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Emergency stash

Chris Farrell Dec 27, 2007

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.

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