Chronicles Of A Father With Cents

Simple Life. Personal Finance. Family

I Have An Emergency Fund But Where I Should Park It?

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Imagine that you’re driving to a restaurant for lunch and you are within a few blocks of the establishment.  Your immediate thinking is to look for parking. As you’re circling around the area you have found three options: a private lot that is right across the street from the restaurant, two street parking spots three blocks away and a good amount of street parking spots six blocks away.  The private lot will cost you a flat fee of $10, the two parking spots three blocks is free but has a two hour limit and the parking spots six away is free with no limits.  Where should I park?  That was the same scenario some are dealing with when they wanted to know where they could put their emergency fund.

What is an emergency fund?

Let’s get to what exactly is an emergency fund.  It’s a pool of money you can use in case an unexpected event happens to you financially.  Such events include a job loss, dental/medical emergency, unexpected travel expenses, or sudden home repairs.  I believe that an emergency fund should be mainly used if you have lost your job because the other emergency events can be covered with the other accounts that you have especially if you are securely funded.

One of the benefits of having such a fund is that you do not have to worry about where to withdrawal money from if a financial emergency happens to you.  You know that this fund will always be in your back pocket.  Another benefit is that you can keep it stashed away and prevent from spontaneous spending like a TV set or a cool pair of dress shoes.  You know those are not exactly items you want to use your emergency fund for.  So you keep it on a separate account, away from the other accounts you make regular transactions.  It is highly suggested that you keep around 3-6 months of expenses in your emergency.  Like for example, you figure that you spend around $25,000 in 3 months or $50,000 in six months.  That’s that amount that you should keep in an emergency fund.

So now we got what an emergency fund is, the next question is where we park this fund of money.  Here are three options I think you should store it.

High Yield Savings Account

Maybe the most popular of the three options.  You can leave your emergency fund in a high yield account and let it build interest.  Although interest rates are around 1 to 1.5%, it’s still pretty good since you don’t have to worry about the possibility of losing money like putting it in a brokerage account or wait for a certain amount of time until you can start withdrawing it like a Certificate of Deposit account.  You know that the funds with be readily available if or when you are in an emergency situation.  It gives a peace of mind that this stash of money will be there for you.

I recently put my emergency fund in a high yield account through American Express.  After years of having it stashed in a regular savings account through my current bank and not getting that much interest, I figured that putting it in a high interest account will generate more

Certificate of Deposit Account

CDs are the safest of the three.  You can leave your emergency fund in a CD but you have to know that these accounts have a time period in which you can’t withdrawal or else you have to pay a fee.  They have time periods as early as 6 months all the way to 15 years.  The longer you keep it in there, the higher the interest you receive.  If you want to keep your emergency fund in here, you have to be aware of the time period you want the CD account to be in.  But with high yield savings account having about the same interest rate as CDs and being more liquidity, it makes better sense to have in a high yield.  CDs are there for funds you don’t want to touch for a while.

When I first got out of debt, CDs were my accounts to go to throw my money in and didn’t want to think about it until the maturity date was up.  I figured at the time that CDs were the safest way to put your money in although you had to leave in their depending on what CD you put it in.  I always had either a 1 or 2 year CD because we knew it was money we didn’t need for a while.  It wasn’t necessarily our emergency fund but more about funds we didn’t want to touch.

Stock Market with the Majority in Bonds

Another option to put your emergency fund is in the stock market.  This way you have the opportunity to build that account through the capital gains you may receive through investments.  Keep in mind that you can also lose that money since the market can be volatile.  A good suggestion to minimize your losses is to have the majority of your portfolio in bonds say, 70-80% which is a good chance you can at least have some interest instead of losing a boatload of money.   You don’t want to have your emergency fund wiped away by the stock market so playing it safe is the best way to go.

So there you have it, your options to put your emergency fund in.  I think that a high yield savings account is your best bet to store them in.  But everyone has different financial philosophies so going with what feels right with you is your best option.

Do you have an emergency fund? If so, what type of account you have it in? Please comment below

18 Comments

  1. I love the picture! I have it in high interest savings accounts. I have read that some people use HELOCs as their emergency fund (which is a bit too much risk for me personally). It’s always nice to have a back up!

    • Haha thanks GYM!! I randomly found it on Unsplash. Aren’t HELOCs mainly used for mainly mortgages?! That would seem like your last resort for an emergency fund.

