Your savings account as an emergency fund

It might seem a bit early to be jumping on the finance theme, as we are all trying to pay off our Christmas debt. But with any luck, you are indeed paying off your credit cards, not just making the minimum payment. And it is never too early to start saving money.

Actually, this is a pretty simple post. Once you've paid off your credit cards, your next goal should be in getting your savings account up to snuff. This concept kind of surprised me, because I'd never really thought of my savings account as anything except as a place to save up for vacations or Christmas or other things I wanted to buy. It turns out it should really be more than that. I'm sure you've at one point or another considered your monthly budget, if not down to the dollar, at least a rough estimate of how much money you spend on living every month. Rent/mortgage payments, utilities, food - the essentials. Take that number and multiply it by eight - and that is how much money you should really have in your savings account. Rather than just being a vehicle for saving for that special something, your savings account should really be a liquid cash emergency fund. As I recently found out, having a very stupid accident at work that almost caused me to miss some work, bad things can happen when you least expect it. That eight month emergency fund should be sitting there for you when you unexpectedly find yourself out of work, to give you a cushion to pay your bills while you are searching for a new job.

The first goal should be to get that number where it should be. I'm currently pretty short, but one of my three financial goals for the year is to get it up where it should be. Once you've got it in place, then you can start to think about ways to maximize earnings. Regular bank interest isn't generally that great, especially in an economy like this one. My credit union offers some more attractive vehicles than a plain savings account, so I'm making something like 2.75% interest, which isn't terrible in this economy, but isn't great either. I'm thinking what I might do is start opening up short-term CDs, maybe 6 months or possibly a year. I wouldn't want to put everything into the same CD though, locking the money away for a year. As an emergency fund it is critical that I have access to the money should something happen, and not have to waste it on early withdrawal penalties. But I could, say, put small amounts in a 6 month CD each month for six months, staggering them so that every month I have at least some money at term that I could use if I needed it. If I'm still employed and don't need it, I can roll it over into another CD. Returns on 6 month CDs certainly aren't going to be all that great either mind you, but with a little research it could be better than just sitting in a savings account. And, at this point, when planning for your financial future every dollar counts.

I guess this brings up another point, but I'd look very carefully at your bank right now. We often pick banks for convenience, but there are differences between them and what they offer. If you have access to a credit union, either because of your job or where you live, it is very likely to your advantage to join that rather than the default local bank. Credit unions almost always offer better interest rates, higher to pay you and lower to charge you. If you move a lot, it can be a bit of a hassle, believe me I know. But still I stay with my New York-based credit union, because the benefits far outweigh the annoyances of trying to find shared branches in other cities. Now, credit unions are as different from each other as anything else, so be sure to do your homework. But I'd say, at least anecdotally speaking, they are almost always better than their bank counterparts as far as saving money goes.