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Where To Park Your Cash For A Crunch

For many Americans, the prospect of losing a job is a frightening scenario only exacerbated by the sinking economy. Financial planners recommend having a reserve fund of at least six months' of living expenses to cushion a sudden job loss.

However, with today's economic outlook, many people don't know where to safely put money they have managed to save - if any. In this column, Early Show financial adviser Ray Martin provides suggestions of low- to no-risk places to keep funds you are accumulating to prepare for the likely turbulent year ahead.

Playing It Safe With Your Cash

With the economy continuing to worsen and job losses rising, folks need to take measure of their financial safety net. With unemployment now over seven percent and rising, a job search is likely to take six months or more. This could be even longer if you are in a sector that's directly impacted by the credit and financial crisis, such as the financial sector, because you might need more time to shift your job search and get training for a career in another industry that provides more opportunity. For these reasons, it's important to have at least six-to-12 months of cash on hand. You should consider the higher end of this range if you are the sole income earner or self-employed.

In these times, folks who are unprepared and have not saved an adequate emergency fund need to consider taking more urgent measures to increase their take-home pay to build their emergency fund.

Create a check-list of financial moves that would increase the cash you take home so you can more quickly build your cash savings.

For example:

  • Decrease your 401(k) plan contributions to the minimum required to collect your employer's company match (typically six percent of your pre-tax pay).
  • Eliminate all unnecessary pay check deductions, such as savings bonds or charitable contributions.
  • Eliminate paycheck deductions for expensive benefits such as group universal life insurance, pet insurance, etc.
  • Reduce your income tax withholding from your pay, especially if you typically receive a tax refund.

    Again, the thing to do is make your take-home paycheck larger NOW to help you to build your cash cushion more quickly.

    Rules For Playing It Safe With Cash

    Many investors are simply putting long-term investment decisions "on hold" for the near-term, as they are more concerned about the return OF their money rather than a return ON their money. And for good reason: The drubbing stocks took in 2008 means this is no market for folks with little cash on hand and who are at risk of losing a job.

    But with interest rates on cash investments at historic lows, the penalty for safe and responsible behavior has never been higher. For this reason, some folks might be tempted to put their cash into "cash-like" investments that appear to be safe but come with additional penalties and fees. For this reason, folks need to keep in mind these rules when looking for places to stash the cash they are saving for emergencies:

    Rule #1: Always be able to get your money out without penalty at any time.

    Rule #2: Get the most competitive interest rate on your money.

    Rule #3: Never break Rule #1 when accomplishing Rule #2.

    With these rules in mind, here are the limited options to consider and current interest rates that are available at the time this was written:

    Bank Accounts

    Bank checking and savings deposit accounts offered by FDIC member banks (and NCUA member Credit Unions that offer similar protection) continue to be covered under the enhanced FDIC insurance protection against losses due to failed banks for accounts of up to $250,000. This higher limit is slated to roll back to $100,000 after 2009, unless the government extends it. Interest rates on bank accounts will vary by location, amount on deposit, and by type of account. Checking accounts will earn the lowest rates, about 0.1 percent to 0.5 percent. But if you use an online bank, you could get a rate as high as 1 percept to 1.5 percent.

    Check out EverBank, Charles Schwab Bank and ING Direct for higher rate interest-bearing checking accounts.

    Bank Money Market Accounts

    These are savings-type accounts offered by banks that can be linked to your checking account. Typically, bank-offered insured money market accounts (IMMAs) are intended for larger deposits that are not intended to be tapped for daily transactions. Therefore, many IMMAs limit the number of no-fee withdrawals to no more than six per year. The interest rates will be higher in IMMAs - about 2.5 percent currently. Often banks offer a higher "introductory rate" for three-to-six months, and after that the rate will be lower. Higher rates are often offered for balances of $10,000, and even higher still for balances over $50,000.

    Check into Dollar Savings EverBank, HSBC Direct and ING Direct for high-yield money market accounts.

  • Money Market Funds

    These are not FDIC-insured bank products, but instead are mutual funds. Currently seven-day yields for taxable money market funds range from 1.5 percent to little over 2 percent, and offer daily access without restrictions. Often, you'll have to start with a minimum balance of about $1,500. Here, an important distinction: Money market mutual funds are regulated under Rule 2a-7 of the Investment Company Act of 1940, and therefore seek to maintain a stable share price of $1. These are registered with the Securities and Exchange Commission as mutual funds. Most commonly, these are offered through brokerage accounts.

    After the Prime Reserve Fund notoriously "broke the buck" last year, which created a panic, the U.S. Treasury guaranteed the value of money market funds that participate in the Temporary Guaranty Program for Money Market Funds. This program runs through April 2009, unless the government extends it. The catch is that only balances on deposit as of September 19, 2008 are covered under the Guaranty Program, so new money you put into money market funds is not covered. That notwithstanding, most folks believe the risk of money market fund failures is behind us, and these funds are seeing money coming back into them. Money market funds currently hold over $3.6 trillion.

    Check out money market funds offered by Fidelity Investments, Charles Schwab, Vanguard and T. Rowe Price.

    Certificates Of Deposit

    These are time deposits offered by FDIC member banks and can be purchased from local banks or from banks across the nation, either through an online bank account or through a brokerage account. The catch is that if you have money in a CD and need to withdraw it before the end of the CD term (before maturity), then the bank may charge an early withdrawal penalty, which can be equal to one- to three-months' interest. With that catch, it's best to consider only using CDs that mature in three or six months, and splitting some of your money into a three-month CD and some money into a six-month CD. But with rates on three-to-six month CDs at around 2 percent to 2.5 percent, some folks might be tempted to opt for a one-year CD offering a little over 3 percent. But remember, you'll lose some interest if you later need to withdraw some of that money before the end of the term, which could more than offset the higher yield you were earning.

    Check out rates on FDIC-insured CDs offered by EverBank, GMAC Bank, HSBC Direct and CapitalOne Direct Banking and compare their yields to the CDs offered by banks in your area.

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