Rainy day fund

Member writes:

In a message dated 3/22/2005 11:52:08 A.M. Eastern Standard Time, X writes:
Set up a rainy day fund.
I know we've talked about this but where do you suggest I put my rainy day money? I remember thinking Money Market but I'm not sure it's smart or not. I just feel it's a waste sitting in my savings account getting little to no interest! Contact AG Edwards?

Money Prof:

You could open a separate AG Edwards acct., then just leave the money in a MM which is automatic.
Or once you have enough money to cover say 3 months of expenses for example, you could leave some in MM, and put some in 3 month CDs which will give you a little more interest. You would never put this in the stock market as that is ONLY for long term money.

It's probably a good idea to set up a separate "rainy day" acct., not so much for the extra interest you'll get while starting it, but for the psychological part that its earmarked for something and can't be used for an extra pair of new sunglasses.

But........................... don't forget the IMPORTANT part:

I know all of you want to learn more about interest rates, stock market, etc, but I'm telling you this below is the important part for now. ...............repeat after me: 5% of zero is zero, 8 % of zero is still zero.

At this point use your mind to set up the "household acct." instead.

Don't miss read this: The rate of return is VERY IMPORTANT, I'm just saying it doesn't matter until you have the money to get that higher rate on.

For those who aren't fast with math let me put it another way: the difference on 1% more interest on say $300 over one year wouldn't even pay for one beer in a bar. NO, I don't mean forget the interest rate and go out drinking more. :)