I quit investing in the stock market.

OK, just kidding, I didn’t really quit. I haven’t changed my retirement contributions in anyway (though I feel foolish every time I see a contribution go through, followed by the stock market falling even further). I left my retirement contributions alone because my time horizon gives me the the benefit of time, the one certain cure for this economic malaise.

However, we have stopped contributing to our taxable brokerage accounts simply because of how violent the market has become. Check out the CBOE volatility indices:

• VIX - S&P 500 Volatility Index
• VXN - Nasdaq 100 Volatility Index
• VXD - DJIA Volatility Index

The volatility indices show the market’s expectation for volatility over the next thirty days and as you can see on their charts, they’re at all time highs. That’s why we’re not putting in any more money, we are going to wait until things calm down before we add back in. (That account was for savings on items we need beyond the next five years)

So, without the stock market, the next question is where should we go with our savings?

Bolster The Emergency Fund

This is never a bad decision. With the economy the way it is, we should use any abundance we have left to start saving for potentially leaner months (or years) to come. If you listen to any experts, you might notice more and more are bolstering up their cash positions. As regular people, emergency funds (and CDs/High Yield Savings) are our cash positions and it’s never a bad idea to squirrel away a few nuts for the winter.

Pay Down Debt

If you have any debt, whether it’s a 6% mortgage or a 20% credit card, paying it down is a smart move. Some would say that you should invest your money and take advantage of the leverage, but I think that’s a little too risky given the volatility of the market. The rewards you will reap by getting rid of your debt will far outweigh the potential gains you’ll earn in our current market. I’m not saying that the money you put into the market will be lost, maybe we have hit the bottom and its on its way up, but by paying down debt you free yourself in a way a few extra dollars in stock gains simply won’t. Also, when you pay down a debt, that rate of return is guaranteed.

CDs & High Yield Savings Accounts

There’s nothing wrong with taking the 3-5% APY of a certificate of deposit (the best cd rates are hitting 5% APY) or a high yield savings account (the best high yield savings account rates are near 4% APY). I think there is a stigma against taking these “safe” gains because we have it in our heads that the stock market can yield returns of 10%. The reality is that the 10% metric is one that’s been overplayed and so ingrained that people are looking at the volatility in the market today and wondering how that figure could possible be correct. It’s not. The market may have yielded gains of 10% since the beginning of time but as all mutual funds state - “past returns are not indicative of future performance.”

One thing is certain though - a certificate of deposit or high yield savings account will get you that yield. The worst case is that you get your money back (bank failure). Unlike money market accounts, CDs and savings accounts are FDIC insured and you’re protected from loss.

Take the safe bet, it’s OK!

Invest In Yourself

Now is the perfect time to invest in yourself by taking some classes, buying some books, and otherwise augmenting your skills to make yourself a more attractive employee or prospective employee. Investing in yourself is one of the best things you can do with your money as knowledge is something that can stay with you for a very long time and there’s always something you can learn.

You don’t have to go as far as taking a class but if you’re in an industry where certifications, and the knowledge those certifications confirm, are important, go out and test for them. In certification heavy fields, many requisitions are filled by those certificates.

Invest In Money-Savers

It’s often said that replacing a ten year old refrigerator can yield significant cost savings (some figures claim $100-$200 of savings [1] [2]). If you have a ten year old refrigerator, consider taking your investment money and replacing it. Let’s say you buy a $2000 fridge and it saves you $100 a year in energy costs - that’s a 5% return on your investment. Since that 5% isn’t taxed, that’s the same as a 6.67% return in the stock market if you’re in the 25% marginal tax bracket. 6.67% return, a new fridge, and being nicer to the environment isn’t too shabby, is it?

There are plenty of other money-savers you can find both in and outside of your home.

Do you have any suggestions on where people can invest nowadays?

(Photo: cishore)

This is the first of a series of seven posts titled the 7 Deadly Sins of Personal Finance. In the next week, I’ll discuss seven mistakes I think we must avoid if we’re going to be successful managing our money. They’re things I’ve learned the last few years as both a personal finance blogger and manager of my own money in our ever changing world. Hopefully you can both take something away from these and give me your own take on the points I bring up.

