Where can I invest my money if I want to be able to easily access it in case of an emergency?
I am starting out in investing and I have $8,000 to invest and can also invest an additional $500 every month. Currently, I have a checking account, but no savings account. I am a risk taker and want to earn good interest on the money deposited, but just in case of an emergency, I might need to take back the money. Do I need to open a savings account, CD, or money market account? I want to earn at least 2 to 3 percent in interest. Alternatively, should I invest this money in a mutual fund?
When you think about where to put your emergency fund, you should think about keeping it in a place that’s safe from market risk, easy to access, and can earn some interest. A savings account or a money market account fits all three criteria. Your emergency savings is for any unexpected expenses; for example, a job loss, car repairs, medical expenses, etc. You should look at bankrate.com to compare rates for savings and money market interest rates. The rule of thumb for emergency savings is to have 3 – 6 months of living expenses in a good economy, and 9 – 18 months during a recession.
Once you established your emergency fund, you can put money towards investing for long-term growth. This is money you don’t plan to take out in the next 3-5 years at a minimum. A good place to start is to look at diversified ETFs with low expense ratios. ETFs can be a good choice relative to mutual funds as they typically offer greater tax efficiency. Since you’re planning to invest monthly, you’re also dollar-cost averaging. When the market is up, you’ll purchase fewer shares, and when the market is down, you’ll purchase more shares. The theory is that over time, you pay the “average” amount for your shares.
With the volatile stock market and in response to your "might need the money in case of an emergency" I recommend the following:
Go to "Bankrate.com" and click on the Savings/MMA button and avail yourself of the top rates available nationwide for FDIC Insured Savings Accounts / Money Markets.
You will find several options there that are paying as much as 2.25% interest (or more) and allow ongoing deposits and offer 100% liquidity and safety. FDIC Insured and NO FEES!
These online accounts "link" to your local savings or checking account and you transfer money back and forth without fees ....
If you need to access your money then a fluctuating asset of any kind is a terrible idea. You should go to treasurydirect.gov and invest in short-term U.S. government Treasuries of one month to two years in duration. The two-year notes are paying almost 3% and they are completely free of all state and local taxes. For short-term needs keep it in the short-term maturities which pay somewhat less but are easier to access. You can link these to your checking or savings accounts at your local bank for quick transfer if needed.
It sounds as though you are on track to building a nice nest-egg. If your $8,000 savings will be increased by $1,000 every two months it can, with time and wise investments, grow to a size that will support you in retirement (though you don't say how old you are, but I hope you are young. Keep this up for 40 years and you could have over a million in investments.)
I have a couple of comments. First, you say you are a risk-taker but seem to be considering only the least-risky investments, cash instruments that pay no more than 2-3%. That's a terrible way to invest for the long term. If you want income you can buy REITs for 7-8% (give or take), or a good preferred-stock fund at 5.5%. You can buy stocks in large, mature blue-chip companies that ought to provide modest growth plus a 3% dividend rate. Or, you can invest for growth.
All of this requires that you have a long time horizon so figure out just how likely an emergency might be, and how much you could need. If your job is secure and you can look forward to a rising income, you probably should not have more than a months' living needs held aside. Keep in mind that as your investment account grows you can set it up with access to margin. It's a credit line with your portfolio as collateral. Then, if you need funds you can take them without having to sell any investments -- and replace the funds withdrawn in due course.
You are asking a very good question and thank you for it. I would allocate that to a money market account if you want access to it and want to earn interest. A mutual fund is a wide class of asset categories, ranging from stocks, bonds, currencies, and commodities. All of these are going to depend on the type of asset you invest in with respect to taking risks- equities, commodities, and currencies will have more volatility and fluctuation than bonds, where the volatility is going to be more related to interest rates. If it is regarding an emergency, a money market account should work well for you. I hope this answers your question.
Yale Bock, CFA
Y H & C Investments