In the past, I have advocated building a cash emergency fund. By “cash” I mean a liquid form of money which could be actual currency, but preferably would be savings in a high yield direct bank account. There has been some insightful commentary recently that has caused me to re-evaluate my position and add some justification to it. Of the many posts on the subject, two were my inspiration for this post. In the first one, Mike from four pillars discussed why a HELOC can be used instead of an emergency fund. In the second one, the money gardener explains why he doesn’t need an emergency fund.

In most cases, an emergency fund is really just a method to avoid debt. If a true emergency arose, which exhausted our cash reserves, most of us would just use credit cards, a home equity loan, or a P2P loan. All of those methods are nearly as liquid as cash and easily obtained, with a cost association in the form of interest.

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A recent statement by US Treasury Secretary Henry Paulson has renewed the debate about the existence of the penny. In an interview, he said that the penny is worth less than any other currency and that he’d like to get rid of it. So today I’ll discuss the pros and cons of keeping the penny.

Supporters of the penny suggest that getting rid of it would mean higher prices, as retailers round up to the nearest nickel. Since it’s common for items to be sold for prices ending in .99, rounding to the nearest nickel would cause prices to go up (to the nearest dollar). This argument is countered with arguments that sales tax and multiple item purchases would reduce this effect. This only holds true if totals are rounded, not individual prices. The reason why retailers use .99 pricing is

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With oil prices hitting record highs, it’s no wonder that gas prices continue to remain high. To help combat overspending, shop around for the lowest price and fill you tank at the coolest time of day.

To accomplish the first point, use GasBuddy.com. There you can enter your zipcode and find the cheapest gas in your area. It doesn’t make sense to drive to a distant gas station to save a few pennies, but as they say on the site, gas prices can vary by as much as 20% within only a few blocks. Going slightly out of your way for a

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Buying generic products can almost certainly save you money. You have to remember though, that there is more to a purchase than just the money you spend. There is also enjoyment that you derive from using a product.

If we based our purchasing decisions purely on cost, then many of us would never buy anything but generic. There are also times when we don’t have a strong emotional attachment for a name brand product. As with most things I try to balance practical with pleasurable.

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Published rates for popular Direct Banking sites, updated weekly

Rates as of March 13, 2008:

ING Direct: 3.10%
HSBC Direct: 3.55%
Emigrant Direct: 3.30%

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Being frugal is a wonderful thing. It is at the foundation of a solid financial plan. Of course, there are other, more important things, than money in the world. It’s in this realm that I’ve found one of the few downsides of being frugal: spenders guilt.

I really do feel guilty spending money. I know that each dollar would be best saved or invested so that it might grow. That doesn’t mean that every dollar must be used as such. As with any endeavor that’s difficult, and living a frugal life is difficult, a small indulgence might make the end goal more achievable.

So be sure to allocate yourself some fun money that you can spend without feeling guilty. Doing so, as long as you keep it to a reasonably small amount, may give just the fix you need to keep living your frugal lifestyle.

Ignoring raises is a great method to save a little more each month. When you get a raise, try to continue living on the money you were making before the raise. You might splurge for a celebratory dinner, or allow yourself to spend the portion of your raise equal to inflation, but otherwise you could refrain from an increased standard of living. If you were surviving on your prior paycheck, then you should be able to use the increase to pad your savings, pay down any debt, or increase your investments.

I’ve always been a fan of the pay yourself first philosophy of savings. What it means is that you should consider saving a required monthly expense. Just as you wouldn’t skip a monthly bill payment you also shouldn’t you skip your monthly saving. There are always reasons to avoid saving on a regular basis. By making savings a priority in your financial plan, you’ll be less likely to skip it.

Using direct deposit is a great way to pay yourself first. You’ll be able to save more by saving first and then using what’s left over for other expenses and spending. Trying to save what’s left over after you’re done spending never seems to work as well.

In the Rich Dad series of books, Robert Kiyosaki went so far as to say that savings (or investing) should take even higher priority than your other bills. While not suggesting that you don’t pay your bills, his point was that if you save first, you’ll be forced to use your mind to create other ways to pay for the other expenses in your life.

Keeping your loose change in a coin jar is nothing new, but still a decent savings habit. You won’t miss the change, since individually it’s so small, but it can quickly add up. I recently cashed in my jar for about $100.

Gone are the days when you had to roll your coins and bring them to the bank to get cash. I just go to my grocery store and dump my jar into the Coinstar machine there. I wouldn’t use Coinstar if I had to pay their processing fee, since it’s a high 8.9%. That takes a big byte out of your total.

To get the Coinstar machine to count my coins for free, I take my cash in the form of an Amazon.com gift card. I shop regularly on Amazon anyway, so for me that’s nearly as good as cash. There are many other gift cards that you can choose to get free coin counting. Coinstar’s website estimates that a 1 Gallon jar of coins is worth over $225, which is more than just chump change.

Direct banking is a great way to turbocharge your savings account. Direct bank providers tend to offer significantly higher interest rates than your local bank. They are able to offer better rates of return because they don’t have physical branch locations and all of your transactions are done online, by phone, or by mail. This reduces their overhead and operational costs, which they pass on to their customers in the form of higher interest rates on deposits.

I compared Emigrant Direct, ING Direct, and HSBC Direct when I was setting up my account. At the time, HSBC was offering the best rate, so that’s who I went with. They were offering over 5% APY when I signed up, but that number changes frequently, so check with each of these banks, and others, to see which one offers the best rate now.