Most people know the importance of establishing an emergency fund aka rainy day account. If you don’t know what that is then you have not been paying enough attention to this blog. But where do you store your emergency fund? In a savings account? Under the mattress or in the big book that no one ever reads?
On the facebook group we had a discussion of where to store emergency money that will provide the most value.
The question you probably have is what is wrong with just putting it in a savings account. Well, nothing is the matter with doing just that but I know my readers want more from their money. The inflation rate as of January 2017 is 2.5% according to trading economics. So if your money is staying stagnant then the power of your emergency fund is decreasing as time goes on. Here are a few alternatives on where to store your emergency fund.
Obviously I’m no huge fan of storing money in a regular savings account and currently in the process of transferring all funds to a money market. Although, a savings account is liquid enough for any case of emergency or chance that the money needs to be pulled from the account. The negative is the interest rate is around 0.001% annually. Even if you had $100,000 in the account the money would only earn $100 at the end of the year. This account is insured by FDIC but will not give your money the opportunity to keep up with inflation rates or more.
Money Market Account
Not a big difference from savings account, is a money market account. A quick definition for this account is financial instruments with high liquidity and very short maturities are traded. If you want to learn more on the account click here.
Earlier in the 2000s the interest rates could be found as high as 5% but unfortunately that is not the case. Currently the higher rates are 1.05% with some accounts providing additional benefits for those who don’t touch the money or have regular deposits. A few banks to check out for this are Capital One 360, Barclays and Ally Bank. These accounts are FDIC insured as well and still liquid, just a higher interest rate for your money.
Certificate Deposit (CD)
Emergencies can happen at anytime, trust me I work in insurance and deal with emergencies everyday. But the reality is an emergency is not likely to incur. Our emergency fund has $3,500 in it and hasn’t been touched since it was started in 2014. For those who don’t mind taking a chance on an emergency not happening this account is a viable option. To learn more on this account click here. The major pro is higher interests rate then your average money market account. The major con is the money made be tied for 3 months or longer, depending on the account. If the money is withdrawn before the mature date the earned interest can be forfeited.
Conservative Portfolio Investment
Still want your money to work harder for you? Let’s talk about the stock market then. Moving your emergency fund money to a portfolio is definitely more risky but the more risk the bigger the profit. To remain on the less risky side of the market a investment portfolio can be opened with focusing on conservative investments with a small percentage invested in stocks. An ideal portfolio would contain:
No type of return is guaranteed at the end of the day but historically speaking the rates will be 2% above inflation rates. The main con is nothing is insured or guaranteed.
All the options listed above are decent depending on what you want to accomplish. Some of course are more riskier but consider the likelihood of an emergency happening *knocks on wood*. Whatever your decision I encourage you to runaway from a savings account. There are other options that will help your money work harder for you. Be smart and be courageous.
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