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?
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 Then, if you need funds you can take them without having to sell any investments -- and replace the funds withdrawn in due course.
The first item you should take care of is as you suggested, an "emergency fund". A savings account you can use as a buffer against any unexpected expenses should they arise. That way you don't have to go into credit card debt, or pull from investments at an inopportune time (during a correction or recession). A high yield savings account at Ally, Marcus, Synchrony, or a variety of other online banks are a great place to stash emergency fund cash due to their higher than average interest rates.
Secondly, while establishing your emergency fund, you may also wish to start setting aside some cash in a brokerage account or IRA. Depending on your tax situation, a Roth IRA may make sense (if you're in a lower tax bracket, it's likely more advantageous to use a Roth). Within these accounts, using a diversified ETF or index fund (for their low costs and tax efficiency) to get started investing is a great way to go.
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.
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
Your question implies an erroneous assumption that many people have about investing. Let me begin by stating that investors should always take the long view. I would never recommend that anyone invest in stocks, bonds or mutual funds if they knew that needed the money within a year or two.
But – and here’s a big BUT – most individual accounts at banks or investment firms can be liquidated within a few days in case of financial need. So, if you have and “emergency fund” and have $8000 to invest, and can add $500 per month to it, go for it! Keep in mind that if you are looking for better than CD rates of return - such as mutual funds - the value of your account will fluctuate and it’s possible that if you need the money at the wrong time there may be less than you put in.
I would suggest choosing a good no-load mutual fund as your investment vehicle and set up a direct link between your bank account and the fund so that you can move money between the accounts with the click of a mouse.
If you are unsure of what to invest in, you can find an RIA - like us - who will appreciate working with small, young investors who have many years ahead of them to watch their money grow.