We are aggressively trying to get our emergency fund to five months’ worth of living expenses right now. However, when I think about all that money sitting around and not making any interest, it bothers me. Have you all found any good accounts that are accessible and still earn a little bit of money? I am just having a hard time thinking $15,000 is just “sitting around”. -Shannon
It can give you heartburn to think of having a substantial amount of your hard-earned money sitting in a non-to-low interest bearing account earmarked as an emergency fund. I know the feeling well; we money “nerds” always try to think of better ways to have our money work better for us!
When it comes to the emergency fund, I’ve found it is helpful for me to think of it more as an insurance policy than a fund that needs to be earning money. With an insurance policy, you are constantly paying premiums for a product that you more than likely will never need. In addition, an insurance policy is a product that is usually for a certain amount in the event of a loss and is not indexed to increase with inflation. So in reality, with an insurance policy, you are losing money due to inflation and constant premium payments, albeit for a specific purpose — risk management.
It is the same with the emergency fund. It is not an investment where your goal is to make a certain rate of return. Rather, it is a “insurance policy” to protect you from a significant loss or set back. When you have an emergency fund, what could be a disaster becomes a mere inconvenience.
Just as with insurance, you do indeed lose money with having an emergency fund in a liquid, easily accessible account due to inflation. That is a price I am willing to pay, however, for the peace of mind that comes from having a cushion to soften the blows when trouble strikes.
We currently have our emergency fund in a local bank’s money market account. I chose this for the easy access and CD-like rates. It may not be keeping up with inflation, but at least its not losing as much as keeping money under a mattress — not that that is a bad place to keep it if you had the discipline not to touch it! I know myself well enough to know if I were to keep the emergency fund in it’s most liquid form (cold hard cash), I would find “emergencies” all over the place.
Some people like CDs; those are a safe place for your fund, but you will have to pay a percentage fee to get the money out in case of an emergency before the maturity date. Another option is a money market fund with check-writing privileges.
In today’s economy, you might as well be resolved to the fact that your emergency fund is going to lose money by sitting there, no matter if you are getting interest or not. In the end, though, the non-tangible benefits of having the emergency fund readily accessible far outweigh any tangible losses.
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.
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