Guest Blog Post by Trace Tisler
There are two camps when it comes to advising where best to keep your emergency fund. One camp offers the traditional advice of keeping your stash safe and accessible. The other camp offers an approach that encourages not only storing your money in an account somewhere, but to actually grow it at the same time. The truth is, there is definite value to the advice coming out of both camps.
Let's take a look at how combining the two schools of thought can benefit you.
Traditional
It’s true that in an emergency you need to be able to access your cash quickly. For this reason, you should opt to keep some cash at home in a safe and some cash in a traditional savings account at your local bank. You may also maintain a money market savings account and an account with an online bank.
· Cash is king in an emergency. By keeping a small percentage of cash right where you can get to it at home, you or anyone you trust can easily access that money day or night for whatever crisis presents itself.
· For obvious reasons, it is not wise to keep your entire emergency fund in your home. A traditional savings account at a local bank branch is a safe option. It gives you the liquidity you need, but also the insurance you should have on your money as well.
· A money market account is another option you can utilize from your local bank. Money market accounts are also insured, but offer better interest rates than traditional savings. Another difference is that check writing or withdrawals are limited. You would not want to have your entire emergency fund in a money market for this reason.
· A savings account with an online bank can give you a higher yield on interest and the insurance you need. Accessibility to the cash in online account is not instantaneous. In most cases, money can be moved within hours.
Now, before moving onto the non-traditional places to keep your emergency fund it is important to recognize that the best approach is to combine fund locations from both philosophies. And honestly, one should consider beginning with accessible and safe first. Once you have a reasonable amount of your fund liquid and easy to get to, then you can begin to responsibly entertain some growth options.
Non-Traditional
It may be hard to accept that your entire emergency fund is just sitting and growing at a snail’s pace. The investor in all of us wants to put our money to work. There are safer investment options that can grow your emergency fund without risking losses.
· Investing part of your emergency stash in a money market fund may be a great option for you. Money market funds have higher growth potential than savings accounts and are still relatively easy to access.
· When investing emergency fund money it is recommended that your initial investment be greater than your actual need. For instance, if you need $5,000 to cover monthly expenses, and your emergency fund covers six months, instead of aiming for $30,000 you should have $39,000. This will give you wiggle room when investing.
· Laddering CDs with varying maturities is another investment option. The longer the term of a CD the higher the yield. Buying a variety of CDs gives you the opportunity to earn more while still having periodic access to the money.
· Purchasing I-bonds may suit your emergency fund investment needs. They pay fixed interest and variable interest. The variable interest is semi-annual and adjusts for fluctuations in inflation.
As with all things financial, the landscape will look different for all of us. With a myriad of careers delivering varying incomes, to personalities and preferences driving our decisions… there is no “one size fits all” approach, even when it comes to emergency funds.
Trace Tisler is the founder of Epic Financial, a fee-only financial planning firm located in Hudson, Ohio.
Trace and I became friends after meeting at an industry conference and I asked him to write some thoughts as a guest topic for this site.