Where do you put your emergency fund? In your wallet? Stuffed in a sock? Buried under a tree? (True story, bro.) In a bank account?
Don’t have an emergency fund? Oh, dear. Read up on the subject first and then come back when you’ve got one, yeah?
But let’s say you’re a responsible adult. So, you’ve got at least three months’ worth of living expenses stashed away. Where should you keep it?
Best Options for Storing Your Emergency Fund
Your emergency fund is much like your savings account, except for one significant difference. When it comes to the former, ease of access is the priority, not growth. You want to be able to take the funds out immediately, if needed, without incurring any penalties or losses.
How you divide your emergency fund depends on you, but the most ideal places for it are as follows:
- Savings account with an ATM (automated teller machine) card;
- A short-term time-deposit account;
- Low-risk investment funds with stable interest rates (such as a money market fund or UITF with no stocks in its portfolio).
For example, if you’ve got about six months’ worth of living expenses saved up, you can divide it like so:
- A month’s worth in an ATM Savings Account;
- 2 months’ worth in a short-term time deposit account (30 days or 60 days);
- 3 months’ worth in a money-market fund.
You should also keep about a week’s worth of expenses in a secure location at home. This way, you’ll still have money even if a storm or some other natural disaster makes it difficult for you to withdraw money from the bank.
Worst Places for Your Emergency Fund
What you don’t want to do is stick your emergency fund somewhere volatile and unpredictable. This is why you should keep your investments and emergency fund separate. Those two serve completely different purposes.
Thus, don’t even think about putting your emergency fund in any of the following:
- Life Insurance – Okay, this provides financial protection in case of death or disability, but it’s useless for everyday emergencies. Not only does its value fluctuate, but it won’t cover you if you lose your job or if a major appliance breaks.
- Stock Market – There are some online brokerages that make it easy for you to withdraw from your stock market account, sure. However, this investment is highly volatile, and emergencies can happen whether the stock market is bullish or bearish.
- Mutual Funds – As with the stock market, these investments are easy to withdraw and can grow your money faster than a typical savings account. However, these often involve investments in the stock market too. (See previous item.)
Plus, if an emergency happens on a weekend, you can forget about accessing your stock market account.
Thus, there is a real risk of losing money if you need to withdraw when the market is down.
Does this all sound tedious? Perhaps, but the whole point of having an emergency fund is to have money on hand for life’s inevitable emergencies. Knowing where to put it allows you to do just that.
Curveballs are bad enough, after all. Money should be the last thing you should worry about when one hits you.