I’m sure you’ve heard of Suze Orman. She’s a personal finance author, certified financial planner, host of CNBC’s “Suze Orman Show” and a frequent guest on Oprah. I think a lot of the financial difficulty people are experiencing today would be much less severe if more people had taken her advice before buying a home. One of her basic principles is that you must have an emergency fund. A few years ago, she said that needed to be 4-6 months of living expenses. Today, it needs to be 9 months of living expenses….because that, on average, is how long it is taking to find a new job after layoff. She is adamant that this is an emergency fund. A new pair of shoes or your cousins wedding is not an emergency. Believe it or not, the down payment on a home is not an emergency. A health care crisis is an emergency. Losing your job becomes an emergency when you can’t pay your bills. She is also very clear that you should establish this emergency fund before you buy a home.
This emergency fund should be liquid – meaning you can get to it when you need it without penalty. That means it is not invested in the stock market. Because if you needed to pull your money out of the market right now, you would most likely have only a fraction of what you socked away. It also means putting it in a CD may not be the best alternative either, because you will probably have to pay a penalty of 3-6 months interest if you need the cash before the maturity date. While that is probably better than the stock market alternative, it is still less than ideal. So what do you do? At GMFCU we have a couple of options to help you build, or set aside, your emergency fund. But before I go further, let me remind you that these accounts are all insured by the NCUA up to $250,000 and we offer additional deposit insurance of $250,000 per account at no cost to you. So they are safe and you will never lose your principal.
If you haven’t yet started, or are still in the building stage, our Automatic Savings is just what you need. The account is designed to help you put a little bit of each paycheck away for that rainy day. We recently enhanced the account to allow lump sum deposits, too. So if Aunt Betty sends you $50 for your birthday, you can save that too. For those who are tempted to dip into savings just as fast as you set it aside, we’ve made it a little bit of a challenge to make frequent withdrawals. The account allows one free withdrawal per month so you can still get at your money whenever you need it. If that emergency comes along and you need $2,000 to pay the hospital, or make the mortgage payment, just call us up and ask us to transfer the funds to your Regular Savings or Checking account. I have found many times, that just stopping to make that phone call makes me think about whether or not I REALLY need to use that money or if I can squeeze by another way.
If you have already built up that emergency fund, you can still have an Automatic Savings, but if the balance is over $25,000 the best option for you is our Optimum Money Market Account. This is our highest rate account and the funds are accessible anytime without a withdrawal penalty. Just one caveat, if the balance falls below $25,000 anytime during the month, you will be charged a fee. So if you won’t consistently maintain that balance, you’ll be better suited to the Automatic Savings or our Regular Money Market Account.
I learned my savings discipline with an account like the Automatic Savings, and it’s a habit that I’ve maintained for over 15 years now. When I first started the account, I was a single mom barely scraping by. I put just $10 per paycheck in through direct deposit. And I found out that I didn’t really miss that $10. So a few months later I increased it to $20. Then when I got my next raise, I put most of the increase toward savings, and I did that for several years. And before I knew it I was saving $300 – $400 a month. And that was money I never got used to living on so it didn’t cause a reduction in my lifestyle as I increased the amount. So if a single mom can scrape together a few bucks to put in a savings account, what’s stopping you?