Without further ado, the first deadly sin of personal finance is…

Not Having An Emergency Fund

An emergency fund is a fund that you set aside specifically to handle the unforeseen emergencies in your life. Some save as little as three months of expenses, others save as many as a year’s worth of expenses, we are going with six months plus adjustments for extenuating or mitigating circumstances. Currently our emergency fund is at six months with no adjustments because we have two incomes and that mitigates the risks brought on by a slowing economy. If we were single income, I might adjust that upward to seven or eight months. If we had kids, I’d adjust it to a full twelve. It’s better to be safe than sorry, you won’t lose much, especially in this economy, by having too much in your emergency fund.

Why is an emergency fund important? When you have a pot of money set aside for emergencies, you don’t need to rely on loans or credits to pay for the emergency. A prime example is a simple flat tire in your car. A flat tire can happen any day and, while not catastrophic, can cost you anywhere from a hundred to two hundred dollars. If you have an emergency fund, you can pay for the service without worrying about adding to your existing debt. With an emergency fund backing you up, you don’t have ride on your donut spare tire (very dangerous!) until your next paycheck.

A flat tire is easy, what about something bigger? Sticking with the car theme, let’s say a rock cracks your windshield when you’re driving to work. Windshield replacement is a little more expensive. With an emergency fund, you can quickly pay for a repair or replacement that can prevent further emergencies down the road. Driving with a cracked windshield is extremely dangerous and with an emergency fund you can take care of those problems quickly and before they develop into bigger problems.

How should you save? This is the easy part. The first step is to budget and figure out how much your monthly expenses are. If you don’t have any empirical data, here’s what I’d do. First, get a ballpark estimate of expenses by calculating what 75% of your pre-tax income is. Use that as your expenses numbers for the first month while you collect data, then replace it with the actuals once you have them.

The best place to save is to open a high yield savings account at an online bank and set up an automatic transfers each month from your checking account. Don’t put it in the stock market, don’t put it in any other investments, and don’t leave it in your checking account where it won’t accrue interest.

That’s it! And like that, you have an emergency fund. If you didn’t have one before and you’re now worried your fund is small, don’t worry. You have a plan in place now and it’s just a matter of time before the savings accumulate. In the event that you do experience an emergency before the fund can handle it, you’re no worse off now than you were before you started the fund. Handle it as you would’ve but keep following the plan.

One last bit of advice: Don’t spend that fund unless it’s on a true emergency. I’ve heard of stories where people have stumbled on a “great investment tip” and raid that fund (you should set up an opportunity fund for that). Don’t. The purpose of that fund is to make sure you don’t fall down a deep deep hole because of one simple financially focused event.

Thoughts?

The New York Times recently released a great series about consumer debt called The Debt Trap. One common thread in several of the videos is the devastating effect “emergencies” can have on your personal finances. A medical emergency, a job loss or cutback in hours, all of these emergencies were weathered, in the short term, with credit cards. In the long term, the credit cards charged high interest rates, piled on fees, and made it extremely difficult to recover. It’s like telling someone to pause for five minutes in the middle of a foot race so that you can strap on a 100 pound rucksack. You might catch up, but probably not.

This underscores the incredible importance of having an emergency fund. The economic climate is pretty rough right now. IndyMac went into conservatorship, Wachovia announced they were slashing 11,000 jobs, and the price of oil gyrates in the triple digits. The stock market is down and there’s a lot of red in those brokerage accounts. The last thing on most people’s minds is boosting that emergency fund. But now is the most important time to focus on your emergency fund.

In times of prosperity, it’s easier to weather emergencies without a plan. Bonuses are bigger, regular and OT hours are more plentiful, and there is less fear that you’ll lose your job. Boosting an emergency fund isn’t fun, but neither is crushing debt, bankruptcy, eviction, and the unfortunate feelings that come with it.

Feel your job is 100% safe? That’s great, but that’s actually not the most devastating emergency. About about half of all bankruptcies are the result of medical bills. You can’t predict the future, but you can prepare for it.

How To Start a Fund?

It’s very simple, get your check book, get your budget, and open an account at FNBO Direct (FNBO Direct review, or pick any one of these high yield savings accounts), they are currently paying 3.50% APY. If online banks make you uncomfortable, open one at your local bank. A fund at 0% APY is better than no fund at all.

You’ll want to save at least six months of expenses, which you can tell from your budget (you budget right???). Try to accumulate that over [insert comfortable time period here]. The faster you do it, by sacrificing some discretionary spending now, the better.

Another option is to ladder your emergency fund in certificates of deposit. One place that makes it very easy is ING Direct but their current rates are all in the 3.30% APY to 3.00% APY range, less than HSBC Direct’s standard high yield savings account rate, so I would put it in HSBC Direct for now.

What are you waiting for?

