There are many places to keep an emergency fund, it all depends how you approach it.

We like to put ours in a Tax-Free Money Market Fund. Yes the interest is low but we view our emergency fund as a type of “Insurance” and not an investment.

Some people like to put keep there savings in a Saving Account at the bank, others in stocks, some even gold, and other mutual funds. Each place has a unique combination of the qualities you want – safety, liquidity, earnings rate and convenience. If you are smart, you probably won’t leave all your cash in a place where it is earning little or no interest. But neither will you put it all where it might be spanked if a recession hits.

The way you make up your mind depends on how conservative you want to be. Money in your checking account, strictly speaking, is working capital which you continually turn over as you pay bills. Still, there is a residual amount below which you seldom go, say $1000 or $2000. If you maintain such a minimum, this could be included in an emergency fund. However, I would never keep an emergency fund in the same account as a checking account. This makes it too easy to disappear. An Emergency Fund is for EMERGENCIES.

When you buy stock, you buy a share of a business for better or worse and take your chances on whether or not it thrives. Of course most stocks are extremely liquid, so you can always get back cash. How much cash, however, is never predictable. It always seems to turn out that when you have to sell a stock in order to obtain cash, the market is down at that particular time. Stocks, therefore, should probably not be considered as part of an emergency fund. But if they are, they should never be carried at 100% of their current price.

Cash reserves in life insurance policies are savings in one sense since you can get them back at any time. To do so, however, you either have to borrow the money back, usually at 5% to 6% interest, or you have to cash in the policy and lose its protection. One problem in borrowing the money from the account is that usually the amount borrowed is “unplugged” from the investment and stops earning interest.

There are other hard-to-measure assets that many families have that might be included in an emergency fund, for example, money built up in a 401K or IRA or ROTH IRA. This is definitely an asset under certain conditions. But there are penalties associated with taking the money out.

If you don’t know exactly how much of these assets to include in your emergency fund, try making up a report on your available resources. You might arrive at two figures, the first being bona fide cash reserves readily available, the second being your ultimate resources available in extreme emergencies.

Building up an emergency fund before you start to invest will save you worry and probably save you money. With such protection you can buy good quality growth stock mutual funds, sit back and let them appreciate in their own good time. You won’t have the haunting thought that you might have to dump them at a moment’s notice. And remember, fate often decrees that when you have to sell at a time not of your own choosing, that will probably be just the worst time – the time when the market is temporarily depressed.

An emergency fund should obviously be reserved for bona fide emergencies: serious illness, loss of job and so on. It should never be borrowed for such relatively unimportant uses as the purchase of a car, house or Flat Panel LCD TV. It should not be loaned even to close relatives except in cases of dire need.

As to how big the fund should be, an old rule of thumb says a family should be able to live for six months if its regular income were cut off. Interpreted conservatively that would mean that a family’s liquid savings, minus its short-term debt, would equal one half its annual take-home pay. Interpreted very liberally, it might mean that a family should be able to lay its hand on enough cash by various means to live six months.

In addition to liquid savings, certain other assets might be counted: cash value of life insurance policies, stocks conservatively valued, the amount invested in a 401K retirement plan. However, there are dangers of this practice. The cash value of a life insurance policy might be needed to keep up premium payments. Stocks might go so low, in a the recent recession for example, that it would be a shame to sell them. The amount vested in a 401K fund might be obtainable but with penalties attached. So for defense against a financial crisis, a family should certainly rely largely, if not wholly, on liquid savings.

There are four qualities you want your savings to have. Remember we looked at if an Emergency Fund was an “investment” or not. These qualities will pretty well determine where the money is to be kept. Listed in order of importance, they are:

Safety – You want your money to be reasonably secure against depression, panic and theft.

Liquidity – You want to know that you can withdraw your savings without too much delay.

High earnings rate – You want your money to earn interest at as high a rate as possible consistent with safety and liquidity.

