Getting Personal: Emergency funds, a relative's loan request

Getting Personal

Marketplace Money guest host Bob Moon and MSN personal finance columnist Liz Pulliam Weston answer listener questions. This week we find out whether or not an emergency fund is absolutely necessary, how to figure out if the credit score you received is valid and how to deal with a relative's loan request.

On a new kind of plastic, duo cards that work as both debit and credit cards:

Liz Pulliam Weston: [With this card], when you sign your name and signature like a credit card, it's actually treated as a credit card transaction. In other words, you can pay it off over time if you want. It doesn't immediately come out of your checking. So that's what's different about this card.

On emergency funds:

Pulliam Weston: Definitely, an emergency fund is not going to be a top priority for most families.

But the story doesn't end there. Click on the orange "Listen to this Story" button at the top of this page for more advice.

If you've got a personal finance question, check out our Getting Personal blog and ask away.

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I know that the conservative approach is to save emergency money in a bank of MMF, but I just can't accept the opportunity cost of putting 6-9 months expenses away in a no or low interest account. In 35 years post college I have only been without income for 1 week.

Instead, I keep about 1 months expenses in a MMF.

For second tier money (about 5-6 months), I save my emergency fund in a conservative and or dividend paying low risk mutual fund. After 35 years of doing this, the only time I lost out was in 2008 and I did not lose out by very much even. Trowe price Capital Appreciation and Mutual Shares are two funds I have used for this purpose

For Third tier money I will withdraw from my Roth IRA

and finally as a last resort, since I am almost 59 ½ I can withdraw from retirement accounts and not pay the 10% penalty and I can withdraw from my 401K without penalty.

This week, Liz Pulliam Weston asserted that taking $10,000 out of your Roth IRA would cost the equivalent of $200,000 at retirement. I think that's a pretty extreme claim. In order for that to happen, you'd need to earn 8% above inflation every single year for approximately 40 consecutive years. I don't think we've had that kind of return over any 40 year time span in our nation's history. And after the last 12 years where returns have averaged about zero, this seems even more unlikely in the future.

I agree with Liz that it's best to leave your retirement funds alone, but she should be more responsible (and knowledgeable) when making the case for doing so.

Emergency fund sources you haven't thought about: Unused leave or vacation time; If you lose a job, you should be able to cash out. Sick leave; May not be able to cash out for a job loss, but it will help you through a medical emergency when you can't work. Pay a month or two ahead on home mortgage or car loans; it's like investining the money at the rate of interest the bank is charging you, which is certainly more than you get in a savings account. While nothing beats cash in the bank, I don't think having THAT much money sitting idle in a bank is the best use for the cash.

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