3 spots to stash your emergency fund
In this day and age, having an emergency fund isn’t a luxury. It’s a necessity. Whether it’s unexpected medical bills, a car repair, or sudden unemployment, having a safety net provides peace of mind. The question is: where is the best place to stash your emergency fund?
In this article, we will explore some available options and guide you in finding the best spot to safely stash your emergency fund. We will discuss the pros and cons of each option while considering factors such as accessibility, liquidity, and potential returns. So, if you’re looking to build or optimise your emergency fund, join us as we share the best strategies to ensure your hard-earned money is protected and easily accessible when you need it.
Why is it important to set up an emergency fund?
An emergency fund is a financial cushion that helps you navigate unexpected expenses or income disruptions without relying on credit cards or loans.
Having an emergency fund helps you avoid the anxiety that naturally arises during financial uncertainty and gives you the freedom to focus on solutions rather than worrying about how to make ends meet. Moreover, an emergency fund can prevent you from going into debt or having to tap into long-term savings.
Financial experts generally recommend saving 3 to 6 months’ worth of living expenses. Of course, we won’t stop you if you can save even more!
What factors to consider before you choose where to stash your emergency fund?
It’s essential to consider several factors to ensure your emergency fund is safe and sound — and within reach.
Here are the 3 you should prioritise:
- Accessibility: In an emergency, you want to be able to access your funds easily without any delays. Consider how easy it is to withdraw money from different account types. Some options may offer immediate access to your funds, while others may have restrictions or withdrawal limits.
- Liquidity: Liquidity refers to how easily an asset can be converted into cash. In the case of an emergency fund, you will want an option that offers high liquidity, allowing you to withdraw your funds without incurring penalties.
- Potential returns: While the purpose of an emergency fund is to provide financial security, it’s still worth considering the potential returns on your savings. Certain account types may offer better interest rates than others, allowing your money to grow over time.
Now, let’s explore some of the options available to you:
Savings accounts
One of the most common options for stashing your emergency fund is a savings account. This type of account provides a secure place to store your money while earning you modest interest. Savings accounts also offer easy access to your funds, allowing you to withdraw cash as needed without any restrictions.
While savings accounts are convenient, they often offer lower interest rates than other options. This means that the purchasing power of your emergency fund may be eroded over time due to inflation. But if accessibility and liquidity are your main concerns, a savings account may be an excellent choice for your emergency fund.
Certificates of deposit
Certificates of deposit (CDs) offer a different approach to stashing your emergency fund, where you agree to keep your money deposited for a specified period, known as the maturity date. In return for this commitment, the bank offers a fixed interest rate higher than what is available for savings accounts.
By locking in your funds for a specific period, you can earn a guaranteed return on your money. This can be particularly beneficial if you have a larger emergency fund that you won’t need to access in the short term. However, CDs come with a drawback in terms of accessibility. Once you deposit your money into a CD, you typically can’t withdraw it before the maturity date without incurring penalties. This lack of liquidity means that if an emergency arises during the CD’s term, you will face fees.
So, it’s important to carefully consider your financial situation and the potential need for immediate access to your emergency fund before choosing CDs as your preferred option.
The stock market
Putting your emergency fund in the stock market can be a smart move in the long run. You have the freedom to determine your preferred level of risk — whether you’re aiming for higher returns, taking a moderate approach, or playing it safe. There is no wrong approach, but the right one will depend on what you aim to achieve. Just keep in mind that the stock market can be unpredictable in the short term, so select a strategy that matches your goals and capacity to be patient.
Ultimately, choosing where to stash your emergency fund should align with your financial goals. Regardless of the option you choose, the most important thing is to have an emergency fund in the first place, as it can provide a safety net in times of financial uncertainty.