(Photo: c.violette.run)

Looks like ING Direct, which I lauded in my post about laddering your emergency fund, has now made it even easier to ladder you CDs by letting you open multiple CDs at multiple maturities all on one page.

If you have an account (if you don’t, you can open one through a referral link on ING Direct $25 new account bonus referral page and get $25 for a $250 deposit), the easiest thing for you to do is to go to their Orange CD laddering page. If you aren’t logged in, that link will take you to a login screen. After you log in, you’ll be presented with the normal account screen. Simple come back and click on the link again and it should take you to a screen that looks like this:

As you can see, the 6-, 9- and 12- month CDs are all at the 3.30% rate (not exactly the best, but you can’t beat the convenience and simplicity that ING Direct brings to the table) and you can open all three simply by entering values on one page.

Here are some recommendations or ideas I wanted to share:

• Name the CDs with the rate you’re getting (conver 3.30% to 330, because the naming system doesn’t allow special characters),
• Don’t label the period of the CD, such as 12 (or 6 or 9) month CD because that will change month and eventually every CD will be a 12 month CD,
• and, I wouldn’t write in the maturity date because that will be listed in your account snapshot (the “Account Type” will be Orange CD [maturity date]).

One final word of advice about ING Direct CDs, they’re default set to renew upon maturity. You’ll want to change that for your 6- and 9- month CDs because you will change them out for 12 month CDs once they mature. You can do this by clicking on the CD, clicking on the Account Maintenance link or icon, and change the Account Maturity to either closer or “Renew Principal Only to:” a 12 month CD (with interest rolling into the main account).

If anyone from ING is reading, any chance you guys could sort the Orange CDs in order of ascending maturity? That’d be nice!

Enjoy laddering!

There are plenty of articles out there discussing the importance of emergency funds and how to set one up, so this is not going to be one of those. Here, I’ll discuss a strategy to maximize your emergency fund’s interest earnings so that you can lessen the pain of not having the funds in an investment account. The strategy is quite simple and works off the assumption that you are using the emergency fund to cover month to month expenses and not an enormous cost that is in the multiples of a month, though it can handle that too.

The Strategy

Ladder certificates of deposit so that you can maximize your interest earnings, minimize risk, and still have access to your funds when you need them. To ladder CDs, you purchase CDs for the amount of each month of savings but with different maturity periods so that one CD comes due each month. Let me us a real life example with ING Direct CDs (though I’d shop around for rates, I picked ING because they make opening a CD a cinch) to illustrate this. Also, for the sake of simplicity, let’s say you’ve saved up 13 months of savings of $13,000, which means 12 months will constantly be cycled into laddered CDs with one month sitting in a high yield online savings account.

• Month 1: If you look at the ING Direct CDs, you’ll see that they offer 6 month, 9 month, and 12 month CDs (the rates are unimportant). Right now you need to find a CD that matures in 1 month, 2 months, 3 months, etc, but that will be impossible. The solution then is to buy one six month CD, one 9 month CD, and one 12 month CD. This sets you up to have three of your twelve months covered.
• Month 2: Next month, you purchase another 6, 9, and 12 month CD. This sets you up to have half of the twelve months covered since the first set of 6-9-12 have now become 5-8-11. This puts your six CDs maturing in 5-6-8-9-11-12 months and your on-hand cash at seven months worth.
• Month 3: You starting to see the pattern? Buying another 6-9-12 puts your total collection of 9 CDs at maturity dates of 4-5-6-7-8-9-10-11-12. At this point you also still have four months in cash sitting in your account.
• Month 4: Now the pattern changes, since your CDs have now matured an additional year, you are looking at maturity rates of 3-4-5-6-7-8-9-10-11 months, but you can’t buy a CD of less than 3 months so you can only add an additional 12 month CD. This leaves you with three months of cash on hand and CDs maturing in 3-12 months.
• Month 5: Add another 12 month CD to bring your full collection to 2-3-4-5-6-7-8-9-10-11-12, leaving you with 2 months of cash on hand.
• Month 6: Add another 12 month CD and now you have a fully laddered 12 month CD structure in place, with 1-2-3-4-5-6-7-8-9-10-11-12 month maturity CDs! You still have one month of cash on hand.
• Month 7: The first of your CDs has now matured and you’ll roll that into a new 12 month CD so that you have the full collection and still have a month’s worth of expenses in cash on hand. You will repeat this over and over and over …

Weaknesses

The primary weakness with this strategy is that you only have a month’s worth of expenses on hand. This lets you weather emergencies that cost less than a month’s expenses and those that have recurring costs, such as job loss. If you lose your job, you’re fine with this strategy because each month you’ll have access to another month’s worth of expenses as a CD matures. One mitigating factor about emergencies with a large cost, you can usually cancel your CD early and surrender the interest you would’ve earned, so laddering may be okay in that situation.

