Suze Orman's Action Plan (14 page)

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here is no substitute for having an emergency savings account safely tucked away at a federally insured bank or credit union. None. Do you hear me?

Credit card:
no substitute.

HELOC:
no substitute.

Money market mutual fund:
not a 100% guarantee either.

Notion of job security:
I need you to pay attention: Even corporate rock stars got laid off in the recent recession. I don’t care how talented and beloved you are at the office, you can’t tell me that there is zero risk you could be laid off, handed a pay cut, or face an income-pinching furlough.

The New Rules for Saving require you to have real money tucked away at a real federally insured
bank or credit union. That is the only way you can be certain that you will be able to handle any of life’s unexpected “what ifs” and “uh-ohs.” I have always advocated the necessity of having a real emergency savings fund, but now more than ever, I hope you can see for yourself the dangers of relying on a credit card or HELOC when what you really need is fast cash for an emergency.

Not only must you have a bona fide savings account at a federally insured bank or credit union, you need to fund it to the point where it can support your family for up to eight months. Yes, I said eight months. Yes, I know that is a long time and a lot of money. But don’t try to tell me that is an unreasonable scenario. You need to appreciate that eight months is what it realistically takes to truly protect you and your family. If you are laid off it can take awhile to find your next job; as I write this in the fall of 2009, the average time to land a new job is six months. If you are facing a furlough or a year without a bonus, or if, God forbid, someone in your family falls ill, you handle all of that by knowing you have an emergency reserve you can tap.

I recognize it may take you months, perhaps even a few years, to fill your emergency fund up to my eight-month requirement. The call to action is that you must start saving—or saving more—today. Not tomorrow. Not next month. Today.

You also need to understand how to keep your savings safe. That starts by making sure your bank or credit union is part of the federal insurance program that guarantees repayment of every penny deposited no matter what happens to the institution. Through 2013, up to $250,000 per person is fully insured at participating banks and credit unions; you can qualify for even more coverage depending on the types of accounts you have.

Safety also comes from prudent investment choices. As of fall 2009, bank savings and CD accounts offer yields of 1%, 2%, or maybe 3% if you’re lucky. Not much, I know. But listen to me, there is no choice in this matter: You must keep the money safe. Do not move your emergency savings into the stock market in search of higher returns. You do not chase higher returns with your emergency account; you keep it safe and sound.

My hope is that once you build up your emergency savings to the point where it can support your family for eight months, you will make it a permanent piece of your financial portfolio. There will indeed be a time when the credit markets shift and once again credit card limits will be expanded and offers of HELOCs will be extended. That shouldn’t be an excuse to drain your emergency savings and revert to using these quasi emergency funds. That’s just too risky. I can guarantee that at
some point in the future we will once again run into a period when the credit markets retrench. Let’s hope it won’t be triggered by an economic downturn on par with what we experienced in recent years. But the economy is cyclical; there will always be ups and downs. Having a permanent emergency savings stash is how you insulate yourself from the inevitable economic downturns and buy yourself protection for any of life’s unexpected and unpleasant surprises.

• Make sure your bank or credit union is covered by federal deposit insurance.
  

• Check that what you have on deposit is eligible for full insurance coverage in the unlikely event your bank or credit union fails. Through December 31, 2013, the general limit has been raised to $250,000 from its previous $100,000, but you need to understand the ins and outs.
  

• If your savings is in a money market mutual fund sold through a brokerage or mutual fund firm, consider moving your money into the Treasury money market fund at that company.
  

• Build up your savings to cover eight months of living expenses.
  

• Move all money you need within the next five to 10 years into savings. Money you need soon does not belong in the stock market.
  

ACTION:
Confirm that your bank is part of the Federal Deposit Insurance Corp. (FDIC) program or that your credit union is part of the National Credit Union Administration’s insurance fund (NCUA). You can check a recent statement or swing by the bank or credit union. If you see the FDIC or NCUA insurance logos displayed anywhere on a statement or front door, you are halfway home. Another option is to go to
www.myfdicinsurance.gov
or
www.ncua.gov
and use the online tools to confirm that where you save is indeed backed by federal insurance.

ACTION:
Prior to the credit crisis, each individual had a base guarantee of up to $100,000 per bank. So if you had a checking account, a CD, and a money market, all the accounts were fully insured if their combined total did not exceed $100,000. If you had a joint account, you and the person you
shared the account with were eligible for another $100,000 each of coverage. (The same limits applied for federally insured credit unions.)

The limit for banks and credit unions was raised to $250,000 per person per bank/credit union for 2009, and this higher coverage amount has been extended through 2013. If you have less than $250,000 at any single bank or credit union and that bank or credit union is federally insured, stop worrying. You are fine through 2013.

ACTION:
No. You have to understand that currently the $250,000 insurance is good only through December 31, 2013. It may be renewed past 2013, but as of now, we do not know if it will be extended. If you have more than $100,000 at one bank the safest move is to limit your CD purchases to issues that mature before December 31, 2013. That way, if for some reason the insurance coverage reverts to $100,000 in 2014, you will have the flexibility to spread your money among different banks without incurring any early-withdrawal penalties on your CDs.

To be absolutely safe, limit the money you deposit
at any one bank to $100,000 or stick with a CD that expires by December 31, 2013.

ACTION:
If the limit is reduced to $100,000—and I am not suggesting this is likely, but only a possibility—you can still choose to cash in your CD early. Most banks will dock you with a penalty for an early withdrawal, but it is typically limited to forfeiting some of your interest, not principal.

ACTION:
You may still have full insurance coverage, but you need to check that your accounts meet the obscure rules that extend your insurance past the basic $250,000. The quickest and best way to make sure your accounts are fully insured is to go to
www.myfdicinsurance.gov
and plug your bank info into the easy-to-use calculator. In just a few simple steps you will have verification straight from the FDIC if all your accounts are fully insured. (Credit union members should use the
NCUA Calculator at
http://webapps.ncua.gov/ins/
). If you don’t have easy access to a computer, I recommend marching down to your bank or credit union and having them go online with you to verify the level of coverage you have; don’t just take a teller’s word for it. You want to see your account information plugged into the EDIE tool (at a bank) or the NCUA Calculator (for a credit union).