Saving

QUESTION: Should Nate cash out a small amount of stock, and use the money for an emergency fund? In this situation, Dave thinks that’s the right move.

ANSWER: That’s what I would do. Basically, your emergency fund is in stock right now. That’s not a good place to keep an emergency fund, because you never know when life will throw unexpected expenses your way or the stock market will go down.

Put the money in a simple money market account—one with check writing privileges and no penalties for early withdrawals. You always want your emergency fund to be safe and easily accessible. Then, make sure you keep pushing forward and take care of Baby Step 4, investing for retirement; Baby Step 5, save money for college if you have young children; and Baby Step 6, pay off your home early. Baby Step 7 means building wealth and giving like crazy.

QUESTION: Keith is concerned about his mom’s savings and investments. He wonders, also, if she should pay off her mortgage. After hearing the details, Dave doesn’t think there’s much reason for Keith to worry about her situation.

ANSWER: I would recommend she go ahead a pay off the mortgage. If she can do that at age 75, and still have $430,000 left, that’s the way to go.

Being in the stock market at her age sounds like a shock to you. I don’t think it’s a bad thing. It’s just not what the typical financial planner tells you to do. For the most part, they’ll tell you to get super conservative with your money as you get older. But she’s not going to use this money; she’s going to use the income from this money. The money’s going to be left alone. If she’s in good mutual funds, and not single stocks, I’m not worried.

Let’s pay off the mortgage, and then she can start taking her income off the remainder. She won’t need as much in terms of income, because she won’t be sending money to the bank to pay the note on the house anymore. I’m comfortable with that.

I’m 58, and I’m 100 percent into stocks through mutual funds. I don’t have anything else, and I don’t ever plan on changing that.

QUESTION: Kristi works for a community college where a mandatory 20 percent is taken out of her paychecks for retirement. She asks Dave’s thoughts on this practice.

ANSWER: That is a lot to take out. I’ve heard of a few places that have a mandatory 12 percent contribution, but 20 percent is very unusual—and it’s unusually high.

I’m not sure what to tell you. I mean, you took the job. It’s what you signed up for. You may have to decide at some point if you’re still willing to work there under those circumstances. But at least you’re not losing the money, so it’s not the end of the world. It’s your money that’s going in there for your use some day.

QUESTION: Will and his wife are completely debt-free. They want to keep a portion of their emergency fund in cash at home in a safe. Dave doesn’t mind the idea, but he stresses caution and reason.

ANSWER: Typically, homeowners insurance policies have a limit as to how much cash they will cover. I’d advise re-reading your policy, and double checking with your insurance agent just to be sure. When it comes to documenting valuables, I’d suggest making a video or taking photographs.

When it comes to the portion of your emergency fund you keep at home, I’d recommend just being reasonable. If you’ve got $10,000 set aside for emergencies, I’m okay with you keeping $5,000 at home in a quality, fireproof safe. I wouldn’t put all, or even most of it, in a safe, though. I certainly wouldn’t keep some huge amount like $200,000 at home in a safe.

Again, just make sure your homeowners policy covers it, and make sure, too, you’ve got a really good safe.