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In the world of personal finance, where does an "emergency fund" come in, and why save for emergencies at all?
Because life happens, and you never know when you'll have to pay for it. This year alone, I've spent nearly $1,000 taking my cat, Ringo, to the veterinarian.
An emergency fund is sort of like the jet fuel on your flight to financial freedom. Rather than putting a hefty charge on plastic, you can pay it off right then and there.
Of course, one of the most important aspects of saving your emergency fund is knowing where to stash it. To help you determine which savings vehicle is right for you, we've rounded of the best and worst places to hide your cash.
Under the mattress
PROS: One of the perks of stashing your dough under covers is not having to pay taxes on it, says Casey Weade, a certified financial planner and vice president of Howard Bailey Financial.
PROS: A checking account is easy to access—just swipe your debit card or hit up your bank's ATM.
CONS: Like hiding money under your mattress, most checking accounts don't accrue any interest and the all-too-easy access makes it easy to splurge your safety net.
Money market accounts
PROS: Unlike individual stocks, which carry more risk, a money market account is hard to lose, says Weade. Plus, they carry higher interest rates than your everyday bank account.
CONS: The liquidity, or ease of access, to money market accounts makes them suitable for short-term savings—think one to three years—over long-term ones. For emergencies, you'll need to plan wisely.
For more places to hide your emergency cash.
PROS: Savings accounts tied to a checking account are a convenient way to transfer money and keep it accessible. "These are perfect for storing a month's savings or income where you can get to it if you need it quickly," says Weade.
CONS: Again, ease of access makes it easy to BS yourself into thinking that sale at Filene's is good cause to smash open the piggy bank.
Certificate of deposit
PROS: Grandma was on to something when she invested in CDs, says Weade. They're perfect for fixed, predictable costs, such as a down payment on a home or a car.
CONS: Unfortunately, their low rate of return and historically low interest rates have earned CDs the nickname, certificates of disappointment, says Weade, so "there are probably better places to store your savings." You also risk getting taxed on a minute amount of interest, he adds.
PROS: Well-suited for young professionals in their 20s and 30s, Roth IRAs offer tax-free growth and the opportunity to take advantage of your company match. "You've got a guaranteed return on your account," says Weade, "and not using it is a gap in planning."
Other perks include better rates of return and the fact that there's no required minimum distribution, or amounts that the owner must withdraw annually starting with the year he or she turns 70 1/2.
CONS: If you're under 59 1/2, there's a limit to how much you can sock away per year ($5,000). Also, you'll have to let the money sit there for five years before you take it out, plus interest. For short-term savings, this isn't your best bet.
— Jill Krasny
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