The Financial Crisis and My Own Pocket

Ok, I'm not panicked yet, though I was freaked out a few weeks ago about Lehman Brothers and then I was all weirded out when Wachovia died because I remember that bank being huge AND because I had considered going over to Wachovia because of their dollar-matching-saving program, compared to Bank of America's Keep the Change program.

I stayed with Bank of America... but only because I was too lazy to do any additional research and then to open new accounts and move my money if that's what I decided to do.

But, after a long discussion this week in my company with our CEO, I started to really seriously consider some small, but, I think, significant, moves with my cash as we head into this financial tailspin (FYI, while I'm not worried too much yet, I do think this going to get much, much worse before we see anything that look even close to "better").

First, I was thinking about cutting my 401k contributions in half.
Right now, I have both a traditional IRA and a Roth IRA with my company. I split my contributions between them. (For those who don't know, with a traditional IRA, your contributions are tax deductible, but you pay taxes on the money you take out when you turn 65. With a Roth IRA, you pay the taxes now, and none when you take the money out.)

The good news is, my company matches 3% of my salary for my 401k even if I don't contribute, so it's not like absolutley NOTHING will be going in there.

I want liquid, but interest bearing, cash on hand. I was thinking of continuing my contributions to my traditional IRA, but diverting what I was putting into the Roth into my emergency fund, which is in an HSBC hi-yield savings account.

Hi-yield is kind of a joke these days though. I think at the peak, I was getting as much as 6% on my money in that account, but now, I get about 3% and if the Fed cuts rates as I saw in this morning's Wall Street Journal, I may wind up earning even less. Because the money in my Roth is not FDIC insured AND it's losing money right now, I thought it would be wiser, for the time being, to save the cash in my emergency fund.

In short, here are the two things I am pondering:

1. Should I put the money I had been contributing to my Roth IRA into my emergency fund instead?

2. Should I find a higher-yield, but conservative, liquid account to stash my emergency fund instead of the HSBC account? If so, any suggestions?

FYI, I really don't think now is the time to start moving a whole lot of money around, but I also think there's no reason to forego a better deal.

DH

Comments

[savvy]

If you can deduct your traditional IRA contributions, I'm not sure why you're contributing to a Roth IRA as well and not taking full advantage of the deduction.

I would suggest maxing out the traditional IRA, setting a goal of at least 6 months expenses in the emergency then contribute as much as you can to your 401k after you've accomplish those two things.

[Tavia]

I think you said that you had about 30% to go before you made it to having 3 months of living expenses, right? I think Savvy's recommendations sound pretty good, especially about the 6-month emergency fund. You've discussed some changes to your insurance stuff recently. If your car needed work or you needed medical care, you might be dipping into your emergency fund for more than living expenses.

I'm not sure what to suggest about where to put the emergency money. I keep my own emergency fund in two places-- part of it is in a checking account and part of it is in a money market fund. I deliberately don't pay a lot of attention to the yield on either account, though I know that the money market's is higher. People talk about putting your money to work for you, usually with the implication that it should be invested for better returns over time. But to my way of thinking, my emergency fund already has a job: to enable me to deal with big problems without being capsized financially. For emergency monies, the yield isn't the most important thing for me.

[Single Ma]

If you don't have an emergency fund, I'd focus on building one, but not at the expense of my retirement account(s).

[Sophia]

Not from the US so i don't know:
could you save in a savings account now and deposit the cash into your retirement account when the funds are doing better? (drawback of this is how to catch the market turning point)

or have a separate retirement account that isn't IRA?

it's easy to forgo saving for retirement for various reasons

[Jerry]

I know it's scary with everything that's going on. We all wish there was some insurance that things will recover quickly. I only hope that this new administration will lead to change.

Jerry

[Lacey]

This was a great post! There is so much turbulence in the market today, and people need peace of mind more than ever. I wanted to offer your readers a link to another blogger who is doing great work. He writes about our 'childhood money messages' and how the best approach to stability in today's market is to resist letting these emotions control our buying/selling habits. It is really fascinating work, and something you should all check out. His name is Spencer Sherman, and you can view his blog at http://www.curemoneymadness.com/blog.

[Katie Wilson]

The US President has been wrong about so much during his eight years in office that it is tempting to dismiss his warnings of the impending financial apocalypse as yet more hyperbole - the boy crying wolf.

Unfortunately, this time I suspect he's right. Treasury Secretary Hank Paulson's bail-out is far from perfect, but without it the American and British economies face a crunch the likes of which we can hardly imagine. But how much money would you put on the likelihood of the lamest of lame-duck presidents driving the plan into law? Bush was half-right: one "sucker" did go down. In the late hours of Thursday, America suffered the biggest bank failure in history, as Washington Mutual was shut down by regulators and the remnants sold to JP Morgan. However, the lesson from the US is that at some point the Government will probably have to spend a significant chunk of taxpayers' cash to keep the financial system - and hence the wider economy.

Source of Information: http://www.mortgagefit.com