Saving Money for a Rainy Day
One of the first things you should consider before you invest is “What would I do if I lost my current source of income?” How would you survive for the first six to 12 months of unemployment or the loss of your current income source? Unless you have a good answer for that, then you should consider the amount of savings you currently have in the bank. When it comes to emergency funds, it's best to have a source of money that is readily available and not subject to market downswings. Usually this means having money in a cash account. Some stock brokerages provide cash accounts, and some are even accessibly through ATM cards. While this may be changing, most people are more comfortable doing their banking in person with a bank down the street. Some other benefits to this is having a local place to go when you need a loan or when things go wrong with your account. Another important consideration is the ability of your spouse or other dependents to access money in the account in the event of an emergency.
However, if you're comfortable with technology and remote customer service, some online banks offer significantly better interest rates for savings accounts. As of this writing, there were online savings accounts offering 1.25%, with few fees. If may make sense for you to have a local checking account linked to a higher interest online savings account, keeping at least enough money in checking to pay near term bills.
If you've provided for your dependents to have access to a second ATM card and your PIN in an emergency, then they would probably be able to access these funds in the short term. However, you may also want to discuss with the bank how you can put their names on the account to ensure they have access, or consult an attorney regarding estate planning.
Your emergency fund in your bank or credit union should be enough to take care of yourself and your dependents for at least six months, although some would suggest having as much as twelve months. In addition to that, it would be a good idea to have enough cash to cover your monthly bills.
Some institutions have better reputations or fee schedules than others. While this book will not attempt to tell you which ones are best, here are some sources of information to help you select one:
Forbes, America's Best and Worst Banks
Wallethub's credit union search tool
High banking and ATM fees can sometimes eat up your savings or checking account balance, which is why some people prefer online banks and credit unions to traditional banks. Take note of the bank's key terms of service, such as any restrictions as to how and when your money is available, or unusually high fees. Comparison shopping and reviewing online reviews is usually also a good idea.
Sometimes banks offer short-term bonuses of $50 to $500, depending on the amount you plan to transfer into a new account. There are usually rules regarding how long you must keep the money in the account, and sometimes the interest rates are fairly low. However, there are often ways to take advantages of these bonuses and come out ahead.
Similar to bank accounts, many credit cards are offered with points or cash bonuses for establishing a new account. While their relative benefits may fluctuate, the one common item to remember is that you should plan to pay them off every month, or begin incurring high interest rates and fees. Some card companies do offer temporary 0% interest periods of up to a year on balance transfer, which would make sense for someone having a balance. Paying off high interest debt before making any investments is a smart idea. You will be hard pressed to find a better return on investment through putting money into the stock market.