Part 19 (2/2)

Short-Ter separate bank accounts for each of your short-tere you any fees It's true that opening s because you have more accounts to keep track of But it's orth it because you'll be very clear about what your short-ter them It's si, with one envelope containing , and so on

Short-Terency fund

2 Car fund

3 Seasonal fund

If you're going to be stashi+ng cash in separate accounts, it would be nice to earn a little interest on the reat choice For years, as accounts have been:ErantDirectcomINGDirectcomHSBCdirectcom Frankly, it doesn't matter much which one you choose Go hichever account happens to be paying a higher interest rate than the others at the tie often, but historically, they have been in the sa to get the absolute highest interest rate Reh?” Deposits at all three banks are insured by the Federal Deposit Insurance Corp (FDIC), up to 100,0001 per depositor And they are all good enough

Opening an online account is fairly easy Follow instructions on the Web sites, and fill out for account to the savings account to make automatic deposits You will also have to provide your Social Security nuency Fund

Whether you call it a rainy-day fund, an e cash available for when bad things happen is funda

What exactly constitutes an eency fund? The typical advice is also the most conservative definition: cash equal to three to sixexpenses I would modify that to be three to six h e, food, utilities, transportation, insurance, and so on

Why? Because in a financial crisis-think, losing your job-you should i out to eat, no clothing purchases, and no golfing You could even start canceling your gym membershi+p, your cable TV service, and your fancy hairdresser appointment The point is you need a cushi+on to pay for necessary expenses, a total far less than expenses during flush times

How do you decide on whether to save three months of expenses or six? It depends on your circumstances For exae eency fund, especially if both earners make about the sa the encies, doesn't wipe out the entire household incoency fund The size of the eency fund can also depend on your financial comht get by with a smaller cushi+on This, by the way, is yet another reason to keep debt at a ency fund? We talked about thecash to live on if you lose your job Other reasons include life's expected-but-unexpected cash drains We don't knohen they're co but cash outlays for such expenses as car repairs,sooner or later Without the cash to pay for these, you're likely to put thees That just encies” ency fund are less obvious It can actually save you money Think about it: With a cash cushi+on, you can feel co no when a salesperson offers you an extended warranty Why? Because you have the money to pay for the repairs if the iteent and raise deductibles on your home and auto insurance, which will save you her deductible if you file a clai peace of mind, which any financially stressed-out person will tell you has a real dollar value

Creating a rainy-day fund can be a two-step process Although the long-teroal is a fund equal to three to six oal ht be to stash away 2,500 At that point, you haven't protected against job loss, but you have given yourself financial breathing room when the car and the clothes washer break down at the saoal Fully funding the cash cushi+on can be balanced a your other financial priorities For exah-interest debt

That's especially true if you take a few steps to grow your eh noncash means A cash horde is ideal, but in a crisis you simply need quick access to money, whether it's your own or someone else's

Here are a few teency fund These are in addition to your 2,500 in cash:Establish a home-equity line of credit Homeowners could count hoency fund A hoainst the equity you have built up in your house It's cheap or free to open a line of credit, and you pay no interest unless you use it If you use it, the interest you pay is likely to be tax deductible Withchecks on the account or using a debit card to access the credit line Apply for an equity line before a crisis occurs Once disaster hits-you lose your job, for exaht not qualify to open a HELOC All that said, however, a hoood choice for coencies And lenders have tightened require a HELOC since the 2008 financial crisis I approved for an equity line

Raise your credit card lih-interest credit cards is a very coency If you're responsible with credit cards and rarely carry a balance, however, it couldn't hurt to ask your card coht way You e li e your credit rating, as I said in Chapter 6, ”Credit When Credit's Due” In fact, it could help your credit rating if you're successful because part of the credit score is based on the amount of used credit coe is the higher li a temporary cash-flow jam There are more details about your credit cards in Chapter 6

Once you're already in a ency fund to tap, ht be necessary None of these options is an ideal solution:Consider nonretireular investht be e an early withdrawal penalty, but these can be sources of eht force you to take an invest a true crisis is usually more i from relatives or friends is dicey at best, and should probably be a the last resorts in a crisis because it has ruined encydown the ter loan docu a cocom to formalize the paperwork

Borroithdraw from a 401(k) I hesitate to mention this option because unless you're desperate, it's a really bad idea But you can borrow and withdraw froe tax penalties and you'll lose growth on the o toward retire, you'll withdraw pretaxafter-tax money Then in retire double-taxed on that es of loans and withdrawals before going ahead All that said, it is a source of cash if you're desperate But consider this e you away from this option

In short, you need a rainy-day fund and a plan to access cash in a financial storm It will, indeed, rain It's just a matter of when

2 Car Fund

Just like you will have financial eencies, you will replace your vehicle It's just a ets consu a car or truck It's a two-headed problem

First, people lust after cars they can't afford, which leads to five-year loans or longer and ridiculous leases (which is redundant because almost all leases are a ridiculous choice for people concerned with spending money smarter) People concentrate too much on the monthly payment, instead of how the purchase fits into their financial life For the record, I'ood and true in personal finance to urge you once again to buy a slightly used vehicle That way, you avoiddownthe payment of a previous vehicle into the loan on a new one This leads to the brutal situation of actually owing”upside down” You can't sell the vehicle-or, if you get in a bad accident, you can't total the car-without losing thousands of dollars

I don't want to get all ridiculous on you, but what if you paid cash for your next vehicle? In fact, I would argue that if you can't pay cash for a vehicle, you can't afford it

Here's how to pay cash for your next vehicle: After you pay off your current vehicle, continuean autoo to replace your vehicle, you'll have the trade-in value, plus cash saved in this account That total becomes the purchase price of your new car, which you can now buy for cash At the very least, you'll have a sizable down payment

Here's just one example of hoould work: Keep your vehicle for four years after paying it off If you were paying 400 a month, you would accumulate 19,200, plus interest, in your car fund For sirand This, by the way, requires no additional sacrifice on your part You've already been paying this 400 aor trading in your old car, you can now pay 25,000 for a lightly used luxury car of your choosing

How cool is that?

3 Seasonal Fund

This is an intentionally vague account Custooals in your life For example, you could use it for three major seasonal expenses, which happen to be spaced apart on the calendar That hout the year These seasonal expenses are as follows:Holiday spending Gifts, travel, decorations, partiesSpring vacation Airfare, hotel, car rentalBack-to-school Clothing, school supplies, tuition, coood idea is to have a separate account when you're saving for a house down payht create an account for ho, new furniture, or a kitchen re thes accounts is to fund theularly and autooals