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?
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.
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 ....
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.