You've done a good job saving money. Now, how do you invest your emergency fund?
When deciding on where to invest your emergency fund dollars, your main focus should be on safety and liquidity with a secondary focus on yield. That being stated, it does not make sense to bury your emergency fund in the back yard earning nothing. Here are some sensible suggestions that offer both liquidity and provide some yield.
Before making a deposit, inquire if your deposit is covered by FDIC insurance. The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. This may include CD’s, savings accounts, and checking accounts.
High Yield Savings Accounts
High yield savings accounts offer both liquidity and flexibility; if they are FDIC insured, they also offer safety of principal up to the insurance limits in the event of a bank failure. Money is instantly available and can often be transferred into linked accounts such as a checking account. High yield savings accounts are available both online and through physical bank branches.
Money Market Accounts
A money market account (MMA) is a deposit account offered by a bank, which has a relatively high rate of interest and sometimes requires a higher minimum balance to earn interest or avoid monthly fees. Money market accounts are different than money market mutual funds, which are not covered by FDIC insurance. Money market accounts are highly liquid and are similar to high yield savings accounts.
Short Term Certificate of Deposit (CD’s)
Short term CD’s (1-6 months) may be an option but require a bit more planning. CD’s offer a variety of maturities but may not provide liquidity should you need the funds immediately. One suggestion might be to ladder the maturities of short term CD’s so that you own several CD’s with different maturities. For example, you may have a CD that matures in March, another in April, and another in May. Understand that this option makes sense if you have enough cash that is liquid and easily accessible prior to investing in CD’s.
High Yield Rewards Checking
High yield rewards checking accounts are typically geared toward depositors who maintain higher balances in their checking accounts. If your emergency fund is well healed, this may be a smart option. The advantages of this type of account are higher interest rates than regular checking accounts plus the convenience of being able to write checks without sacrificing safety. These types of accounts may require you to use your debit card or make a certain amount of transactions per month to avoid service charges and fees.