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 Building a Cash Fund Before Emergencies Happen There are times when even the best budgeters find themselves hungry for cash – whether they need it for a minor item, such as a car repair, or a major one, such as living expenses during illness or unemployment. There are ways to prepare for emergencies that require cash - before they happen. Short-term emergency fund: Specifically earmark some savings to include regular payments into a money market account, certain certificates of deposit or short-term government bond funds. This money is kept “liquid,” or immediately available, without any penalties for withdrawal. To build your fund, a fairly painless first step is to take any “extra” chunk of change and save it. Squirrel away all cash holiday gifts, income tax refunds, bonuses or raises in your emergency fund. Also, review agreements with household vendors, such as long-distance providers and cable companies. How much are you spending per minute on your phone? Are you really using your premium cable services? If you are confident that your cash crunch is short-term and will be resolved in less than 60 days, you might siphon money from an individual retirement account (IRA). If you roll the amount distributed from your IRA back into an IRA within 60 days, you can avoid paying income tax and any withdrawal penalty tax. Longer-term emergency funds: If you know you are going to need a major home renovation in a few years, first determine how much you need to save. For these longer-term expenditures, consider keeping funds in something that has a higher potential return than most money markets, such as mutual funds. Of course, mutual funds are not FDIC-insured and may be worth more or less than their original value upon redemption. You may also want to consider lowering your mortgage costs by refinancing and saving the difference in your longer-term emergency fund. Next, look at the private mortgage insurance you may have been paying. If the equity in your home is now greater than 22 percent, the law says you can demand that your lender cancel the private mortgage insurance. IRA options: In certain situations, IRAs can also help in the long term. The standard 10 percent penalty fee is waived if you are unemployed and the money is used for certain health insurance or higher education expenses. Also, first-time homebuyers can take out as much as $10,000 penalty free. Get professional help: Financial advisors can provide other creative tips to help increase cash flow and build emergency funds while assessing your long-term and short-term savings needs. June 13, 2002
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