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