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Emergency savings

Question: This is a basic question, but with everything that is going on I am confused. I am starting a job and I want to begin setting aside an emergency fund of three to six months of living expenses. This money is only for emergencies, so my primary interest is having access to it. What are the types of accounts or institutions I should consider for this emergency money, and what can I expect in terms of fees and returns? John, Palo Alto

Answer: You're not the only one that's confused at this time, and we're all asking very basic questions about our money. They're usually the best questions. The legendary investor Benjamin Graham once wrote that when challenged "to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Very simple. Very basic. Very wise words for all seasons, but especially at an unsettled time like this.

Now, stuffing our money into a couch--however tempting--isn't a good idea. I'd do nothing more glamorous that putting the money--or at least most of it--into a bank savings account, a money market deposit account, a short-term certificate of deposit and the like in an FDIC insured institution. (Credit unions have a comparable federal insurer.) Your money is completely safe up to $250,000 even if the bank fails, and you have easy access to it if you need it.

As for fees, a number of banks are hiking fees and penalties in an attempt to shore up their crumbling finances. And I thought fees and charges were already to high. It pays to shop around, and I'd look into community banks and credit unions. Here's is an email we got over the weekend about credit unions from Dana in Federal Way, WA.

I just got finished listening to your segment on interest bearing bank accounts. Minimum balance of $3500? Nope! My account is completely free. My checking account is through a credit union.

As a general rule the trade-off for safety is a very low interest rate on savings. But so what? The money will be there if you need it.

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