SM: Fatten Your Reserves

It may be a cornerstone of financial planning -- the idea of maintaining an emergency cash fund for a rainy day. But according to some recent surveys, that kind of thinking may have about as much appeal of late as the mandate to eat lots of green leafy vegetables: Another helping of kale, anyone?

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A 2011 poll by Bankrate.com showed that just 24 percent of Americans held the classic six-month cushion of income advisers recommend, and almost a quarter had no savings whatsoever. Perhaps even more telling -- especially in the current era of economic turmoil and gnawing unemployment -- is that building up cash reserves doesn't rank particularly high on most Americans' financial to-do lists: In a recent survey from ING, reducing debt was the top priority of 54 percent of respondents; setting up an emergency fund ran a distant second, at 24 percent.

There's an obvious reason for the anti-savings sentiment, say financial observers: In a penny-pinching economy, Americans are just too pressed paying for basic living expenses -- meaning that a repair-the-roof kitty starts to feel like a luxury. "It's great if you can afford it," says Lee Munson, chief investment officer of Portfolio, an advisory firm in Albuquerque, N.M. But even if Americans were psyched up to save, the banks and markets aren't making it all that appealing, given the near-zero percent interest-rate environment. Little wonder that those who have actually funded their emergency fund are starting to question if it's really worth it. "My clients who have money sitting in cash reserves are extremely frustrated," says Larry Rosenthal, president of Financial Planning Services in Manassas, Va.

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Ironically, this frustration may be paying off, say financial experts, in that it has led to a radical rethinking of the emergency fund -- one that acknowledges the difficulty of saving and that offers alternative solutions to a cash reserve (or, for those who have already built up their fund, a tweak to their investment strategy). For starters, many financial advisers are reconsidering the once-sacrosanct "six-month rule": In a two-income family, a three-month cushion may be more than enough; conversely, in a one-income family where the breadwinner is a top executive, nine months to a year may be more realistic, because it may take the breadwinner that long to find a new job should he become unemployed. The bottom line? It's not a one-size-fits-all fund, says Rosenthal.

Indeed, it may not be a "fund" at all in the traditional sense: An increasing number of financial pros say investors can consider other means, including tapping a home-equity line of credit or borrowing against a life-insurance policy. It's not that advisers are encouraging clients to be reckless with their money and then pile on the debt in an emergency. Rather, it's that money conceivably slated for a reserve fund can be used instead for financial matters of arguably greater precedence -- such as paying off a high-interest credit card or funding a 401(k) plan to earn the maximum employer match. At the very least, experts say, investors can't see the reserve fund as their only priority. "I would equate it to having multiple fishing lines in the water," says Bankrate.com senior financial analyst Greg McBride.

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Then there's the matter of those near-zero percent savings accounts: Who's to say that's the only option when it comes to a reserve fund? While no financial pro suggests putting emergency cash in, say, small-cap stocks, more than a few believe bond funds with low volatility are a reasonable alternative -- at least for a portion of a plentiful reserve. "You could tier it," suggests Bob Fragasso of Fragasso Financial Advisors in Pittsburgh, with different accounts at different risk levels.

All this is not to suggest that the traditional reserve model -- a half-year of salary, invested in an FDIC-protected bank product -- doesn't continue to have plenty of fans in the financial community. Of course, that may not be what the 76 percent of Americans who lack that rainy-day stash want to hear, but that's precisely the point, argues McBride. "Americans need to buckle down," he says.