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Offline rich_t

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Investment or Insurance?
« on: July 01, 2011, 04:37:48 PM »
You folks constantly impress me with pointing out angles and perspectives that I haven't considered on a wide variety of topics.  So I thought I would ask your opinions.

Do you have a rainy day fund?  You know, "cash in the bank" so to speak to cover unexpected expenses?  I am not talking about 401K or IRA plans.  I am talking about liquid funds that one can quickly access without incurring tax penalties from the dreaded IRS for early withdrawal.

If you do, do you consider it an investment or a form of insurance?

Many financial experts used to say that you should have 3-6 months worth of your current net pay set aside.  In recent years I have heard some claim 6-9 months.  I have to say that with today's economy the 6-9 months is probably a safer bet. 

Now for most of us that are not yet retired, that is a significant amount of money to try to put aside.  Especially with the sky rocketing costs of food, fuel and energy.  But if you are able to swing it over time, would you consider it an investment (geared toward making money), or an insurance policy (which in effect costs you money)?

By this I mean where would you keep it?  In a low yield money market account or other savings instrument earning 1% or less (the interest income on these funds probably isn't going to keep up with the cost of living increases, but are about as safe as anything can be when dealing with a financial institution)?

Or, would you put it in a low risk investment account (bonds etc.)?  These "might" keep up with the cost of living increases, but some risk of loss is incurred.

I can see the pros and cons of both ways.  I am currently splitting the difference and contributing to both types of accounts, with a minor emphasis of getting 6 months worth of my annual gross in a money market/savings type of account first.

My goal is to have one years worth of my current gross salary in my "rainy day fund". 

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Offline JohnnyReb

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Re: Investment or Insurance?
« Reply #1 on: July 01, 2011, 04:45:05 PM »
Well, don't take advice from me. I have more than enough for a year or two in CD notes and someimes I wonder, "What am I doing with it in CD notes that don't earn squat." :thatsright: :thatsright: and another  :thatsright:
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Offline rich_t

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Re: Investment or Insurance?
« Reply #2 on: July 01, 2011, 04:53:15 PM »
Quote from: JohnnyReb on July 01, 2011, 04:45:05 PM
Well, don't take advice from me. I have more than enough for a year or two in CD notes and someimes I wonder, "What am I doing with it in CD notes that don't earn squat." :thatsright: :thatsright: and another  :thatsright:

If I had that much already set aside, I'd probably feel a bit more comfortable about putting some of it in an investment account of some sort and incurring a little risk in exchange for the potential higher ROI.

The thing that I don't like about CDs is the early withdrawal penalty if you are forced by circumstances to cash them in early.
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"The American people will never knowingly adopt socialism. But, under the name of 'liberalism,' they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened." --Norman Thomas, 1944

Offline JohnnyReb

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Re: Investment or Insurance?
« Reply #3 on: July 01, 2011, 04:58:21 PM »
Quote from: rich_t on July 01, 2011, 04:53:15 PM
If I had that much already set aside, I'd probably feel a bit more comfortable about putting some of it in an investment account of some sort and incurring a little risk in exchange for the potential higher ROI.

The thing that I don't like about CDs is the early withdrawal penalty if you are forced by circumstances to cash them in early.

What penalty!!!!! I just got a notice that one is rolling over at 0.41%.

On a $10,000 CD that would be $41....small penalty if you really needed the money.

Again.... :thatsright: :thatsright: :thatsright: :thatsright:...nope, still hasn't knocked any sense into my hard head.
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“The American people will never knowingly adopt socialism. But, under the name of ‘liberalism’, they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened.” - Norman Thomas, U.S. Socialist Party presidential candidate 1940, 1944 and 1948

"America is like a healthy body and its resistance is threefold: its patriotism, its morality, and its spiritual life. If we can undermine these three areas, America will collapse from within."  Stalin

Offline rich_t

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Re: Investment or Insurance?
« Reply #4 on: July 01, 2011, 05:37:24 PM »
It ain't the amount of the penalty...  For me it's the principle of having to pay it.

