THE COLOR OF MONEY
Find ideal account to store extra money for living expenses

By Michelle Singletary

One of the key things you need to do to build a sound financial house is to stash away enough money so that you can cover living expenses for at least three to six months.

But how do you calculate how much emergency money to set aside and where should you put it?

Start off by pulling out your bank and credit card statements. With these in hand, start figuring out how much you spend each month.

How much is your rent or mortgage? On average what do you spend for food? What does it cost you to go to work each month? What does it take to fill your car's gas tank every week? Don't forget about daycare expenses or insurance payments (car, life, home, disability).

Most important, be realistic about what you pay out every month to make ends meet.

Now take that amount and multiply it by three or six to get the amount you should have as an emergency fund.

Next, figure out where to park the money until you need it. Keep in mind that this is money you want to keep liquid — meaning you can get your hands on it quickly without having to sell something or pay an early withdrawal penalty (this might happen if you lock this money up in a long-term certificate of deposit). This isn't money you are "investing." You mission here is to protect your principal.

Here are some options:

Savings account. Right now the rates are lousy but it's one of the safest places to put your emergency or living expenses money. Personally, I keep my — if I lose my job or my husband gets crazy and walks out on me — money in a credit union account. This money is automatically deducted from my paycheck. My credit union has very few branches so I can't get my hands on the money for quick cash pullouts to pay for a trip to the dry cleaners or grocery store. I also don't carry with me the ATM card attached to this account. These are all obstacles I put in place to ensure I'm not tempted to dip into this money.

Certificates of deposit (CDs). Unfortunately rates for short-term CDs are also pitiful. But you could "ladder" your CDs. CD laddering allows you to take advantage of typically higher rates offered by longer-term CDs while maintaining access to some of your money. So instead of buying a five-year CD, you might divide your money up into equal portions and buy a series of CDs that mature at different times. For this purpose you could buy 30-day, 60-day, 90-day or six-month CDs. This way you don't have to tie all your money up in lower-paying CDs. Bank of America has an online calculator to make the process of CD laddering a little easier. Go to www.bankofamerica.com/deposits and click on the link for "exploring CD laddering." The online tool calculates how much will be earned under the laddering scenario using the bank's current CD rates and annual percentage yields (APYs). Scroll down to the section that says "customize your CD laddering strategy." Click on the link for calculator that allows you to type in various CD amounts and terms.

Money market deposit accounts. These are interest-earning savings accounts offered by FDIC-insured financial institutions. Money market deposit accounts offer many of the same privileges as a checking account. However, you are limited in the number of transactions you can make in a month. No more than six transfer or withdrawal transactions may be made in one month and of those six, no more than three checks may clear in one month. Money market accounts also have a minimum balance requirement. You can find a money market account yielding about 2 percent today but check around for rates. Try www.bankrate.com. In fact, Bankrate.com suggests that you ask the following questions before opening a money market account: What is the minimum opening deposit? Is there a monthly maintenance fee? What's the fee for writing more than three checks a month? Is there a fee if my balance drops below the required minimum? Can I get a higher interest rate if I deposit a larger amount?

Money market mutual fund account. This is quite different than a money market deposit account. Money placed in this type of account is not federally insured. When you invest in these funds, your principal is not guaranteed. But the risk of losing your principal is extremely low. You can sell your shares in a money fund at any time and many have check-writing privileges (with limits of course). Money market mutual funds usually invest in Treasury bills, bank CDs and high-rated corporate bonds. Usually this account will pay higher than a bank money market fund and often responds faster to a rise in the interest rates than a bank money market account. Still the rates on these accounts aren't great right now, so shop around.

I know for many it's not easy to save several months of living expenses. But the economy is still shaky and you don't want to be caught without some money saved to carry you through a rough financial period.