Convenience – You want your savings to be located where you can take care of them with minimum trouble.

No one institution provides the maximum safety, liquidity, earning rate and convenience all in one package. It would be nice to have a place right across the street that would keep your savings completely safe and entirely liquid, while paying 15% interest. Naturally there is no such place. To get a high interest rate you must sacrifice some other advantages, such as liquidity. To have your savings instantly available you must be prepared to accept a lower interest rate.

It may be best, therefore, to split up your cash and put it in several places.

In general, we have found a tax-free money market account to be an excellent place to park money for our emergency fund.

How about you? Do you have an emergency fund? If not… get started today!

One of the first “rules” in investing is: Don’t use money that you may need for something else. The reason behind this thinking is that even the most carefully selected investment probably won’t appreciate in value all at once. It may take years for it to fulfill your hopes and expectations. In the meantime, as the stock market goes up and down, the value of your stock holdings may at times be below what you paid for it. We’ve seen that during the current recession where the stock market lost about 40% of its value. Now, if during such a dip in price you happened to need money desperately and had no reserves for emergencies, you might be forced to sell out at the worst time.

That’s the reason, one of the first investments anyone should make is to put away a certain amount of money in an emergency fund. If you have such a fund, you can approach the problems of investing with a freedom from pressure and worry that will enhance your good judgment.

Strictly speaking, an emergency fund is not an investment since investing implies converting money into stocks, real estate or something other than cash. Nevertheless, an emergency fund can earn interest or dividends and grow in value. So it is an investment in a sense. Several questions arise about a fund of this kind. What’s it for? How much do you need? Where do you put it?

Assume for a moment that all the good points of every investment could be combined into one perfect security. Here is what it would do for you.

1. It would be safe in the sense that it would return a dollar for each dollar invested.

2. It would also be safe in the sense that it would not shrink in purchasing power as a result of inflation. Its value in dollars would increase along with other prices.

3. It would give a satisfactory percentage yield.

4. The yield would start at once at a satisfactory level – not be artificially set up to start at zero and increase over the years in such a way as to penalize early liquidation.

5. The yield would continue indefinitely or for the life of the investment.

6. There would be no selling charge or other expense for making or holding the investment.

7. The investment would be liquid – that is, convertible into its original dollar value on short notice.

8. Money could be invested in a lump sum or periodically in smaller amounts, but in the latter case there would be no penalty or loss if such payments were discontinued.

9. The investment would offer a chance for long-term appreciation and participation in growth.

Naturally no investment can have all those qualities. Every investment, no matter how good, has two or three drawbacks that affect its advantages. There are no “perfect” investments.

Many people when they think of investing only view the end game… and that is to have money. An investing purpose will make the process, steps and focus much more defined and help “push” you towards the final goal. I know it has made the process of regular investing much easier in our family.

To determine your own particular needs, look at the list of questions below. They will help you focus on your own objectives.

• Do you want complete safety of your dollars, so that you can be sure of getting them back, or are you willing to take some risk? Remember NO risk = Low return
• Can you spare the money for a period of years, or do you want it readily available because you might need it at any time?
• Do you want the income from the investment to start now, or are you willing to settle for the possibility of a larger profit in the future?
• Is it to be a reserve against financial trouble or loss of job? (Emergency Fund)
• Is it for protection against inflation and loss of purchasing power?
• Is it eventually to provide income when retirement comes?
• Is it for future use in purchasing a home or business, or for some other undertaking?

Most families have several of those objectives. Therefore, in general, they should have several types of investment. And by combining one type of investment with another, a family should be able to achieve any reasonable financial goal.

Business conditions and your own finances are always in changing. A good place today for your money may be a bad place tomorrow. So the wise money manager makes regular comparisons pitting one investment against another. Our purpose over the next few articles offer some suggested standards by which you can make comparisons and judge what particular investments are best for your purpose at any given time, and why.

