You have quite a few choices. You could keep your emergency cash in an interest-bearing checking or savings account at your bank, both of which offer convenience and the benefit of FDIC insurance (up to $100,000 per depositor per bank). But the interest rates tend to be quite low. Another choice is a money market bank account, also FDIC insured. It will likely offer a higher yield than a traditional passbook savings account, but often with a higher minimum balance requirement and limited transactions. Another alternative is to invest your money in a money market mutual fund, although that is not FDIC insured. For all of these options, shop around to get the best rate and the right level of accessibility. Make sure you understand the withdrawal procedures and fees.
I'd certainly advise you to keep at least three months of living expenses in something completely liquid and accessible. If you want to have another several months of emergency cash or cash for short-term goals (like paying for an upcoming vacation or a child's wedding), you could buy a three-, six-, or nine-month CD and increase your yield a little bit more. But remember if you have to access the CD before its maturity, you'll forfeit quite a bit of interest.
PROTECT YOUR ASSETS WITH INSURANCE
There is no question that an emergency fund will help you weather a short-term financial storm; however, when you're preparing for the unexpected, insurance also plays a crucial role. In general I take a pretty cautious view when it comes to buying insurance - I often see people who have purchased unnecessary or inappropriate coverage.
Everyone needs to understand the serious financial problems that can arise from serious illness or injury. Health insurance is a must for everyone, regardless of their age. If your work doesn't provide it, shop around and get your own policy. Some 50 percent of bankruptcies in this country are caused by health care expenses, and even a substantial emergency fund can't begin to cover the out-of-pocket expense of a serious uninsured health problem.
In addition, I view disability insurance as a must for anyone who relies on their employment income. According to the National Association of Insurance Commissioners, if you're between the ages of 35 and 65, you have a 30 percent likelihood of facing a period of 90 days or longer during which you won't be able to work. Disability insurance is one of the best ways to make sure that your disability, no matter how severe, doesn't turn into a full-fledged financial disaster.
Of course, if you have dependents, you have to have life insurance (if you don't, don't waste your money on this). Term coverage is quite inexpensive if you're young and in good health. And homeowners should purchase home insurance, including extra coverage for those in earthquake or flood-prone areas. If you rent a home but have a lot of personal property, you should consider renter's insurance.
I still believe that the biggest challenges for most people are the long-term ones, like a financially secure retirement and paying for college for their children. Don't neglect the challenges of the near-term. Start putting something away for the proverbial rainy day. Make sure you've got the insurance coverage you need. You can't anticipate the unexpected, but you can certainly prepare for it.
