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60-Second Guide to Short-Term Savings

Could you cover the cost of a new water heater if yours suddenly went on the fritz? Would you have to put the unplanned purchase on a credit card, and then adopt a Ramen-only diet for months afterwards just to cover the tab?

Having money at-the-ready for life's financial hiccups -- both planned and otherwise -- can cut a lot of stress from your life. Give us just 60 seconds, and we'll show you how to establish a short-term stash of cash in no time.

0:60 Calculate how much you spend every month
The first rule of savings is to bank enough to cover the necessities if -- knock on wood -- an emergency arises. How much do you need? Well, how much do you spend on a monthly basis?

Add up what you spend each month on necessities such as food, shelter, transportation to work, and anything that you promised to buy your kids. (If you're not into keeping detailed records, Mint.com's free online service can give you a pretty good immediate snapshot of where your money goes.)

0:52: Add some padding for "just-in-case" scenarios
There are small emergencies (bad perm) and big ones (job loss). Bump up your monthly spending number a tad to account for things like job-hunting expenses, should you suddenly find yourself in need of a new gig. Then multiply that figure by three or six (for the number of months that you want to cover), factoring in other available monetary resources and the number of people for whom you're financially responsible.

Voila! Now you have the amount of money you need to stash in your emergency savings account.

0:48: Gaze into your 1- to 5-year "big expenditures" crystal ball
With your emergency savings covered, now it's time to figure out what other kind of cash you should put aside. Planning a renovation, extreme dental work or a family vacation? These things are also part of your short-term savings strategy. Put 'em down on paper and estimate how much these purchases will cost.

0:40: Figure out how quickly you will meet this goal
You want to fund your cash kitty ASAP (emergency expenses tend not to wait around until it's convenient). Come up with an amount you can afford to contribute each month. Make it one of those must-pay expenses -- just like your electric bill and grocery money. Yes, it's that important. Once the emergency stash is stashed, move on to the non-emergency short-term savings goals. (Use our savings calculators to crunch the numbers.)

0:37: Pick a parking spot for your cash
Easy access is essential when we're talking about emergency savings, so your money should be stashed somewhere you'll be able to get your hands on it quickly ... in case of, well, an emergency. It should also be in a "safe" investment -- meaning one that won't tank every time the stock market takes a tumble. That narrows it down to:

  • High-yield savings accounts.
  • Money market accounts.
  • Money market mutual funds.

For non-emergency savings (where you pinky-swear to let the money sit untouched until you need it) less liquid investments -- such as certificates of deposit -- may offer you a better interest rate on your money. (We've covered the ins and outs of all these types of accounts in "Where to Park Your Cash.")

0:29 Click around and comparison-shop
Look at bank ads in newspapers, check out the best national rates on Bankrate.com, see what your broker is paying on cash in your brokerage account, ask your regular bank or local credit union what they offer, and get information on money market funds from websites like iMoneyNet. Find out:

  • What interest rates are available.
  • What are the comparable yields over identical time periods.
  • What timeframe the rate applies to.
  • What fees (if any) there are to purchase and maintain the investment.
  • The minimum investment required to get favorable interest rates.

(Investors beware: Some institutions will offer aggressive rates in order to lure you to send them your dinero, only to lower the rates soon thereafter. Check historical rates at Bankrate.com to test the interest rates over time.)

0:17 Just do it
The clock is ticking. There's no time to waste. A short-term emergency fund is one of The Motley Fool's top money "must-haves." In fact, it may be the very thing that saves you from a long stretch of high-interest credit card debt after a fender-bender, chipped tooth, basement flood, or really unfortunate haircut.

0:03: Extra credit: Automate it!
If you're having trouble saving, we highly recommend an automatic transfer program. You can also see if your employer will split your paycheck (direct deposit) between your ordinary account and your short-term savings account, or you could set up an auto-transfer from your checking account into your emergency account.

Got a few minutes to spare?
Here's more advice on socking away your cash:

Seeking a high-yield account for your short-term savings? Our Banking collection has all the information you need.


Read/Post Comments (8) | Recommend This Article (168)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2008, at 6:39 PM, danaseilhan wrote:

    Yes, and then in an article about debt repayment you tell people to give up the savings account in the name of paying off credit cards. Gotta update this and get it consistent!

  • Report this Comment On December 14, 2008, at 10:02 PM, Zhire wrote:

    debt repayment and emergency savings are different matters. interest rates, if high enough, can warrant depletion of funds.

  • Report this Comment On January 15, 2009, at 2:56 PM, jetmacjoe wrote:

    my funds are always depleted.

  • Report this Comment On February 07, 2009, at 8:43 AM, nvtashak wrote:

    If nothing else, the old coin jar or dollar bill jar in the kitchen or bedroom can help one start daily or weekly.

    When first begun, it may not be much (in terms of an unexpected dental/medical/veterinarian bill etc.), but at least you will have a couple days' food money or jobhunting busfare/gasoline.

    And it can be amazing how much adds up as the jar begins to fill.

    Some banks and credit unions have free coin counting machines, so you don't even have to roll the jar's contents before depositing at least part of it into a designated emergency fund.

    Or you can always try to "pay yourself first" when depositing a paycheck or SS check by asking that your walking around/grocery cash also include a roll or more of quarters or dimes. I find it hard to give up the coin rolls for spending (other than at the laundromat), and they do accummulate fast enough to deposit into the designated emergency fund.

  • Report this Comment On September 14, 2009, at 12:31 PM, rlewis001 wrote:

    I think insurance savings could be added to this guide. It would take longer than 60 seconds, but cutting car insurance costs could save consumers a ton of money each year. Just as you advised consumers to comparison shop for interest rates, they should compare insurance policies and save too. Great article!

  • Report this Comment On July 03, 2010, at 12:11 PM, mudman90039 wrote:

    I try to do little things like don't get that glass of wine at a restaurant because they charge you the price of a bottle at the store. I also went thru my colored Tshirts and realized I had several from a trip 20 years ago, now that's getting a bargain.

    I often pay for things with $20 and put the change, even dollar bills in my pocket and this goes into a jar. Then in a couple of months that goes into a high dividend investment and have it drip back into my savings as a reward, but the principle is safely in my investment account and growing. I can easily find something with better yields than bank CDs.

  • Report this Comment On March 30, 2014, at 6:38 PM, BizKikr wrote:

    It's easy to read about what to do but engage in the scenario to really find out. For example, speak with a good friend and challenge that person to a sudden crisis...job loss, unexpected health bill, a range of bad scenarios you're thinking "glad that's not me right now" and have them run a blow by blow action checklist of what will be done with the calculations to determine if the current 'status quo' succeeds. And then have them do the same with you. Payback in a grateful way! Grill each other until you're both satisfied a serious problem has just been walked through and now you know the results ... next question is what do you do from there? A good maxim about advice is this: The wise don't need it and the fools don't heed it! Fool on :)

  • Report this Comment On May 22, 2014, at 1:51 PM, gracewatson wrote:

    Great list, thanks for the ideas. The tip about adding a little padding for just-in-case moments was a light bulb moment for me. I recently had a dental emergency that I hadn't factored into a budget, and not having that padding made the visit far more stressful than it should have been. Since then, I've realized that anything you can save will help, even if you just start small. Don't think that just a dollar here or there won't do any good - speaking from personal experience, it will all add up!

    Grace Watson | <a href='http://www.dentalsmile.com.au/services' > http://www.dentalsmile.com.au/services</a>

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