  2. Hi Kris!

    We usually keep a little bit in physical cash at home and the rest in our checking account. We could find a decent “high yield” checking/savings account to put the money, but I personally don’t like opening too many different accounts with too many different institutions. I like to keep things all in one place so that it’s simple. When you’re working at a bank, you’re pretty much forced to open an account with them. But if we weren’t working at a bank, we would look for a better yield on a checking/savings account. We currently have it in our bank’s checking account which earns close to nothing, but MAY consider finding a better place and just open another account.

    I would never recommend anyone putting their emergency fund in the stock markets. That just wouldn’t qualify as an emergency fund anymore, lol! I know a co-worker who did this and he lost money when he needed liquidity.

    Another way people do it is they set for example $5,000 or $10,000 as a bare minimum and will access the remaining through HELOC (like what GYM said). That way, they don’t have to keep a large amount of cash earning close to nothing.

    At the end of the day, you’re right. It depends on people’s perspective but the above is how I view it lol. Great post!

    • You might consider opening an online savings account for your emergency since their rates are the best right now. It’s really easy to open one and you will get more interest than a checking account.

  3. I use a high-yield savings account through a credit union for my emergency fund. Their rates are better than most. Another trick that I’ve been doing is to put a little bit more than I need in there, and then take a small portion and put it in a CD to get even higher interest. So I’m basically carving the top 10% off my emergency fund, because I can’t ever see needing that. But good to know it’s still there.

    • Hey that’s a great idea, if you know that you don’t need the money for the foreseeable future even if in an emergency situation why not put it in a CD account where you’ll be getting more interest.

  4. Hmm I have my emergency fund mixed in with my savings in a savings account. Maybe I should take a better approach to this and find a better account that would be more effective for me. Thanks for the tips!

    • No problem Melanie!! Definitely check for online ‘high yield’ savings account, they have the better interest rates than most brick and mortar banks.

  5. We’ve generally just kept a smaller emergency fund in a money market account (2-3 months of living expenses). I keep meaning to look into a high yield savings account but just haven’t made the switch. I probably should though, because our account makes pennies.

    • Yes, I suggest that you should look into a high yield savings account whenever possible. The interest rate should be close to 1.5% now which is better than a money market account.

  6. I like it in a high yield savings account. I don’t worry to much about generating a return with this cash. I try to fight inflation and just leave it be.

    I find ways to take risk in other areas.

    • Yeah same here. It’s for emergency purposes so getting high returns should not be a high priority for this pool of funds.

  7. We keep ours at a credit union that pays 3%. And building our emergency fund is one of the best decisions we have ever made. We spent a long time figuring that our double income status/high savings rate was an emergency fund in itself. But no, that did not give me the same piece of mind that money in the bank provides.

  8. I have about 1/3 of our cash in the CD ladder I started to build (earning 2.3%) but it’s locked up for 5 years and I realized that the horizon on my emergency fund is supposed to cover 18 months, not five years, so the other 2/3 is waiting on a decision in a high yield OSA earning 1.35%. Not awesome but liquidity is the thing right now!

    I’m researching bond funds, trying to decide if they have the liquidity and are worth the expense ratios, they earn around the same as the 5 year CD.

    Basically an emergency fund, for us, has to be something we can access quickly without fuss or much cost. That means no stocks but also means I broke my own rule a little bit with the 5 year CD 🙂

    • I think you can make 5 year CD as something for the long-term since it won’t mature until the 5 years is up. The other two-thirds of your emergency fund should definitely be in a high yield OSA since it’s liquidity so it can be much easier to withdrawal. Plus your getting some interest on it as well.

  9. I use the first two for my emergency funds. In my every day accounts I keep enough to keep me going for a little over 2 months if all income stops. Now I’m just getting started with a High Yield Savings account and building this. At the end of last year I also purchased my first 5 yr CD with the intent of building an annual 5 year CD ladder. It wasn’t much and it was a start. In today’s market it probably isn’t the smartest money move to make and I’ve always wanted a CD ladder, now that I finally have enough to start one, I did. It’s another income stream in the future and I’m all about income streams lately. I also have a little bit in bonds but that money is in my retirement account so don’t count it as emergency funds. Today I’m mostly focusing on building my High Yield Savings account balance.

    • Thanks for stopping by my blog Teri!! High Yield savings are the way to go to stash your emergency fund and for any income stream for the long term, CD accounts are the safe approach to leave them in.

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