I want to invest my emergency fund to earn interest. What is a relatively safe and liquid investment I can easily withdraw from if disaster struck?

By Amy Fontinelle AAA
A:

When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money quickly, easily and without penalty, when you need it. Financial professionals don't recommend investing your emergency fund in the stock market because stocks are volatile. You don't want to have to sell an investment at a loss to access your emergency fund. Bonds are a poor choice for similar reasons.

Dave Ramsey, long-time host of a financial advice radio show, author of several personal finance books, public speaker and designer of programs to help individuals get out of debt, recommends that individuals not invest any of their emergency savings. He advocates keeping a $1,000 emergency fund in cash in your home in a place where you can't easily access it. Making the money difficult to access prevents you from grabbing it out of convenience for non-emergency purchases. Keeping the money in cash in your home means it will be available at a moment's notice if you need it, so you won't resort to charging your emergency to a credit card and accumulating debt. Ramsey says that if you insist on keeping the $1,000 in the bank, it should be in a savings account that isn't linked to your checking account, so it can't be used for overdrafts or easily transferred.

For amounts in excess of $1,000, Ramsey recommends a money market account with check writing privileges. Money market accounts are safe (many are FDIC insured, and the ones that aren't generally have pristine records) and tend to pay more interest than checking or savings accounts.

An online checking or savings account, rather than an equivalent account at a brick-and-mortar bank, is another good option. These accounts typically pay more interest, since online banks don't have the overhead expenses that traditional banks do. Just make sure you have a debit card and/or checkbook that allows you to quickly access the money in these accounts, since you won't be able to walk up to a bank teller and make a large withdrawal.

The problem with keeping an emergency fund in certificates of deposit is that you must pay a penalty to cash out a CD before it matures. This penalty discourages people from using the CD, even if the penalty is significantly less than the interest they might pay if they charged the emergency expense to a credit card. It's important to understand that we don't always make rational decisions regarding money, so we need to put systems in place to force ourselves to make the right choice. Some banks offer no-penalty CDs that let you withdraw your money without sacrificing any of the interest you've earned. You may earn a lower interest rate than you would with a regular CD, but a no-penalty CD lets you earn interest while still keeping your fund liquid.

RELATED FAQS

  1. What is the difference between the yield of stock and the yield of a bond?

    Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond ...
  2. How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ...
  3. What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information ...
  4. How do I calculate yield to maturity in Excel?

    Learn how to calculate a bond's yield to maturity in Microsoft Excel, which is one of the best methods of comparing bonds ...
RELATED TERMS
  1. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  2. Impact investing

  3. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
  4. Direct Bidder

    An entity that purchases Treasury securities at auction for a ...
  5. Indirect Bidder

    An entity that purchases Treasury securities at auction through ...
  6. Bid Wanted

    An announcement by an investor who holds a security that he or ...

You May Also Like

Related Articles
  1. Investing

    Will 2015 Finally Be The Year For Rising ...

  2. Stock Analysis

    Government Bond ETFs: Pros and Cons

  3. Economics

    Evaluate Your Investment Portfolio For ...

  4. Investing Basics

    CDs or Bonds: Which Investment is Better ...

  5. Investing

    Reflecing On Financial And Investing ...

Trading Center