Always remember, there is no one type of foolproof investment suitable for all purposes. Investments are just like clothes. The kind you buy to wear in the Alaska winter are not the kind you buy for a summer trip to Florida. Acquiring a speculative stock in the face of business uncertainty is like putting on a bathing suit when it is threatening to snow. Buying a low-interest bond during an inflation is like wearing an overcoat on a balmy day in June. You probably don’t need that much protection. To carry the example a little further, if your own personal circumstances are such that you can barely afford to buy clothes for office wear, you would not be smart to splurge on a tuxedo.

Thus, the first thing that you, as an investor, must do is get clearly in mind the job you want each particular investment to perform. If you want it to protect the family in case the breadwinner dies, that is one thing. If you want it to work for you over the years and are willing to take some risk and all investments require some risk, that’s another thing. And there is not much overlapping. One investment usually does one job, sometimes two, but rarely more.

The more “risk” taken usually the greater the return.

To invest you must HAVE money, to get that money most people have to learn to save. Saving means the building up of a cash fund which can be spent or invested. In broad terms, the growth in cash value in a life insurance policy or a decrease in the amount of the mortgage on your home are also savings. But for our purposes, let’s define saving to mean accumulating cash or the equivalent.

Saving is not easy, sexy or much fun. Despite what people say, there is basically only one way to do it: hold down your outgo and keep up your income. There are, however, a few tricks to make the job of savings less of a chore and a little more intriguing. Here are half a dozen of the most common.

The Marked Money Method

This method is one of the oldest known to man and is simply a piggy bank (jar) with a rule book built in. Pick a coin, anything from a penny to a half dollar. Say you decide on quarters; from then on, quarters are unspendable. Every quarter you get goes into the jar. Keep this up for a little while and it easily becomes a habit. And you’d be surprised at how quickly small-change savings can mount.

Today people use less cash and spend more with a debit card. Companies like Bank of America have a program called “Save the Change” where the change from a purchase goes into a saving account. In our house we never spend change always dollar bills and save about $60 per month is loose change for savings.

The Short-Cake Method

The short-take method is based on the theory that anyone can sacrifice for a week or two at a time. Just about anyone can manage for short period of a few months you could not stand indefinitely. Many people and families have successfully used the technique for a brief period, say three months, and just save like crazy. They’ll cut expenses to the bone, knowing that the end is always in sight, and stack up away a nice chunk of cash. When it’s over, they celebration and resume their mismanaged living (but with cash in the bank) until they feel strong enough for a repeat the process.

The Windfall Method

The windfall method is where the circumstances have to be just right. Every once in a while you may “find” some money. Perhaps you get a raise, or finish paying off a debt. Perhaps the doctor orders you to quit smoking, or the computer breaks and you cancel your monthly cable bill. Wherever it comes from, there’s suddenly “extra money” without a name on it. Grab it quick, or a large portion of it to put into savings, before it gets absorbed by living expenses. You survived without it before, and you can continue to.

NOTE: This works great in paying down debt using what is called the debt snowball.

The Even Swap Method

The even-swap method requires focus and determination. Pick one specific regular expense. Trade it in for savings money. Make it a sacrificial lamb and deposit its cost in the bank each month. This is a bit easier than more general kinds of budget-cutting because the dramatic twist helps focus. For example… Managing a reduction in the entertainment budget, for some mysterious reason, is generally more difficult than banking the price of the midweek movie in a jar as you settle down to a quiet evening at home.

The Self-Service Method

The self-service method calls for “finding” a job you currently pay other people to do you could do yourself. House cleaning? Lawn mowing? Home repair work? Do it yourself and bank the saving.

The Elbow Grease Method

The elbow-grease method simply means save more by earning more. It’s not as hard as it sounds. If your goals are modest enough, say $300 or $500 a month, there are plenty of opportunities for a little part-time income. For example, delivering pizza, parking cars on weekends, baby-sitting for neighbors. Look around. If you can spare a couple of days or evenings a week, there may well be a way to cash them in.

