Emergency Fund – What should you do with it????

Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.

-Will Rogers
Photo by Fabian Blank on Unsplash

You know that the world often throws you curve balls, so you have worked hard to sock some money away for those inevitable “emergencies.”   Maybe you diligently save a bit out of each paycheck, or maybe you sold some of your extra “stuff” to fund the account.  No matter how you got here, you have created a wonderful cushion to soften any landings you might have in the future. GOOD WORK!!  

Depending on the amount you have, and on your plans for what will happen next, you have some options on how to hold on to that money.

  • Cash:  While it may seem like cash is not risky, there are risks to holding money.  If you physically keep the money on your property, there is the risk of fire or burglary.  If you keep the money in a checking account at a local bank, you are mostly safe from theft and fire, but you are still at risk of bank fees corroding your funds, and, over a longer term, losing the value of your money due to inflation. (If inflation rises 3%, and your funds have only earned a measly 0.25% in a bank savings account, you have suffered a loss in value of your money because you do not have the buying power you had when you deposited the funds.)
  • High-yield savings account:  If you are pleased with your accumulation and know that you can keep your account full to this level, but you are not prepared to continue saving for any other mid- or long-term goals at this point, you will probably get the most security, and a tiny bit of monthly interest, by parking your funds in an online High-Yield savings account. (try SallieMae Bank and do some research to see who has the best current rates.)  Right now, interest rates are on the rise, so it is worth doing a bit of research to see where you can get the best rates. You are probably going to keep inflation losses at bay for the most part with this type of account.
  • Invest:  If you are fortunate enough to now have the “saving bug” in your ear, encouraging you to keep building that savings account up with every spare penny you can find, then you may want to take some of the funds you are accumulating and try to get a bit of more substantial growth out of it.  Let’s say you initially set out to accumulate $1,000 in an emergency fund. After three months or so, you realize that it wasn’t all that difficult to build up the funds and you decided to add another $1,000 in the next few months.   As you keep growing this fund, you may decide that letting it earn 3% interest in the High-Yield account just doesn’t seem like enough. Surely, you don’t want to lose your emergency fund in the stock market, but at some point, as you keep growing these funds, you may exceed what you think is a reasonable amount of emergency money for your lifestyle.

 This is the tipping point where you could choose to invest in the stock market in a conservative way, like by investing in a good mutual fund that tracks a large part of the market (try Vanguard VTSAX or Schwab SWPPX*).  You want to make sure that you are protecting yourself from taxes on your earnings, so make sure you put your money in a tax-sheltered Roth IRA account if you qualify to open one.  This type of account allows you to invest some of that “extra” emergency money and will not penalize you for taking the money back out if you need to use it for something that comes up. With the tax shelter of a Roth IRA, any earnings that you make in the stock market on these funds have to remain in the account until retirement age or other qualifying factor, so that you don’t get penalized for using them early.  It is a great way to dip your toe into investing.  Stay away from stock picking.  If you have so much “extra money” lying around that you want to try risky trading or stock picking, you will have to look elsewhere for advice… this author has never experienced “extra money” and has never been willing to lose even a penny on a risky bet…

*There is a lot to learn about investing! But these two companies have low/no fees and are a low risk way of getting started… Vanguard has a higher minimum ($3,000 for most funds at the time of this article) while Schwab allows you to open an account with just $1. Read as much as you can about investing as you start this journey! Some excellent sources are MMM and Bogleheads sites.