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4 Good Places To Stash Your Emergency Fund
April 15, 2019
In this country, however, only 35 percent of Americans have enough savings available to cover a $500 emergency, and 34 percent have nothing put aside at all. Only 15 percent have $10,000 readily available. Millennials fare a bit better, with 47 percent reporting they have at least $500 on hand.
Financial experts recommend that everyone have at least $1,000 available for emergencies, and that everyone attempt to set aside at least six months’ living expenses in case their employment situation changes unexpectedly.
But what should you do with all that money? Wouldn’t you be better off investing it rather than have it sitting in a savings account? The short answer is no. Because it’s meant to cover emergencies, it should be kept someplace safe where you can access it immediately. But that doesn’t mean it can’t be earning better than the next-to-nothing percent available from most banks’ savings accounts.
Here are a few ideas on where to stash your cash.
- High-yield savings account
Better than a typical bank savings account, which generally offers in the neighborhood of 0.09 percent, high-yield savings accounts can offer up to 2.5 percent interest. They also don’t normally carry a maintenance fee or require a minimum monthly balance. They may, however, charge a penalty if you make too many withdrawals.
Start with your own bank, then others in your area, and move to online banks. The latter often offer higher yields because of their low overhead. The problem with an online account, however, is that you may have to transfer your money to your own bank to withdraw it.
- Money market funds
If you have a tidy sum to invest, check money market funds. These can frequently offer the convenience of check writing and debit cards like checking accounts, so they are liquid. However, they often carry higher minimum balance requirements and also come with limits on the number of withdrawals. And like other investment instruments, they charge management fees which can eat into your returns, so be sure to check around for the lowest fees before investing.
- Certificates of deposit (CDs)
CDs offer a fixed rate of interest for a specific term, which can be 12, 18, 24, or 36 months, or longer. The interest rate on CDs can approach three percent, but there’s a catch: If you want to withdraw the money sooner than the agreed-upon time, you’ll pay a penalty. You also have a higher minimum-deposit requirement than with savings accounts.
To get around this, many people use a ladder approach. That is, they’ll buy one CD of each length so that they’ll reach maturity at different times, thereby ensuring that at least some of their money will be available when they need it. Keep in mind, though, that the bank or credit union may make you jump through some hoops to cash out a CD early.
- Roth IRA
Unlike a 401(k), in which you deposit pre-tax income and pay taxes when you withdraw from it, a Roth IRA is a retirement account that works exactly the opposite. You put after-tax dollars into your account and pay no taxes on withdrawals when you reach age 59 ½. The beauty of a Roth IRA is that you can withdraw contributions (but not earnings) at any time without any penalties for early withdrawal, unlike a 401(k) which charges not only penalties but taxes on any withdrawals before age 59 ½. The downside is that, as with a 401(k), your money can lose value depending on what you’re invested in.
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