment

JM

September 20th, 2010
8:21 am

Wes, I am 31 and have built up a 12 month emergency fund after listening to you. I would prefer having 12 months over 6 just in case. If I only need 6 months at a minimum as you suggest, should I look towards something with a better return than the 0.2% that I am getting at the bank? Where?

ATL

September 20th, 2010
9:04 am

JM — Maybe you could look into a CD or a bank like ING Direct that pays over 1% interest. You can do better then 0.2%.

Ironwood

September 20th, 2010
9:06 am

You are on target. JM go online to Bankrate.com and you will see some banks were you can get 1.2% on a money market account. Not much but more than .02%.

Dr88

September 20th, 2010
9:24 am

Cash is King! But… I tried a couple of those online banks and they will drop your rate after the first few months; some of them are like teaser rates. After moving my account 3 different times, I finally got sick of the gaming and just went back to the old credit union. And after all this we have been through, I like knowing I can show up at a physical location and talk to someone.

atlmom

September 20th, 2010
9:49 am

JM: you can also tier the money – i.e., start by putting 1/4 of the money into a 1 month CD – then keep doing that every three months, until all the money is in CDs. Then, when the ‘roll over’ you can put the money in for a year again. You would never be more than 90 days from something maturing, and you are over time probably earning more interest…so if there’s a penalty, it’s probably not so much (but read the fine print) and it’s worth it to get your money if you need it. You could also tier them in 1 month intervals (each month take 1/12 of the money and put it in year CDs…or every 2 months put 1/6 the money – you get the idea).
Depends what your tolerance is, really…if you really don’t want to take the chance of paying a penalty, don’t do it – but again, if you pay a penalty – it probably will be better getting the higher interest and paying the penalty…

Ironwood

September 20th, 2010
9:53 am

JM, get a money market account. I have used Dollar Direct and I am getting 1.2% the last few months. It is true some banks have teaser rates but get one that does not. This money is FDIC insured. This is a bank.

cyril

September 20th, 2010
9:55 am

JM, if you decide to go with a CD over a money market account, check into credit unions. Many credit unions will let you take the money out of the CD without a penalty, though I think they may not give the interest earned leading up to that point. So if worse comes to worst, you didn’t lose or gain anything.

DW

September 20th, 2010
10:02 am

If you have $10,000 in your emergency fund, whats the difference between 1.2% and .2% ?? thats $120 vs $20 a YEAR. Not even worth the hassle of changing accounts. Your not trying to make a bunch of money your just holding onto cash until an emergency arrises people. Rates will go up eventually.. relax.

Ironwood

September 20th, 2010
10:04 am

atlmom is correct. It is called laddering your CD’s. However, I am getting as much in a money market account as I would laddering my one year CD’s and rates will be going up. The government will not be able to continue to keep rates as low as this for a long time. The longer your CD’s, the longer you will have to wait to gain from an uptick in interest rates. As a result, you want short maturities. Rates are historically low right now. Another reason you do not want to buy bonds because of interest rate risk.

Austrian Advocate

September 20th, 2010
10:05 am

Well, if you believe the idiot economists that work for the government and blather all of the mainstream media, this approach will destroy our economy. We should just be out spending and spending with little regard for the future (just like the clowns in our government are doing).

Of course the Austrian economists (who have predicted every economic crisis since the creation of the Federal Reserve in 1913) understand that savings and investment are the health of the economy and not spending.

The only real problem with having a crisis fund is that if it is dollars, the likely collapse of the dollar could wipe this fund out through hyperinflation in a matter of months. An even better strategy would be to sock away money in the form of gold and/or silver. At least these things will always have value unlike paper which always returns to its inherent value (zero).

Excellent article. Everyone needs to prepare.

