Where Should I Keep My Emergency Fund with Interest Rates so Low?

This episode of Ready for Retirement is all about emergency funds. James walks the listener through the purpose of an emergency fund, as well as potential options of what to do with your emergency fund.

He shares that the purpose of an emergency fund is to be able to cover unexpected expenses, such as loss of income, medical emergencies, or home and auto repairs. Without an emergency fund, when these moments happen, you may have to use credit, or draw from your portfolio, in order to cover the expense.

So, when people want to make money off of their emergency fund, James encourages them to think of an emergency fund as an insurance policy, not an investment. There are, however, a few options of what to do with your emergency fund. While you can always leave the money in a bank savings account, you will likely receive no interest.

One of the best options is to move your money to a high yield savings account. Here, you will be able to earn some interest and can still access your money easily. The final option is to purchase a certificate of deposit. While this will likely earn you a little more interest, you will not be able to access your money, early, without penalty.

James makes the point that while it can be beneficial to earn interest on your emergency fund, the amount you will actually earn is minimal, and you should therefore avoid putting too much of your energy toward this endeavor.

He ends with the strong encouragement to remember the purpose of an emergency fund, and because of the purpose, he never advises investing your emergency fund.

Key Points

• The purpose of an emergency fund
  • To meet emergencies, something unexpected that happens
    • Job loss
    • Medical emergencies
    • Home or auto repairs
  • To prevent you using credit or drawing from your portfolio in order to cover unforeseen expenses
  • Your emergency fund is more like an insurance policy and less like an investment
• What you can do with your emergency fund
  • Keep the money in a traditional savings account
  • Place the money in a high yield savings account
  • Purchase a CD (certificate of deposit)
    • You may get more in interest versus the interest rate of a high yield savings account
    • You can’t add money to a CD
    • You lose the interest accrued if you remove the money before the time is up
  • Invest your emergency fund
    • This is not recommended
    • You could lose money
    • An emergency fund is not an investment

Timestamps

0:05 – The encouragement to keep an emergency fund

1:22 – The purpose of an emergency fund

3:12 – What you could do with your emergency fund

3:23 – Your bank savings account

3:35 – A high yield savings account

4:20 – How much should you have in your emergency fund

7:22 – A certificate of deposit

10:24 – Investing your emergency fund

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