Saving for an emergency

PERSONAL FINANCE

Your Money

June 27, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

One of the basics of personal finance is to set up a rainy day fund.

It's not exciting. And you certainly won't be bragging over cocktails to friends that you put away money for emergencies. But having a few months' living expenses tucked away in an easily accessed account means you won't have to resort to credit cards if the unexpected happens.

Still, something that sounds so simple eludes many of us. Fewer than four out of 10 adults polled have an emergency fund, according to a Bankrate.com survey this month of 1,005 individuals.

Also troubling, 37 percent of those with savings earned nothing on their money or not enough to keep up with inflation, Bankrate says. This at a time when interest rates are rising, and some savings accounts, short-term certificates of deposit and money market funds pay about 5 percent a year in interest.

By not shopping for the highest rates, savers might earn less than 1 percent in interest on deposits, while banks lend the cash out at nearly 7 percent, says Bankrate's Laura Bruce. "They are giving their bank pretty much a free loan," she says.

So, how much do you need to save if you want an emergency fund? And where can you get the most for your money?

For its survey, Bankrate defines an emergency fund as three months' worth of living expenses. Some financial experts recommend six months. That can be a big pot of money, but you can start small and gradually build.

Christopher Parr, a Columbia financial planner, says some savers won't necessarily need to have a half-year's worth of expenses, say, $30,000 or $50,000, just sitting in an account. They can instead park a chunk of the cash in a money market fund or short-term CDs, he says. For the rest, they can open up a home-equity line of credit. They'll be able to borrow against the equity in their home when an emergency arises.

A line of credit is only for those disciplined enough not to tap it for non-emergencies, Parr warns. And consumers must set up a line of credit when they don't need the money. If they wait until they lose their job, they won't qualify, he says.

To search for high-yielding savings accounts, money market accounts and CDs, check out Bankrate's site at www.bankrate.com. Some of the highest rates are offered through online banking. For instance, OneUnited Bank in Los Angeles offered a savings account with an annual percentage yield of 5 percent as of last week. EmigrantDirect.com and HSBCdirect.com, both in New York, offered 4.8 percent.

Some three- and six-month CDs pay a little over 5 percent, not much less than five-year CD yields, Bankrate found. Given this, it's not worth tying your money up for years, especially if you expect rates to keep rising.

With CDs, you will forfeit interest by pulling money out before it matures, a drawback for using a CD as an emergency fund. Bruce suggests laddering CDs, such as buying a six-month CD each month for six months. That way, you'll end up with a CD maturing each month, and you can use the money at that time if you need it without penalty. If you don't need it, reinvest it in another six-month CD, she says.

A more flexible option is money market funds, some of which pay nearly 4.8 percent, Parr says. These aren't FDIC-insured as are bank products, he says.

Shop around

Consolidating student loans just got a little more consumer friendly. It used to be that if loans came from a single lender, borrowers would have to consolidate their debt with that lender. Recently, that requirement was thrown out the window. Now borrowers are free to shop around for the lender that offers the best terms and service.

The deadline to consolidate student and parent education loans to lock in more favorable rates is Friday. Beginning in July, the variable rates on loans will jump nearly 2 percentage points.

Best gas price

Travelers know they can save money by filling the gas tank before returning a car to the rental agency. What they might not know is where to find the cheapest, closest gas station to the airport. Now there's help. Expedia .com last week launched an online gas locator at www.expedia.com/cars.

Select Baltimore's airport and five stations pop up, selling gas for $2.92 to $2.99 a gallon.

Questions? Comments? Write Eileen Ambrose at personal.finance@baltsun.com

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