Before you invest in stocks, build that emergency fund

The Ticker

September 19, 1997|By Julius Westheimer

IT'S A GOOD idea to have an "emergency" fund to cover expenses during unemployment or disability, or to pay large unexpected bills, such as repair and medical.

Families should have an emergency fund before they invest so that it doesn't become necessary to sell stocks to cover the emergencies.

To decide where to put those funds, figure out how much money you'll need. According to the Institute of Certified Financial Planners, most advisers suggest three to six months' take-home pay.

Three months seems enough if your job is secure, or if you have other income such as Social Security, stock dividends, etc. You should save more if your income fluctuates due to commission, seasonal income changes or job instability.

If you worry that saving three months or more of income is difficult with a paycheck-to-paycheck lifestyle, remember your crisis fund handles only basics: shelter, clothing, food, medical insurance and so on. During an emergency, many families reduce "discretionary" spending such as vacations, entertainment and gifts.

Here are places for emergency money:

Money funds or savings accounts. These are basic places to start. Money is safe, easy to access and money funds pay more than a bank. Shop around; yields on money funds vary widely.

Certificates of deposit. CDs are safe and yield more than most money funds. Idea: Put half of your money in a money fund, half in a higher-yielding CD.

Short-term Treasury bills. Issued every Monday, T-bills require a minimum purchase of $10,000. Buy them through your broker or the Baltimore branch of the Federal Reserve Bank. Interest is free of state income tax.

Short-term bond funds or conservative mutual funds.

In both these cases, investors take some risk. Bond fund prices decline if interest rates rise, and mutual funds travel with the volatile stock market.

Pick bond funds with low expense ratios.

Pub Date: 9/19/97

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