CDs with different maturity periods: What if your bank doesn’t offer 3 and 6 month periods? If you only have a 12 month period, then buy one year-long CD a month for a full year and you can the same laddering. The setup time will be longer and you surrender a bit of interest but there’s nothing you can do.

I hope you all were able to follow this explanation, it’s hard explaining something like that in text and I’m not an artist so it will have to do!

Today must be emergency fund day because earlier this morning I talked about how you shouldn’t rely on credit as an emergency fund; now I’m going to remind you that you should adjust your emergency fund limits based on any changes in you or your environment.

Having an emergency fund is one of the cornerstones of a solid personal finance plan. Whether you subscribe to the three month, six month, or full year’s worth of expenses, an emergency fund is something that every single person and family needs. Emergency funds enable you to weather the difficult times, especially since they all seem to cluster together, without putting you in an even worse situation. Some people rely on credit cards to supplement the emergency fund and others will only rely on credit cards at the last moment, but ultimately you need to have an emergency fund that matches both your needs and the chance of a Bad Thing happening.

The first part of that last sentence is pretty well understood by people who have emergency funds. Most people are very aware of their own needs and how it affects their emergency fund. If you buy a house and have to service a mortgage, it’s clear that the emergency funds requires additional padding. If you have a child, most people recognize that the emergency funds need to be boosted to weather any additional crises that come with children. For those of you who understand risk analysis, the part people understand best is the impact or severity of a risk.

The part people are less cognizant of is the second part. In risk analysis, we’re talking about the probability (as opposed to the severity) of a risk occurring. Specifically, we’re talking about people changing their planning as the probability changes. For example, the onset of a recession increases the likelihood that you will be fired or laid off. While the severity of being fired remains the same (you lose the same amount of salary regardless of future he economic prognosis), the probability increases based on the economy and the industry you’re in.

So, how do you do this? Periodically sit down and re-assess your financial plans. Check out your retirement accounts, check out your bank statements, and check your emergency fund. Think about whether the environment has changed and whether you need to increase or decrease your emergency fund. Now, if you think a potential recession will increase the chances you’ll be fired, boost your emergency fund. You’re essentially self-insuring against being fired (and other negative events). As long as you recognize that the environment has changed and your emergency fund needs to as well, you’ll have done what you can to help weather any potential downturn. You can’t predict the future but you can at least prepare for it as best you can.

Countrywide decided to cut off the home equity lines of credit (HELOC) of tens of thousands of people, one of whom was Nina at Queer Cents! For Nina, that HELOC was like an emergency fund - capital that could be accessed if she needed it and existed solely to mitigate any catastrophic situations. However, last week, in an instant, her catastrophic fund was snatched away when Countrywide decided to close her HELOC with very little notice. Luckily for her the HELOC wasn’t her emergency fund, it was actually the backup to the emergency fund, but it underscores the importance of having a actual (non-credit) emergency fund.

Many people use HELOCs as an emergency fund. A HELOC as an emergency fund makes a lot of sense because the interest is tax deductible, making it significantly cheaper than a normal loan. It’s akin to using credit cards as an emergency fund but a little less scary (credit card interest rates are much higher and not tax deductible). Until the other day, I never heard of a lender suddenly closing a HELOC and very rarely do credit cards close accounts. Lenders want you to spend and closing an account makes it much harder for you to spend. So when this does happen, it happens suddenly, unexpectedly, and likely catches you unaware. Ultimately, it’s not a problem if they just closed your Macy’s account and you can’t buy clothes. It is a problem if they just closed your Macy’s account and you can’t make a surprise medical bill payment because it was your emergency “fund.” (it’s an extraordinary scenario but that’s what emergencies often are)

This underscores the importance of having an actual emergency fund, actual dollars in an actual bank account where the principal is protected. A credit card or a HELOC can be a supplemental emergency fund but it shouldn’t your primary. It can handle months 13 and 14 but don’t lean on it for month 1 and 2. You never want your future in the hands of a third party (especially if they are focused solely on their own profit!).