None of these tricks contains any magic. But any one or another of your own imagination – might prove a shot in the arm to make the flesh as willing as the spirit.

Let’s assume, for a minute you have went through the steps and filled out two of the three columns in your net worth and cash forecasts – Last Year & Estimated This Year. Things overall look pretty good. From the numbers it looks like your net worth will grow through the year. It even looks positive that the bank balance will increase to a level higher than what is necessary to provide sufficient working capital. With all of this bright picture it definitely is not the time to plan a trip to Hawaii. First, take pad and pencil and make a list of some of the things that are going to be needed – or even just wanted – during the coming year. These may be things that weren’t bought last year, so these have not been calculated in the forecast. New car? New clothes? Kids going to summer camp or college? Fix the patio? Replace the refrigerator?

Write down a few items and the projected cash balance may begin to take on the appearance of a deficit. This is the time we call a family budget meeting. What comes first, the new refrigerator or new clothes? How are you going to pay for it? Use cash, borrow or sell something? Since you are looking at the money several months out, you have plenty of time to figure interest charges if you decide to buy on credit. Or maybe you might decide (which I would) to use our savings rather than borrow. If possible, treat this as a loan to yourself, to be repaid later.

Once you decide what you want and how to pay for it, begin to check on the dates of future sales and prepare to grab a bargain if you can.

Are you thinking of buying a house, trading in the car, taking out more life insurance or starting to fund your 401K plan? You can figure out exactly how it will work by getting some scratch paper and sketching out rough net worth and cash forecasts as they would appear with the proposed changes. There are pitfalls to be avoided in making hypothetical forecasts. For example, if you are planning to sell some stock for example or a piece of property, don’t forget that you will have to pay a commission and possibly a capital gains tax. Settlement charges in real-estate transactions can amount to thousands of dollars.

After you have been comparing actual expenses with your forecasts for a while, you should begin to see some patterns evolve. A sudden or unexplainable change is worth reviewing. If the “family shopper” is on his or her toes, your spending for food should stay fairly even. A steady expenditure indicates that shifts are constantly being made to buy goods that are in season or in plentiful supply. If the figures jump up and down from month to month and there is no ready explanation, it may be a sign of careless or impulsive buying.

There is much additional interesting news about your family that a financial forecast will tell you. But don’t ask it to do too much at first. Start out simply with not too detailed a breakdown of expenses. Keep the sheets handy with the checkbook and bills. Label them clearly Forecasts. Budget is a nasty word. Setting one up is an unpopular business. It would be too bad if anyone discovered that that is actually what you have done.

Once you have taken the steps to complete your cashflow and net worth forecasts you are ready to get down to business. Maybe the process took several evenings get everything figured and entered, but it will be worth it. You have now created a wonderful tool that has many, many uses. Let’s look at some.

First of all, you should now have a pretty good idea of where all of your the money has been going. As months go by, you can begin to put together a pretty smart guess as to where it will go in the future. By knowing future demands, you should be able to eliminate some overhead. Bank service charges can be cut and or eliminated. I did by using my debt/check card one time per month. Borrowing can be kept to a minimum. Maybe you will be saving a bit more in the months ahead. If, on the other hand, you are spending more, you should be able to quickly see where it is going.

The fuel which keeps a business operating smoothly is its working capital. A business may have buildings, equipment, tools, trucks and other fixed capital worth millions, but if it does not have the bank balance to meet its payroll and buy raw materials, it cannot survive. In other words, a percentage or proportion of the capital of every business must be in liquid form. And the same is true for a family.

In every family, and in every business, there is a ratio between working capital and the amount of money flowing in and the money spent. The working capital of a business is defined as the difference between its current assets and current liabilities. Any company likes to feel that it can easily meet its regular obligations and take advantage of buying opportunities or chances for expansion if they arise.