Wes Moss

September 20th, 2010
10:28 am

The current savings rate for your CASH BUCKET right now…is dismally low. It wasn’t that long ago when money markets were paying 3 to 4% and CDs were paying 4 to 5%…things have changed, and according to bankrate.com the average 1 YR CD rate last week was 1.24%, and the average money market rate was 0.7%…not a lot to write home about – but will still serve the true purpose of providing a safe emergency cushion when you need it.

2 Great Resources to help fill your cash bucket:
http://www.bankrate.com
http://www.treasurydirect.gov

ATL

September 20th, 2010
10:29 am

Oh boy, here we go with the Gold people telling us the dollar system is bound to fail. Sure would rather have my money in dollars then in Gold which is at an all time high and historically returns very little.

ATL money man

September 20th, 2010
10:46 am

In ATL, you should go to Private Bank of Buckhead for money market accounts. They are big on service and one of the few banks that are making money. They did not take TARP and are succeeding. Like all banks and other money market instruments, the yields are not high but then no one expects them to be in this economy. Look for a bank that will be a full service bank for you with more than just savings and investment accounts but one that is lending. You never know when a relationship will come in handy if you ever need a loan.

Austrian Advocate

September 20th, 2010
10:58 am

There has never in the history of man been a fiat currency that has survived. They have all collapsed. Gold and silver are not investments. They are money. Gold is up several hundred percent in just the past couple of decades, and its current price does not reflect its increasing value, but rather the declining value of the dollar. An ounce of gold still buys about what it has always bought. It holds its value. Can you say the same about a dollar? Even with the interest you earn?

If you think that the doubling of the money supply in the past 2 years by the Federal Reserve will not have an eventual impact on the price of everything then you have fully bought into the government lie.

But hey, its your future. I know that my gold purchases are worth more than double (in dollars) than what they were when I bought them. How are your “investments” doing?

When hyperinflation hit Germany in the 20’s and 30’s, people were literally burning marks just to keep warm.

JM

September 20th, 2010
11:09 am

Thank you all for your advice. I am going to look into the money market fund at Dollar Direct and if not do some shorter CDs. This blog group was very helpful!

Wes Moss

September 20th, 2010
11:31 am

Are Money Markets Safe?
Since 1933, FDIC insurance has allowed investors to feel comfortable holding CDs and bank Money Market accounts- provided they adhere to the deposit insurance limits (currently $250,000 per depositor/bank/account category). See http://www.fdic.gov/deposit/deposits/dis/index.html for more detail.

Wes Moss

September 20th, 2010
11:34 am

What the Austrian Advocate is bringing up has to do with the negative impact that INFLATION can have on the purchasing power of your investments…Historically, cash has not been a great hedge against inflation. How could it be if cash has averaged 2-3%, and inflation has done the same…However, the CASH BUCKET is not meant to hedge against inflation…it is meant to give you a cushion incase of an emergency. Other asset classes like gold, commodities, and stocks are purchased as a hedge to inflation…however, they go into important BUCKETS that I will go into in future posts…those include the “Income Bucket”, the “Alternative Bucket”, and the “Growth Bucket”…all important conversations for the near future.

Kar

September 20th, 2010
1:09 pm

I used to do counseling at a homeless shelter. One of the big features that we would see with these families (not single winos, families) is that they did not have a cushion for emergencies. So if the car broke down, someone got ill or they lost a job, they did not have contingency funds and ended up in the shelters. I couldn’t believe how many people ended up in the shelter because their “monthly checks” were a little late or didn’t follow them in the mail.

Admittedly, it’s hard to save up funds if you’re that close to the edge and if there are generations of this “here today, who knows about tomorrow” behavior, it’s not the most instinctual one. However, that ability to plan for the unknowable that made the difference for many of my clients. How they’d react to a situation determines if they would ultimately land on their feet.

So as they managed to get jobs, they’d have to put some money into a fund for not only a housing deposit but for future contingencies so that they didn’t return to the shelter.

Tinytam

September 20th, 2010
9:50 pm

Really great column Wes! I look forward to reading your blog and seeing you here on the Atlanta Bargain Hunter page.