Okay okay, earlier this week I wrote seven irresponsible and fun ways to spend your holiday bonus and now I’m going to throw a bone to the responsible crowd out there and list the seven responsible things to do with your holiday bonus. Personally, I think everyone is a mix between the two (or at least I am between the two). If you spend your entire bonus on fun things, then you aren’t saving enough for the future. If you save the entirety and do responsible things with your bonus, then you aren’t really enjoying the fruits of your labor. What I think you really need to do is find a nice happy medium between the two without going overboard in either direction.

1. Eliminate Debt

Are you carrying any high interest credit card debt? Before your spend any of that bonus on anything, put it towards your debt. Before you save for your retirement, pay down your debt. Paying down a credit card debt at 19.99% is like earning 19.99% on an investment (not exactly, but you get the idea), so pay down that credit card debt as soon as possible. Before you can build your personal finance house, you need to firm up your foundation. In this analogy, firming up your foundation means getting rid of all of your debt so that you can start fresh.

2. Pump Up That Roth IRA

You have until April 15th of next year to make a contribution for this year, using your holiday bonus towards this is a great opportunity to save for your retirement. Now, if you haven’t put anything in your Roth until now, I recommend that you revisit your retirement savings strategy for next year and put a little away each month. You may not get a bonus (or as much of a bonus) next year so waiting for it to arrive before making a contribution is risky. If you’ve contributed for this year, consider saving it and contributing it towards next year. By making the contribution as early as possible you let your money grow as long as possible.

3. Bolster Your Emergency Fund

Do you have three to six or twelve months of expenses saved away in your emergency fund? If not, then you should consider saving a part of your holiday bonus into a high yield savings account for a rainy day. An emergency fund is a crucial part of your overall savings picture. It allows you to weather the emergencies in your life without having to put you in a debt hole that you have to climb out of. At a minimum, I recommend three months. I personally keep around four months but that’s because we have two incomes (I would recommend at least six months if you only have one income).

4. Consider A Home Renovation Project

Now is a great time to consider a home renovation project if you own your own home. What’s great about a renovation project is that you get the benefit of the renovation plus the potential increase in home equity. Now, not all renovations are created equal so don’t think that you’ll get back every dollar you put in. Adding a bedroom or a bathroom will increase the value of your home nearly as much as it costs to add it, putting on a sun room isn’t as as valuable. Lastly, this year is the last year to get a tax credit for making energy saving home improvements.

5. Make Another Mortgage Payment

If you don’t own your home, then you can skip this one. If you do own your home, consider paying down a little extra principal this month. By paying down more principal, you reduce the amount of interest you end up paying but just a little bit. What actually happens is you accelerate your amortization schedule, a schedule that is front loaded with a lot of interest that benefits no one except the bank. So, by making an additional payment, you are shortening the loan terms and saving yourself significant money on the back end. If you end up doing this each year, then you can shave years off your loan. For example, on a $300,000 loan at 6.25% interest for thirty years, you would normally pay approximately $365,000 in interest over thirty years. If you make a one time payment of $1,000 after the first year (say you started the loan in January and made that extra payment that December), you would reduce your total interest paid by over $5,000.

6. Predict Your Potential Needs & Save

Look towards the next year and try to predict any large capital expenses you may encounter. For example, we’ve been using a water heater that has been here for the last twenty years. It’s a water heater that may or may not need to be replaced in the next year and it’s an expense we’re prepared to pay because we’ve planned ahead and saved enough. An emergency fund is great to handle those emergencies you can’t see coming, but if you think you’ll need some funds for a specific reason it’s often better to save in a separate fund for those cases.

7. Go On A Vacation

That’s right, the seventh responsible idea for spending your bonus is to go on a vacation. Why? It’s because you need to be rewarded for a year’s worth of hard worth and great performance (or at least good enough performance to warrant a bonus!). Your employer saw it fit enough to reward you for your hard work so far be it from me to advise that you don’t actually reward yourself for that hard work. So, go on a vacation, enjoy yourself, and send me a postcard!

(Photo dntanderson)

What is the most important thing about emergency funds? Capital preservation. Your emergency fund is supposed to be the foundation onto which the rest of your personal finance house is built upon and it’s not something that should be meddled with unnecessarily. You should pour it, let it sit, and hopefully never have to touch it. However, if you ever find yourself in a situation where you’ll need it, you want it to be there just as you had left it. That being said, a friend recently asked me if I ever thought about putting my emergency funds into a money market account or if a high yield savings account is better.

