Nuptial Nest Egg

By Chandra Orr

October 17, 2008 5 min read


Translating expert advice to real-world use

Chandra Orr

Creators News Service

As newlyweds, you took the experts' advice and started saving. Now what?

Sure, you've got a lot on your plate like saving for a home, a family, your children's education and retirement, but you also need a rainy day fund.

"Economically, we are in a very volatile time. You have to be practical. Things happen -- layoffs, accidents, the pipes break in your house. You need to have access to short term cash so you don't have to go into debt if you have an emergency," said Bambi Holzer, author of "Financial Bliss: A Couple's Guide to Merging Money Styles and Building a Rich Life Together" ($22, AMACOM).

A solid nest egg can prevent a run-of-the-mill emergency from becoming a financial catastrophe. When these things happen, you don't want to rely on long-term investments or credit to cover the expense.

If you pull emergency funds from your retirement savings, you'll pay a 10 percent penalty on the funds and pay taxes on the money. And with credit card interest rates as high as 20 percent or more, you don't want to rack up a big debt using plastic to pay for the unexpected.

From losing your job or suffering a disability to car repairs and unforeseen medical expenses, three to six months salary stowed in an emergency fund ensures that life's little detours don't detour your plans for the future.

"Sometimes that's achievable, sometimes not, but six months income is a good cushion for emergencies," Holzer said.

The key is to keep that savings fluid and available when you need them -- not locked up in long-term investments. Short-term fixed securities are usually the best way to go.

High-yield savings accounts, certificates of deposit, treasuries and money market accounts are all great places to park your nest egg until you need it. They keep your money safe, allow for some growth without undue risk and offer the flexibility to access the funds when you need them. You won't get rich on the returns, but you will have piece of mind.

* HIGH-YIELD SAVINGS ACCOUNTS: Like traditional savings accounts, high-yield accounts are FDIC insured up to $100,000, so the principle is never at risk. While the required minimum balances are generally much higher than those of traditional savings accounts, high-yield accounts offer interest rates that are more competitive with other short-term investments. However, beware of teaser rates designed to lure you in. Check the account's six-month interest rate history to get a better idea of the potential for growth.

* CERTIFICATES OF DEPOSIT: Certificates of deposit (CDs) offer some of the best guaranteed returns on your money. In exchange for investing a fixed amount of money for a fixed amount of time, the bank agrees to pay a set amount of interest. The interest paid depends on the length of the CD -- generally, the longer the term, the higher the rate. That interest rate is locked in for the life of the CD, but so are your funds, so stick with 30 to 90 day CDs when investing emergency funds to avoid paying penalties on early withdrawals.

* TREASURY BILLS: Treasury bills, or T-bills, are similar to savings bonds; it's a way for the U.S. government to raise money from the public. Unlike savings bonds, which take years to mature, T-bills pay out in 3-month, 6-month and 1-year increments. Sold in denominations of $1,000, T-bills can be purchased directly and commission-free from the U.S. Department of the Treasury at Stick with short-term T-bills to avoid paying a penalty if you need your cash quick.

*MONEY MARKET DEPOSIT ACCOUNTS: Money market deposit accounts, offered through banks, pay higher interest rates than savings accounts. In exchange for the higher rate, customers generally must maintain a higher balance -- between $500 and $1,000 -- and are limited in the number of transactions they can make each month. On the plus side, you have easy access to your funds, and, because the accounts are offered by banks, your funds are FDIC insured.

Holzer recommends staggering the payouts on your short-term investments so you always have access to a portion of your nest egg. Don't keep funds tied up for more than 30 days just in case you need the money immediately.

"Shop around and find the highest rate you can find, but remember it's about saving and protecting your money, not about growth," she said.

Note: Book publisher AMACOM is all caps.

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