Given Robin’s recent inheritance, it was clearly time for her to pay off her consumer debt.  She had the remainder of a car loan, which I told her to pay off right away, as well as her credit card balance of $3,000.  I suggested that she might want to change her outlook on how to use credit cards going forward.  Credit cards, when the balance is paid off monthly, give you the opportunity to get some cash back or rewards for their use.  I suggested that she spend a little time at the website www.creditcard.com to find a rewards card that matches her needs., some offer discounts on airline tickets or free flights, others give pay you back in gift cards to buy gas or are affiliated with major retailers.  Even though she had carried a balance for years, she had a good credit rating from always making timely payments, and would have no problem getting a card with rewards.

The next basic bit of planning to take care of was to create an emergency cash account. She only had $1,500 in cash, in her savings account.   There is a widely accepted rule-of-thumb that people hold between three and six months worth of expenses in cash.  Robin was spending around $4,000 per month, as we could easily see from her bank statements.  As a single person, it is important to hold the larger amount, six times one’s monthly expenses, if that is possible.  And for Robin at this moment in time, it was.

“Where should I keep all that cash,” Robin asked, “and where should I get take the money from?”

I acknowledged that it is difficult to know what to do with cash in this time of historically low interest rates.  Online savings banks pay a little more than most banks, but currently they’re offering just a little over 1% on savings accounts.  Money market accounts at financial institutions are paying less than .5%, so they are not the place to look for interest on your savings right now.

“Should I put the money in a CD then?”  she wanted to know? I don’t recommend CDs at this point in time  because you end up locking in a very low interest rate.  “It is likely that rates will go up in the next 12 months and so it’s better to hold your money in an account with a variable rate that will increase after the Federal Reserve raises their borrowing rates.” I told her.

The more difficult question to answer was what investments she should sell to create the emergency cash account.  She should not take it from her inherited IRA as it is preferable to keep tax-deferred savings in those accounts for as long as possible.  In her taxable savings from the inheritance she had $350,000.  This is the account where it should come from.

I asked Robin if there was cash in the account already and she did not know.  She had a difficult time reading the statements, never having had much in investments previously.  Robin was clearly very anxious when it came to trying to understand financial statements and generally had preferred to ignore them.  So we opened up the most recent statement together to take a look.