Assume that a family’s working capital is simply its average checking account balance. Use your cash forecast to estimate your own. For each period, average the initial balance after you have deposited your paycheck and the final balance. Then average all twelve. This figure has a definite ratio to your net worth. Take the family with the $300,000 house and two cars. It obviously runs a bigger total of monthly bills and needs a bigger bank balance than a family that rents a small apartment and has one car.

When a businessman’s working capital is too low it puts him under a strain. He feels as though he were driving a car too fast. There isn’t enough time to slow up or change course if a sharp bend appears in the road.

In the same way, many families keep too little cash available for day-to-day living. The reason is usually not lack of money. Rather, the money available is poorly distributed. Too much is tied up in fixed assets such as a house and a car, or in an overambitious investment programs or the credit card balance is maxed out buying “stuff they needed” and interest is eating away every month. Bad money management may cause bank service charges to be unreasonably.

By keeping an extra $500 or $1,000 dollars in your account, you might save from crisis living overdrafts. An average bank balance equal to one month’s income is for most people a comfortable level.

Too small a bank balance can also cause unnecessary short-term borrowing and prevent the taking of discounts for prompt payment. It can even hurt your credit by making you late in paying bills. But worst of all, it can cause all kinds of worry, stress and strain as payday approaches and the bank balance sinks dangerously close to zero.

After your have your personal cash flow statement in place it is time to look at your net worth. Calculating net worth is comparatively easy but many consumers make it much more difficult. Forget about your income and your living expenses. A water pipe does not care what quantity of water flows through it. All you are interested in now is what you are catching in the reservoir.

Take your net worth forecast sheet and list in the left-hand margin your major assets. Omit minor items such as personal possessions, clothes, and furniture. Stick to such things as the market value of your house, car, stock and bonds, the amount in savings accounts, the cash value of life insurance policies and the actual cash you have on hand at the end of the period.

Use this Online spreadsheet and visit the “Consumer Equity Sheet” tab at the bottom.

Next list your liabilities. These will include the balance you owe on the mortgage, the balance you owe on other debts such as the loan on your car, and bank loans. Use a red pencil for last year’s figures, green pencil for this year’s estimates and blue pencil for actual results.

To get your net worth at the end of each month, simply subtract total liabilities from total assets. The month-to-month increase probably won’t look too large, but let’s face it, that’s all it was. Maybe you can do better, but don’t fall for the temptation to begin a new intense savings program on the spur of the moment.

There are a couple of tricky things about your net worth. Theoretically your house is depreciating, losing value because of increasing age. But maybe over the past years the actual market value has gone up because of inflation. Here is the way to handle this part of your net worth forecast. For all last year’s months simply list what you consider the market value was at the beginning of last year. To get this year’s figure, make a new estimate in the light of the condition of the house and the real-estate market today. Use this figure for all months of this year, and plan to revalue again at the beginning of next year.

Your car is another item somewhat hard to assess. A car loses value much faster than a house. Depreciation plus obsolescence (going out of style) reduces a new car’s value by 30% to 40% the first year, 15% to 20% the second year, 10% to 15% the third year, and around 10%, 9% and 6% in the years succeeding. The person who opts for a new car every year has an average annual depreciation expense about twice that of the person who keeps his car six to eight years. This is a real decrease in net worth, which shows up unmistakably in the trade-in allowance.

Figure how much your car has depreciated from its original cost. If it is two years old, it has depreciated 45% to 60%. So for its present worth put down between 40% and 55%. The exact figure will depend on the condition of the car. At the beginning of next year its value will have dropped another 12-1/2 % on average. So during this year lower the value by one twelfth of this amount each month. Say you figure it is worth $8750 now, but will be worth only $6560 in a year. Each month its value will drop around $180.

The reason you can look at your net worth statement as – A Place of Hope – is that every month you can see as you are paying off debt how your net worth grows.