Saving for a Rainy Day

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By Robert Brokamp (TMF Bro)
July 11, 2002

Yes, we're all wondering what to do now. (In fact, we even wrote a book about it.) Your first line of defense in troubled times: a comfy cash cushion. You can consider this to be your emergency fund, your opportunity fund, or your "at least this account won't drop 20% in one week" fund. Whatever you call it, several thousand dollars sitting in a safe, liquid investment is ballast in the storm.

The standard advice about emergency funds is that you should have three to six months' worth of income stashed away in cash equivalents. What are those? Boring things you get at the bank, like savings accounts, money market accounts, and certificates of deposit. You won't earn a lot of interest on these types of accounts, and they're no fun to talk about at parties. (Could you imagine someone taking a sip of his martini and saying, "I don't mean to brag, but I just bought a CD that pays 5%"?) But the money will be there tomorrow, if you need it.

Why would you need it? Because sudden, unexpected, big-ticket expenses are part of life. Car repairs cost hundreds of dollars, house repairs often cost thousands, and body repairs... well, you just better hope you have good health insurance. Then there's the fate suffered by tens of thousands of people over the past few years: the loss of a job. If you don't have a reliable source of cash to draw upon in these circumstances, you may have to consign yourself to the shackles of credit. Relying on plastic in times of need just makes a bad situation worse. Looking for a new job is no fun; doing so while covering your expenses with a credit card that charges 18% interest is a nightmare.

To learn more about how much you should have stuffed in your cash cushion, and how you can get some decent rates on money markets and CDs, visit our Short-Term Savings Center.

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