Last week’s question and answer

I delivered my first submarine more than a century ago and changed my name from Electric Boat Corp. in 1952. Some of the names that have been in my hangar over the years include Canadair, Cessna, Convair, Fort Worth, Gulfstream, Pomona, Stinson and Vultee. I’ve manufactured products such as tanks (6,653 Sherman tanks in 1944), missiles, guns, rockets, warheads, motors and more. My slogan is “Strength on Your Side,” and I specialize in business aviation, information systems, shipbuilding and marine systems, and combat systems. I employ more than 70,000 people and rake in $16 billion per year. Who am I? (Answer: General Dynamics)

Short-term savings

You probably know that you need to save for retirement by making long-term investments. But too few people focus on another critical need: short-term savings. Ignore short-term savings and you may end up wiped out, perhaps even in bankruptcy.

You need short-term savings to protect you against financial emergencies and to pay for predictable expenses, such as vacations, new cars and weddings. You have two choices:

• Save up and earn interest, or
• Borrow the money (often via a credit card) and pay interest (at a much higher rate).

This sure seems like a no-brainer to us.

How much money do you need in short-term emergency savings? It depends on your situation. Generally, aim to have at least three to six months of living expenses in an emergency fund. If you’re a software programmer who has little trouble finding work, a couple of months’ worth may be enough. If you’re a performance artist who’s the sole supporter of six children, three aged parents and a llama, you may want to aim for a year’s worth of expenses in ready cash.

Beyond your emergency fund, any funds you’ll need within three to five years should not be at risk in the stock market. That’s right — stocks can be terrific for long investment periods, but in the short run, anything can happen. You don’t want the market to plunge three months before you have to make a massive tuition payment.

Short-term savings belong in instruments such as money market accounts, certificates of deposit (CDs), short- to mid-term government and corporate bonds and bond mutual funds. Your return will vary, of course, but right now money market accounts are paying around 2 percent. CD rates depend on how long you’re willing to tie up your money, but short-term CDs start out about the same as money market rates and go up in small increments as the term gets longer. Corporate bonds tend to pay more than CDs or Treasury bonds, depending on the risk of the bond.

Learn more about your short-term savings options at www.fool.com/savings and www.bankrate.com.

The new Sara Lee

Get ready for a much smaller Sara Lee (NYSE: SLE). The company revealed a bold restructuring plan that will allow it to concentrate its resources on fewer areas.

Sara Lee will spin off into a new company consisting of businesses that account for about 40 percent of its annual revenue, such as its Champion and Hanes apparel brands. It also will sell three other units, including its U.S. retail coffee segment, although it will retain its new Senseo coffee brand. Sara Lee has been reworking its mix for some time, most notably through the spin-off of its Coach leather wares business. It soon will be focused on just food, beverages and household products.

There is some reason to be optimistic. Sara Lee seems to have its priorities in the right place. The company expects to save between $575 million to $800 million annually through the restructuring, spending an additional $250 million on marketing and research and development. Sara Lee’s success with Senseo underlines the importance of new products in capturing consumers’ attention. It will need several more hits to stay competitive, and its new structure will give it at least a fighting chance to do so.