Question: I'm newly married and trying to put together a plan for budgeting and saving for our future. The book I've been reading suggests emergency savings of at least 3 months take-home pay, in addition to reserve savings for planned expenses. Additionally, it recommends keeping this money in a money market fund, or index fund with check-cashing privileges. In the past you've recommended index funds over other sorts of mutual funds. Can you talk more about this, and suggest some places to look? I will be making fairly small deposits, at least at first. Jeremiah, San Francisco
Answer: The advice to put the cash in a money market mutual fund is conventional and non-controversial. To use the Wall Street jargon, it's a very "liquid" investment, meaning you can write a check off your money market fund when you need funds in a pinch.
What I don't get is the index fund advice. When I talk about index funds, it's usually a broad-based domestic equity index fund, an international equity index fund, or a bond index fund. In each case, fees are razor thin and your investment will match the performance of the underlying index. However, these are riskier investments--you don't want your emergency savings tied to the movements of the stock or bond market. I think it's a great idea to put money into index funds in a taxable account, but I would reserve it for long-term savings, such as a child's college education.