Chances are, if you’re reading this blog, you know about emergency funds and savings accounts. But do you know the differences between the two and when to use them?

Let’s start out by defining specific uses:

Emergency Fund: Usually consists of unplanned expenses, the ones that pop up with no warning such as unexpected bills, deaths, job loss, illness, unexpected life circumstances and appliance repairs/replacements. I hate to mention it again but since the recession is upon us it is imperative that you have at least 3-6 months saved as any combination of the above is likely to create the perfect storm in your financial life. You’ll be able to sleep easier at night knowing that should any or a combination of the above happen, you’ll be covered in the majority of cases.

Savings Account: This is typically where you save for a specific goal such as downpayment on a car or home, childcare expenses, appliances, furniture, educational expenses, investments and hobbies. Obviously, these are planned expenses and not haphazard emergencies. We typically save to meet a certain goal that has been planned for some time. This prevents us from spending money we don’t have through the use of credit cards and increases discipline once the stated goal has been achieved.

The Grey Area This is an area I found myself going back and forth on with my husband because many of these are debatable. We listed the following as being in the grey area: traffic tickets, car getting towed, unexpected tax bill, prolonged medical expenses, legal fees and debt reduction. I’m sure there are more so feel free to list yours in the comments. All of these are debatable which is why they are in the grey area. Still, it makes sense to address these issues before they happen and decide which account should be used to cover these expenses. None of these are planned, but they aren’t dire emergencies either.

Questions to ask your self:

• Which account would you use to pay the junk yard to get your car back?
• What about that unexpected tax bill with April 15th around the corner?
• Legal fees to defend that reckless driving charge?

What about debt reduction? Some believe you should use savings to knock down debt, others believe you can use your emergency fund while some believe in working to pay down debt. I struggle with using my emergency fund to pay down debt because when you know what hits the fan, my bills need to be paid and I would rather pay the minimum in a pinch than give up security. That said I think it wise to create a “when sh*t hits the fan fund” so you’ll be covered and not have to dip into your savings or emergency fund.

What are your grey areas?

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I am also feeling bad because I feel like we should be farther along than we are in the area of saving money. We have both been in graduate school for the last 3-4 years since graduating college and my husband just finished his masters program in December. But I don’t want to make excuses anymore. We are a six figure income household and after meeting with a financial advisor back in October, she gave us a plan and said everything else was within its limits (mortgage, debts etc etc). We told her flat out that we needed to take control of our finances and be more responsible. I also needed her to give us a plan on what to do even though they are things we know already. Do we pay down debt first, save or contribute to our 401k? These are things we hadn’t learned as children and it was so apparent after looking at our spending patterns and trends in 2007. In 2007 we exhausted our savings due to buying a new house which included buying down the interest rate, new furniture, and a few family emergencies. Anyhoo, so I’m taking control and the first step by writing it down.

Wish me luck! I will post the 2008 budget and goals when I nail it down. I want it to be specific, attainable and measurable.

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Now the program has been stripped to:

• 3% down
• 620 credit score (Wasn’t credit score driven prior to this change)
• 74k income limits (Limit was 106k prior to the change)

What does this mean for you?

SAVE SAVE SAVE!

For instance, if you are considering purchasing a 250k home, you will need at least a $7500 downpayment and funds towards closing costs and other items such as earnest money, home inspection, taxes etc.

Debt reduction and clean up is a must!

Let’s face it, debt isn’t hot at all. Owing thousands on various credit cards with nothing to show for it means you are throwing your money away and not steadily building for a secure future.

• Lower your utilization rates and cut the credit card spending to a minimum. What’s the minimum? If you can’t pay it off by the end of the month then you can’t afford it and shouldn’t spend it. Idally they should be less than 30%
• Pay off your balances on time
• Pay more than the minimum payment each month.
• If you have a decent FICO/VANTAGE score then transfer your balance to a low/no interest credit card and pay it off within that period.

The banks are tightening their belts and so should you. Let 2008 be the year that you get your act together and take it to the road! Your goal may not be to purchase a home this year, but it can be to save more, spend less and pay down debt!

Make it happen!

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We are on the hunt once again for a new high yield interest savings account. Over the last few years we’ve remained loyal to ING with one defect to Emmigrant Direct. However with planning the wedding last year we fell off and stayed with ING. So we’ve decided that we would start 2008 off right by finding a high yield online savings account with rates of at least 5%.

Here’s what Ive come up with so far:

OneUnited Bank is pretty new to me and I was also delighted to find out that they are the First Black Owned Internet Bank.

According to BankDeals:

“OneUnited Bank has been FDIC insured since 1982 (Certificate # 23966). The bank has $632 million in assets and $358 million in deposits. Bankrate gives the bank 3 out of 5 stars (performing) based on 6/30/07 data.

Account Features

• $1,000 minimum to open and earn interest
• No monthly maintenance fees
• Must be a US citizen
• Can be funded by ACH transfer or by mailing in a check
• 9 day hold before your initial deposited funds are available
• Online application with nothing to mail in for most cases
• After the application, an email will be sent with instructions allowing you to register for Online Banking
• No hard credit inquiry - just a soft pull
• ATM card - Maximum withdrawal is $300/day
• Typical limit of 6 electronic withdrawals per month - no limits on deposit
• ACH capability for electronically transferring funds to and from your other banks
• Unlimited ACH links to other bank accounts can be set up.
• ACH links don’t require voided checks. Trial deposits used to verify accounts.
• Standard ACH transfers are free and take 3 business days
• Standard ACH transfer limits: outbound: $20k/day, $40k/month, inbound: $20k/day, $100k/month
• Premium ACH transfers take one day and cost $10 - dollar limits are lower
• Interest is credited and compounded quarterly
• Accrued interest will not be paid if you close an account before the accrued interest has been credited.

Rate History

The rates have remained very competitive since OneUnited launched this savings account in April of 2006. Here’s a summary of the rate changes:

APY     Date
4.50%   4/2006
5.00%   6/2006
5.25%   7/2006
5.30%  12/2006

During 2006 and the first half of 2007, their rates were good but nothing great compared to other online savings accounts. But now with them continuing to hold the rate steady since the Fed rate cuts, they’re way above most other savings accounts.”

(Source: Bank Deals)

Take your pick and see which one works best for you. After reviewing each I think the obvious choice for us will be OneUnited Bank given their high percentage yield. Keep in mind that if you aren’t comfortable with banking with an institution online, check out your local credit union rates. After taking a peak at the latest rates, our credit union offers slightly lower rates depending on the deposit amounts. That may be an option for those of you who prefer to bank closer to home.

For even more options for high yield savings accounts check out Bank Deals.

Happy Chasing!

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