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By: Tony Wanless, The Province
Excerpt from National Post, December 23, 2000
For some time, advisors have watched, and cringed,
as everyday people took every cent they earned,
and more, and tossed it into the stock market.
And, they say, usually the first money that's
blown on the market rush is the emergency fund.
This personal finance staple of years ago is
almost moribund now, but there was a time when
it was the most important part of a financial
portfolio. And now, as the market and the economy
enters an unstable period, it's time for the emergency
fund to resurface.
Adrian Mastracci, a fee-only investment
counsellor with KCM Wealth Management Inc.
of Vancouver, suggests that much of this willingness
to dip into the emergency fund for market speculation
comes as a result of too much short-term thinking
of the wrong kind. "You can't build a house without
a blueprint and you can't build an investment
house without an investment plan.
"But people try to, and they jump in and out
of the markets. People should relate everything
they do to some kind of long-term plan. And every
long-term plan has a short-term emergency fund."
The general rule is that an emergency fund should
consist of six month's take-home income, kept
somewhere in an easily accessible account. But,
many advisors say, changing and increasingly unstable
times emphasize the need for a large fund that
can get you through six months of little or no
income. Generally, emergency monies are held in:
BANK ACCOUNT
Ultimate liquid cash reserve but should only be
used for very quick emergencies such as a suddenly
needed repairs. In many cases, there's a cost
to maintaining this fund, so it should be kept
small.
MONEY MARKET FUND
Because money market funds invest in short-term
securities, they earn some interest while waiting
for deployment.
TREASURY BILLS
These government short-term bonds are a good way
of holding money because they can be bought and
sold instantly and earn fairly good interest.
LINE OF CREDIT
This is a revolving loan account set up with some
institution that can be accessed quickly. Unlike
most loans, you don't have to pay back the principal
on a prescribed schedule, only the interest. These
are useful for emergencies, especially if you
have regular income, but pose a danger in that
they can become slush funds for non-emergency
buys.
CREDIT CARDS
Although this is probably the worst method for
cushioning emergencies, it's also common, because
it's so easy to use. Its high-cost credit and
can steer you into a debt spiral.
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