Now that you’ve started building an emergency fund, the next step is deciding where to put it. Fortunately, there are various safe solutions available that are particularly created for this purpose.
Your emergency money should be placed in very safe and liquid items. There are a few investments you should avoid as well, which we’ll go over in this section. You’ll have to give up some liquidity in exchange for higher interest-bearing accounts, but you shouldn’t invest in anything that takes more than a week to withdraw from.
WAYS YOU SHOULD INVEST
The options listed below are organized by liquidity and return. Because the two are intertwined, the greater the liquidity, the lower the return. The key to all of the items listed here is that they all fit into the “low-risk” category of investment. This implies you will not lose any money invested even if the bank goes bankrupt.
Chances are you already have one; most banks promote the use of savings accounts by paying a small interest rate on funds placed in them. You may withdraw cash quickly and easily (usually within one business day), and losing your initial investment is nearly impossible. Because bank fees are the only way these accounts may lose money, it’s critical to understand the restrictions that apply to your individual bank in order to prevent them.
Money Market Accounts
These accounts are quite similar to savings accounts, with the difference that the frequency with which you can withdraw funds is restricted. However, as long as you make fewer than two withdrawals every month, this should not be an issue. Money Market Accounts (MMAs) provide better returns than typical savings accounts, although withdrawals may take 2-5 business days.
Certificates of Deposits
Certificates of Deposits are great for emergency finances, but they might take a long time to set up properly. The returns are proportional to the timeframes they reflect. The larger the return, the longer you invest. The catch is that you won’t be able to receive interest payments until the full term has passed. If you need to cash out before the certificate matures, you’ll lose the interest you’ve earned but not the money you’ve put in.
From government-backed Treasury Bills to corporate bonds, bonds come in a variety of shapes and sizes. Bonds are typically secure investments, but some have the potential to lose value, so talk to your financial or bank counselor before buying. Bonds, like Certificates of Deposits, are acquired for a specific period of time. If you cash out before the maturity date, you may be subject to fines and costs.
WAYS YOU SHOULD NOT INVEST
There are also several investments you should avoid and we’ll review these in this section.
Stocks, mutual funds, and annuities
While these assets have traditionally provided higher returns, they are too risky for your emergency fund. In general, you should avoid any assets that have the potential to rapidly depreciate in value. During an emergency, the last thing you need to be concerned about is losing your emergency money!
Following the economic downturn, commodities, particularly precious metals, have seen a surge in appeal. With doomsday-like economic projections, several brokers have been preaching the significance of including precious metals in your cash holdings.
While these arguments are persuasive, commodities, like stocks, should not be included in an emergency fund since they can lose money abruptly and without notice. An emergency fund, on the other hand, is not a doomsday fund.
Real estate may be a rewarding investment, and it is normally non-volatile, notwithstanding the present housing market scenario. Liquidity, or the speed with which you may convert your investment into cash, is the major issue here. We don’t have the luxury of time in an emergency. Selling real estate takes time, a lot of time, in fact. Your emergency fund should be able to be converted to cash promptly and without the involvement of a third party (real estate agent).
IN THE END
Your emergency money should be kept in a separate account that you don’t use for anything else. The ideal approach to achieve this is to create a second online banking account into which you either direct deposit or transfer money on a regular basis.