You Need An Emergency Cash Stash

I read an article from the Wall Street Journal recently about how it was silly to have "emergency" money in a low-interest bank account. Instead, the writer, Jonathan Clements, advocates a somewhat tortuous stragety of allocating assets between stocks or bond funds, in taxable and non-taxable accounts, establishing a home equity line of credit, then pulling cash from these sources depending on the type of emergency, the state of the stock market and the effect on one's taxes.

Sounds simple enough.....if you're an accountant.

I'm not going to dispute that Mr. Clements' system may work and may even earn more interest and save taxes in the long run then simply putting money in a savings account. I do question if it's suited for everyone.

In February of this year, Federal Reserve Chairman Alan Greenspan reported that the 2004 savings rate in this country was an frighteningly low 1% per year.

At the same time, Americans' personal debt load is climbing. Per bankrate.com, the average household debt in this country is $14,500--and that doesn't count mortgage debt.

We're using credit cards like there's no tomorrow. We're hardly save anything.. And far too many of us have little or no spare cash at all, much less money in stocks, bonds or IRAs. A significant medical bill, a job layoff, even a sudden increase in the cost of living (can you say high fuel prices?) can kick many families in this country into financial crisis. And what we'll desperately need in such a situation is cash ......available quickly and without complications. (To get a check from a money market fund or IRA can take days, or even weeks. You need at least some money you can access instantly.)

Some people advocate using credit cards for "emergency" funding. But when you're in trouble financially, does it make sense to take on more debt? And using a home equity line of credit may mean borrowing money at a bit lower interest rate than using a credit card.....but if you can't make the payments, you may lose your house!

So if your outgo equals (or even exceeds) your income, start by cutting expenses and banking what you save, in an government-guaranteed bank account separate from your checking account. If you can save as little as $40 a week--and I'm willing to bet you can save a lot more-- you'll have $2,080 in the bank in a year. Make sure that you use this money only in true emergencies (Buying school clothes or a new stereo system is not an emergency.) Once you have the equivalent of two or three months worth of take-home pay in your emergency fund, you can then start learning about higher interest savings vehicles, stocks, bonds and tax liabilities. But build a instantly accessible stash of cash first. (You should also start paying off your personal debt....but that's a whole other article.)