I hope everyone who celebrates Christmas has/is having a lovely one.

After coming home from my grandmother's, I spent some extra time with my brother (who is also probably my best savings pupil).  He was trying to decide what to do with the Christmas money he had gotten.  I went through my priority list for unexpected income and that brought us to his Emergency Fund, at which point he reveals to me that he has $9000 in his checking account.  My first reaction was to tell him "Good job!"  My second reaction was to go "Wait, you have that all in regular, no interest checking?"

When you first start out, it may makes sense to only have a checking account as they tend to have no or low minimum balances.  However once you saved enough to be safely above the minimum balance, you really ought to move a portion of it into an interest bearing account.  Partially to earn interest and partially to give your money better protection.  If some one steals the debit card linked to your checking, this can help prevent them from getting to all your money.  It's part of the "don't keep all your eggs in one basket" bit of wisdom.

My brother and I made a list to figure up his living expenses for 6 months, and decided that $5000 would be a reasonable amount for an Emergency fund.  So he's going to move that much into a money market account, where it will both gain interest but remain fairly accessable.  He is 24 and has no retirement fund set up yet, so I've encouraged him to look into setting up a Roth IRA (last I checked $2000 was the minimum for getting one started.)

His monthly expenses are generally less than $1000, so I told him he normally didn't need to keep more than that in his checking account.  He should consider keeping the remainder in a regular savings account (which in the book, I would label as short term savings).

Unless you have a larger than average purchase in planning, you generally don't need to keep more than a months worth of expenses in your checking account, particularly if it's not an interest bearing account.  While I realize the interest rates on regular savings are fairly low right now, every little bit helps.  Compound interest is a marvelous thing.  Particularly as your savings increases you want to diversify it, so it can be as safe and fruitful as possible.

One of my parents (of the kids I watch) gave me a Visa gift card for Christmas. I'm grateful for the extra cash, but it baffles me why people would waste money on Visa Gift Cards. For starters there's a $4.95 activation fee (may be higher in other states). And if you don't use the amount on the card within 7 months, they start charging a $2.50 fee (until the money is gone). You can't draw money out from them, so there's no way to put the money into savings. Personally I'd prefer the flexiblity of fee free cash...but again I'm not complaining.

I will certainly be putting the gift card to use and soon. I'll probably be using mine to cover some Christmas presents for others, but I thought I'd repost our priority list for unexpected income:

Priority 1: Needs

Priority 2: Small Debts

Priority 3: Emergency Fund

Priority 4: Large Debts

Priority 5: Big Dreams and Entertainment