Money Market Deposit Accounts (MMDA)

For those who aren’t familiar with money market deposit accounts, they are basically savings accounts where the bank has greater discretion in terms of what it can invest in. In return for this greater flexibility, the banks often will give you higher interest rates but may demand that you give them at least 7 days notice before withdrawals (Federal Reserve Regulation D).

• Principal is safe.
• Interest rate is higher than regular savings.
• Potential 7 day lag in accessing funds.

High Yield Savings Accounts

ING Direct, the high yield savings account that I believe has been around the longest, is offering 4.20% APY on their online savings accounts. Comparatively, Bank of America’s Balance Rewards Money market savings account’s highest APY is only 3.05% and that’s if you have over two and a half million dollars in your money market savings account. BoA’s money market account likely isn’t the highest around but it’s not even within spitting distance of ING’s 4.20% rate for nothing (and ING isn’t the highest rate around either!).

• Principal is safe.
• Interest rate is higher than regular savings.
• 4-5 day lag in transferring funds from high yield savings to your bank

Money Market Mutual Funds

A money market deposit account may be confused with an actual money market mutual fund, which is a wholly different animal. A money market mutual fund is like any other mutual fund with its own risk and return profile. You might be offered a higher rate of return but in this particular case you have no guarantee on your principal. If things go south in whatever the fund invests in, like in any mutual fund, your emergency fund could find itself depleted. I would not invest my emergency fund in anything that doesn’t guarantee my principal.

However, let’s say you wanted to take the risk, what are the returns like? Vanguard’s Federal Money Market fund, just to take a random example, currently has a yield of 4.69% and an expense ratio of 0.24%. So, even if we ignore the expense ratio and look strictly at the yield, you’re talking 4.69% versus a 4.20% at 100% safe ING Direct. Half a percent isn’t worth it for me to open an account, transfer money, and take the risk.

• Principal is not safe.
• Interest rate is higher than regular savings.
• Lag if you don’t have checkwriting rights.

Summary

Put part of your emergency fund in a high yield savings account, keep some reserve in a local bank so you can get to it ASAP. I don’t know why anyone would have any funds in a money market deposit account given current high yield interest rates. I also don’t know why anyone would put their emergency fund in a mutual fund, money market or otherwise, because of the risk, even if it’s low, you could lose your principal. We’re in a strange place now where high yield online savings accounts are giving such great returns and all these traditional products, like MMDA’s, are really not worth it anymore.

Where do you put your emergency savings and why?

Today, I’m going to tackle one of the most seemingly unsurmountable pieces of personal finance advice out there: you should have an emergency fund. Before you read on further, this is a Devil’s Advocate post, which means I’m going to try to argue the other side even though I don’t believe it. So… before you read on, let me be absolutely clear … you should have an emergency fund, but if you want a few reasons why you shouldn’t… here they are.

First off, let me go over what I consider an emergency fund. It’s money you set aside for a real bad rainy day in a bank account, whether its a high yield online savings account or just a regular old savings account at your local bank; it must be in an account where the principal is protected. Putting it in a brokerage account, that’s not an emergency fund because the principal could evaporate on a really bad stock market day. So, why don’t you need an emergency fund…

Most Emergencies Are Small…
or if they’re big, they’re really really big. So, in most cases the emergency fund you have will either be way too much or not enough to handle the emergencies of life. If I were to guess the number one emergency that pushes someone to dip into their emergency fund, I’d say it would have to be for auto repair. Even if you follow the most aggressive recommendation of three months, a few hundred bucks for an auto repair probably won’t do too much damage to the emergency fund so your money would probably be better served in a brokerage earning market appreciation rates than whatever minimal rates you’d get in a savings account.

Credit Cards Can Get You By
If you go by the rule that you need 3/6/9/12 months of salary, you probably have that much on your credit cards. In fact, when you do face an emergency, it’s probably a good idea to pull out the plastic first even if you have the emergency funds because you can probably get at least 1% in points from it.

You Have Insurance
You probably pay hundreds of dollars a month in auto, home, life, and medical insurance; so why do you need thousands of dollars saved away for emergencies? Bust a tooth? Use dental insurance. Flooding in your house? Home insurance. Crash your car? Auto insurance. While it certainly makes sense to have a few dollars saved away, having a year of your salary sitting in an account earning a sad rate of return is simply not a strong financial decision.

Ultimately, what you want is to strike a balance between having no emergency fund and having too much earning a low rate. Certainly, since this is a Devil’s Advocate post, I think that having an emergency fund is a very strong financial decision (despite what I said in the last reason) and one that everyone should definitely start once you can.