 Dear
Dr. Don,
I have all retirement plans in place. I contribute
through work and invest on my own. But for the present, the
right now, how much liquid cash should really be on hand in
the bank? How much do most people have just lying around in
money markets and savings, etc.? Thanks.
-- Nance Nuance
 Dear
Nance,
Financial planners typically suggest that an emergency fund
should be large enough to carry you through three to six months'
worth of household expenses. The money should be invested
in short-term, liquid investments that would allow you to
convert the investments to cash without risking principal.
As for what most people do about emergency savings, Bankrate's
2004 Financial Literacy Survey reported:
Though they know what they should do,
their actions often don't follow suit. There's a substantial
gap between attitude and action. For example, 71 percent of
(survey) respondents say that keeping an emergency fund is
"very important," but just 44 percent say they always have
one on hand -- a gap of 27 points.
The problem is that, ideally, this is money
that you're never going to need, but if you invest in money
market investments, it won't earn much of a return. In other
words, you pay a pretty high price in lost investment income
for this security blanket.
Over time most people gain a measure of financial
flexibility that allows them more than one alternative in
meeting a financial challenge. The more flexibility you have
with your finances, the less important it is to have a large
emergency fund.
A home equity line of credit with a large available
balance can be very useful as a financial backstop. So can
the ability to borrow from your account in the company's 401(k)
plan, although that carries some risk since the loan would
become immediately due and payable if you leave the company
-- voluntarily or otherwise.
Cashing in some investments, or borrowing against
them, can tide you over if you have a taxable investment portfolio
large enough to give you that flexibility.
Investing in longer-term certificates of deposit
and accepting the interest penalty for early withdrawal is
a way to get out of investing your emergency fund in short-term
investments. There's some risk, but it's manageable. Shop
around to find the best tradeoff between interest
rate on the CD and interest penalty for early withdrawal.
-- Posted: Nov. 19, 2004
|
When
applying for credit cards with better terms, should I drop the old
cards so that I don't have too much available credit, or should I
keep them because of the age of the accounts? 
