What should you do with that emergency savings fund money you’ve been accumulating?
I don’t know. Why don’t you just keep it under your mattress? That’s probably the best idea.
April fools! (Sorry, just couldn’t resist.)
No, no, no…a thousand times NO! Please don’t keep your emergency savings fund money under your mattress. That’s one of the worst places to keep cash around the house. Under the mattress or the bed will be one of the first places a burglar looks for valuables.
Now there is nothing wrong with keeping cash around the house. You might need some for a spur of the moment issue. Banks aren’t always open and you might not be able to get to an ATM. But you don’t want to keep the emergency savings fund around the house.
Because we are talking about a large amount of money you’d be storing.
Now a beginning emergency savings fund is anywhere from $500 – $1,000. That’s a sizable amount but you might not be hesitant to keep that much at home. But what about a fully funded emergency fund? That’s a different story.
Most personal finance experts would agree that a fully funded emergency savings fund should be at least 3 months of expenses on the low end. Opinions vary on the high end – I’ve seen anywhere from 6 to 12 months of expenses. Given those ranges a typical family of four may be looking at $15,000 to $30,000 plus in their fully funded emergency savings fund.
Do you want that much cash lying around the house? I don’t either.
So where should it be put?
Emergency Savings Fund Money = Investments?
Before I share where to park your cash, I think it’s important to understand what an emergency savings fund is not. This will be crucial for you to understand and accept before I tell you where the cash should go.
An emergency savings fund is not an investment. It is not designed to be money that is put to risk seeking a financial return.
An emergency savings fund is insurance. It is insurance to protect us in case of a financial emergency.
For some reason this concept of an emergency savings fund being insurance doesn’t sit well with us. Our minds have been conditioned that if our money is either lying around or sitting in a low interest account that it is being wasted. Surely there are situations where I could get a higher rate of return on the $20,000 I have in cash.
Well, certainly there are – the stock market being one place. However, once you cross that line of putting money in the market and chasing returns it can no longer be considered emergency fund money. It’s investment money at that point, subject to all the ups and downs and risks that come with an in-flux market.
Plus, if the money is in the stock market it’s tougher to get to. We recently had a situation where a furnace went out during the winter. We needed it replaced that day. If my emergency fund money had been tied up in a stock market mutual fund or in a Certificate of Deposit (CD) at a local bank I couldn’t have accessed it that same day.
The emergency savings fund might not be bringing a financial return. But it is bringing you something of value. You will be receiving a peace-of-mind return.
What does that look like?
A peace-of-mind return is the calmness that comes with knowing you can write a check for the transmission and not have to put the expense on a credit card. It’s being put at ease knowing that even though you require knee surgery the doctor’s bill will be 100% paid for with cash. It’s how every emergency situation in your life becomes simply a hassle to work through instead of a stop-the-presses, freak-out ordeal.
The peace-of-mind return that comes with an emergency savings fund cannot be measured in percentages. But you won’t fully get it if you view the emergency fund as an investment. It’s insurance, plain and simple.
Where to Put My Emergency Savings Fund Money
With that said, there really is only one place I’d recommend putting your emergency savings fund money – in a money market account either at a local bank or in a high yield, online savings account (the latter being able to provide you with slightly higher interest rates). In those two places your money will be insured and you will have quick access to it when an emergency hits.
I know those don’t sound exciting. You will receive negligible interest, to the point that the rate of inflation may devalue the money you have saved in the account. For many it’s financial blasphemy to allow that to happen.
It really doesn’t bother me because a) I view this money as insurance and b) I have other investments that are kicking inflation’s tail.
But even if you have not reached the investment stage yet, I wouldn’t worry about it. Achieving financial freedom is a series of steps and the emergency savings fund is the most foundational one. Park the money in a bank somewhere and sleep easy at night knowing it will be there when you need it.
Questions: Do you view and emergency savings fund as insurance or as an investment? What have you done with your emergency savings fund? Where else could you park it where it wouldn’t be considered an investment? Besides cash, what other ways have you funded an emergency?