Where should you keep your Emergency Funds? Do you have an emergency fund set aside?
First you need to remind yourself what an emergency fund is. It is meant to be there when times are tough, markets are down, and jobs might be limited. This should be part of your portfolio that is set aside and not positioned for growth and invested in equities. Doing so can position you to take on more risk in your investments if desired and possibly get better long-term returns with a cushion to weather the storm when times like our current environment sneak up on us.
You must be disciplined with this unique portion of your portfolio. An extra percent is not worth it if the money is not available when you may need it most and positioning this money conservatively is paramount.
Of course, with interest rates near record lows, it is hard to find a place to park your emergency funds and get much in the form of interest. You should always try to keep your emergency funds earning some sort of interest and not just leave it in your checking account earning close to nothing in the current market. Here are a few solid places to consider:
- High-Yield savings accounts with online banks or credit unions will give you rates that are sometimes 10 times more than your local bank. If the bank is FDIC insured this is a good place to put some of your emergency fund.
- Money-market funds are also a good place to have your emergency funds. Now keep in mind that they are not FDIC-Insured the same way bank accounts are but with the money market reform act that went into effect October 14, 2016 most retail funds now offer federal government securities and treasury funds which can be a conservative alternative.
- Certificates of Deposit (CD’s) are also a popular place to house emergency funds. However, not you must be careful, as banks typically charge early withdrawal penalties, but with rates so low many banks have now allowed penalty free withdrawals making this a fairly good place to hold your emergency funds.
Just remember you do not have to pick one you can use a mix of all three of the options mentioned just keep in mind safety first, so the funds are there when you need them most.