How To Invest Your Emergency FundSubmitted by Castlebar Asset Management on September 25th, 2013
Having an emergency fund established is a foundation to becoming financial independent. The next step once you have reached your goal of having three to six months in your emergency fund is how should you investment this money. Last week I discussed the basics of your emergency fund.
When it comes to where to put an emergency fund you should think safety first. This account is not something you are looking to maximize returns. It is there to provide a cushion when the unexpected happens. Your emergency fund should be in either a savings or money market account. In today’s low interest rate world it might seem like nails on a chalk board to hold cash and earn next to nothing. In the moment you need it you’ll be pleased it is there.
Setting up a savings account at an FDIC insured financial institution is a great place to hold this account. Another option is to put it in a money market fund with mutual fund or brokerage company. Money markets could enable you to pick up a little bit more interest but still meet the liquidity requirements needed.
If you just can’t bear the interest rates offered in savings or money market accounts there are a few other options.
Online savings accounts are a way to pick up between 0.5% to 1% in interest over traditional savings accounts. There are many great sites out there that will show which banks are paying the best rates.
Breakable CDs can be a way to get rewarded for parking your emergency fund for a longer period of time. Banks offer a certificate of deposit that will allow you to withdraw money with only a slight penalty of a month or two of interest payments. CDs have the additional benefit of keeping this cash outside of your immediate reach. If you are tempted to use your emergency fund to buy discretionary items this could be a good choice
Blending these accounts or investments is also a smart decision. Keeping three months of expenses in a savings account and three months in CDs or some other combination is an intelligent way to invest your emergency fund.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.