Post #34

Part 3: Money and Investing (continued)

Emergency Fund
This fund is for true emergencies.  If you are without work and don’t have enough money to buy food, tap into the emergency fund.  If you need up front money for a heart transplant, tap into the emergency fund.  Otherwise, don’t use the money.

• Figure out how much you are spending each month.
  • Look at your checking account statement for 4 consecutive months.
  • Add up the total amount you have spent for the four-month period.
  • Subtract the amount of any one time purchases, like an automobile.
  • Divide the result by 4.  This will give you the average amount of money you are spending each month.
• Keep about three month’s worth of your average monthly expenses in your checking account. 
• Keep another three month’s worth of your average monthly expenses in the Vanguard Prime Money Market Fund.
• To open the Money Market Fund:
  • Wait until you have about $3,000 extra in your checking account, because the fund requires a $3,000 minimum deposit.
  • Call Vanguard at 800 662-7447 and ask them to send you the paperwork to open the fund.   Or use their website (www.vanguard.com) to download the paperwork.
  • Fill out the paperwork and send it back with a check for a minimum amount of $3,000 made payable to The Vanguard Group.
  • Thereafter, you can make additional deposits for $100 or more.
• This six-month supply of money is your emergency fund.

What is a Money Market fund?
A money market fund is offered by your local bank, Vanguard, and lots of other money management companies.  The bank Money Market Fund is insured by the Federal Deposit Insurance Corporation.  The other Money Market Funds are not insured, so there is a very slim chance that you could lose the money you deposit in these funds.  With Vanguard, it’s about as likely as a cobra biting you while you are watching TV, but it could happen. 

Money Market Funds pay more interest than a regular checking or savings account.  The interest rate can vary.  Vanguard allows you to write checks of $250 or more on your Money Market Fund balance.  It’s not a checking account, which is why you can’t write checks for smaller amounts.   If you have retirement money in a money market fund, do not write checks, as this will incur penalties and taxes.

There are a few on-line banks that offer savings accounts with interest rates comparable to the Money Market Funds.  You can’t write checks, but you can transfer cash from the on-line bank to your checking account without any problems.  You could use this type of account instead of a Money Market Fund.  The money on the on-line bank accounts is insured by the FDIC.  Check out the interest rates for these accounts at ING Direct and Corus Bank.

If you’ve already got a checking account, a credit card (one, remember, one credit card), and an emergency fund, you are ready to make a big decision - buy a house or invest your money in the market?

Comments

is there such a thing as a joint money market account? how does that work for tax purposes if the two people are filing separately?

[Paul]

Yes, you can have a joint money market account, just as you can have a joint bank account. Here’s a link to Vanguard’s website, showing the different types of ownership that a money market account can have:
Vanguard - Money market accounts - Personal accounts

So who pays the taxes on the earnings from a joint account? The primary account holder! When you open the account, you fill out a registration form or a new account form, or whatever they want to call it. Somewhere on the form you have to tell the fund company who will be the primary account holder and who will be the secondary account holder. At the end of each year, the fund company will send the IRS a form telling them how much money was earned by the account, the primary account holder’s name and the primary account holder’s social security number. The IRS will be looking for taxes from that person.

By the way, don’t try to get a SS# for your cat and include Mr. Claws as the primary account holder. Nowadays, the government is getting very sensitive about these types of shenanigans. They even took $10 Million away from old dead Leona Helmsley’s dog. Leona Helmsley's Dog Loses $10 Million