Here on our blog we have said many times that having an emergency savings account available should something happen, like an accident or loss of job, is a very good idea and vital for all consumers. The biggest problem however is that putting rainy day funds into a regular savings account is just slightly better than putting that same money into a jar and keeping it in your cupboard at home. Sure, it will be there if you need it but, if you have between $10 and $20,000 in cash, it really should be somewhere that it’s making you more money while you (hopefully) aren’t using it.
That’s why maybe it’s time to rethink how your emergency fund is saved. Indeed, there are quite a few better ways to put that emergency fund money to work and today’s blog is going to give you a look at all of them. Enjoy.
One excellent alternative is an online-only savings account. This not only allows you to keep your emergency funds relatively close at hand but also gives you better yields and lower fees. The reason is that, since an online only bank has no physical branches, they are usually free and can pass these savings on to their customers in the form of better rates and fewer (or no) fees. Some of them offer rates that are close to 1% which, while it doesn’t beat inflation, at least gives you a better return than a normal savings account.
Then there are penalty-free and short-term CDs, which normally offer yields that are double those of traditional bank accounts. What you will need to look for are CDs that have maturity dates of 1 to 5 years (relatively short) and possibly consider dividing your emergency fund money among several of them in case you need to withdraw some of the funds ahead of time. Some banks offer penalty-free CD options with no minimum deposits so do your due diligence and shop around for the best.
There are also short-term bond funds, a lower risk investment that typically has a maturity date of 3.5 years on average. It’s a slightly riskier than putting your cash into a CD but could help you to be more diversified.
TIPS or Treasury Bills are a bit safer than bond funds as they are backed by the federal government and have inflation protection. Both are quite secure and offer a better return than a typical savings account.
Having a good mix of several of these types of accounts and assets, known in investing circles as “diversification”, is an excellent strategy for your emergency funds. Most experts agree that if you’re keen on diversifying your emergency fund money that you should spread it among two or three savings vehicles at most, putting a large chunk of it into a purely cash account and the rest in short-term investments as described above.
While this has nothing to do with where you put your emergency fund money, it’s an excellent idea to pay down any revolving debt that you have before you make a big effort to fund your emergency account. Frankly, if you’re taking out payday loans and putting a large amount of money on credit cards you’re already spending a lot more money in interest and fees than you’re going to make on any type of emergency fund account or investment. You would be better served to pay down your revolving debt first and then, once it’s done, start stashing that extra cash into your emergency fund account.