Withdrawal Penalties
Early withdrawal penalties can be stiff. One bank charges 365 days' simple interest for the early withdrawal of CDs with terms of 36 months or longer. Federal law stipulates that all CDs that are cashed out early are subject to a minimum penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit. Other than that, banks are free to set their own penalties. There is no maximum limit on penalties.

It's not unusual to see the following penalties:

CD term                           Interest penalty
30 days                           All interest
Two to 12 months               Three months
13 to 36 months                   Six months

What's worse than forfeiting interest you've earned? Forfeiting interest you haven't earned.

Suppose you bought an 18-month CD and decided to cash out after four months. You would have to pay six months' interest even though you had earned only four. That means you're digging into the principal you paid for the CD.

Some banks may impose a stiffer penalty the earlier a withdrawal is made in the term.

The moral is, before you buy the CD, be sure you have enough money to cover any emergencies so you don't need to raid the CD account.

http://www.bankrate.com/brm/green/investing/investing2-4a.asp
« Last Edit: July 01, 2011, 05:40:46 PM by rich_t »
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Offline IassaFTots

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Re: Investment or Insurance?
« Reply #5 on: July 01, 2011, 08:49:51 PM »
I have more than one bank account, and the second one I have no checks, or a debit card for.  I auto deposit $ in there, and currently have a little over 3 months salary.  I also have cash saved as well, but I ain't saying where I have that.   :whatever:
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Offline Thor

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Re: Investment or Insurance?
« Reply #6 on: July 01, 2011, 10:20:56 PM »
Guns and ammo seem to be a good investment lately.......
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Offline Lacarnut

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Re: Investment or Insurance?
« Reply #7 on: July 01, 2011, 10:28:13 PM »
Sounds like you are doing the right thing and that is saving and diversification. If you have a mortgage, you may want to add an additional amount on the principal each month. Getting out of debt is like lifting a mountain off your shoulders.

The summer is usually a slow time of the year for the stock market. So, if you are thinking about that, I would wait another couple of months. Now is a great time to buy real estate.

Several on line banks offer about the same interest rates on savings as CD's.
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Offline GOBUCKS

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Re: Investment or Insurance?
« Reply #8 on: July 01, 2011, 10:40:16 PM »
At the rates CDs are currently paying, an interest penalty is hardly worth worrying about.
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Offline Rebel

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Re: Investment or Insurance?
« Reply #9 on: July 02, 2011, 12:25:13 AM »
Thought this was about insurance. I was going to say neither. It's a gamble.
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Offline rich_t

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Re: Investment or Insurance?
« Reply #10 on: July 02, 2011, 04:27:32 AM »
Quote from: Thor on July 01, 2011, 10:20:56 PM
Guns and ammo seem to be a good investment lately.......

I've got a pretty decent amount in that investment already.
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Offline rich_t

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Re: Investment or Insurance?
« Reply #11 on: July 02, 2011, 04:29:24 AM »
Quote from: Rebel on July 02, 2011, 12:25:13 AM
Thought this was about insurance. I was going to say neither. It's a gamble.

It is a sort of insurance per se.  I guess the real question is the amount of risk vs. return one is willing to take.
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Offline rich_t

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Re: Investment or Insurance?
« Reply #12 on: July 02, 2011, 04:32:32 AM »
Quote from: IassaFTots on July 01, 2011, 08:49:51 PM
I have more than one bank account, and the second one I have no checks, or a debit card for.  I auto deposit $ in there, and currently have a little over 3 months salary.  I also have cash saved as well, but I ain't saying where I have that.   :whatever:

I have my funds spread around as well.  You've got a good start with 3 months of salary.  I have about the same set aside.

The cash on hand that I keep handy comes in calibers.   :-)
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"The American people will never knowingly adopt socialism. But, under the name of 'liberalism,' they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened." --Norman Thomas, 1944
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