Ha! See what we did with the title? That’s clever. It’s like we’ve got a little series going to start 2019: first it was Jan-YOU-ary, and now Febru-WHERE-y. (Looking ahead, “March” doesn’t quite fit the pattern, but that’s a problem for future me.) Staying in the present, hopefully you’ve started paying yourself first - that was what Jan-YOU-ary was all about, after all. Those of you who happened to miss that particular article or perhaps would just like a little refresher (shameless plug coming), you can read past Beachcomber issues online! Go ahead, we’ll give you time to get caught up...
Alright. So you’ve started (or will start) paying yourself first every time you get that paycheck. Where’s the best place to put that money? Bank account? Stocks? Under the mattress?
First things first - get that emergency fund in good shape. There were two studies done last year that you may have read about. The first one was from Bankrate (actually a pretty great website for comparing different bank accounts, mortgages, credit cards, etc.) and found that 60% of people couldn’t afford an unexpected $1,000 expense. Then the Federal Reserve comes out with their study (say what you will about their ability attempts with monetary policy, we’re fairly certain they’ve got the academic study thing down cold) and says 40% of people can’t afford an unexpected $400 expense. For reference, $400 is new brakes on your car and $1,000 is an MRI after you twist your knee in an old turtle nest while running on the beach.
As a target, aim for a large enough emergency fund to cover three months of expenses. And yeah, that takes time to build up, but really prioritize getting at least one month’s expenses put away. The thing about emergency funds is that you really only want to touch them in an emergency, so it helps to have the funds somewhere other than your daily checking account or linked savings account.
A quick search of the interwebs finds that you can get a 2.45% return on FDIC-insured savings as long as you have a $100 balance and deposit $100 a month into it. Or 2.39% with no minimums and no deposit requirements. (For more reference, 2.4% returns in 2018 would have beaten global stock markets by a whopping 11.4%!) Granted, these rates are with banks you’ve never heard of and won’t see an ATM for, but they are still accredited institutions and FDIC insured. And with your emergency money somewhere other than your debit card account, you’re more likely to still have it when an actual emergency hits.
Once you get that emergency fund to one month’s expenses, then we have more options available as to where we can put money. Don’t forget about it completely though! - remember, we’re trying to get up to three months’ expenses - but once there’s a little cushion, take some comfort in knowing you are more secure than the majority of people in the country and reward yourself by expanding where you put your money. Saving up for a big vacation? Investing in the stock market? Starting a college fund for a (grand)child? Now we’re talking. The emergency fund is priority number one across the board, but after that it comes down to personal preference - what are your goals and what is your comfort level with taking risk to achieve those goals? And that’s where a financial advisor can help out. So if you feel that’s you, drop me a line at firstname.lastname@example.org and we’ll find some time to get together.
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