Why Emergency Funds Are Important To Have and Where To Put Them

As we all witnessed in the recent government shutdown, very unexpected things can happen that cause you to need money.

Perhaps it’s a short term loss of income as in the shutdown, or the furnace goes out, or the roof has a leak, or any number of unexpected happenings.

The rule of thumb is to have at least three to six months worth of income, preferably more, saved and available if you need it.

This can add up to a lot of money. So where do you put it?

In the 30 years that I have been a Certified Financial Planner® professional I have seen very few people actually need substantial emergency funds, so putting this money in a low-interest rate savings account or money market fund may cost you a lot of potential investment growth over time.

There are several different ways you can deal with this. *One option is to keep 30 to 60 days worth of income in a savings account. You can check out who’s paying the highest interest rates on savings accounts at Bankrate.com. Then, put the rest in a liquid investment account that you can access in a few days. I use low-cost mutual funds that are well diversified for this as they are easily accessed but if you don’t need them they have the opportunity to grow over time.

Of course, this money should be invested in a way that is consistent with your overall risk tolerance, keeping in mind that you may need this money in the event of an emergency. It needs to be able to be withdrawn without penalties or fees.

And if you do need it, in a true emergency, you should be able to get it within just a few days.

So remember, there are risks in investing, but there are also risks in being far too conservative. Don’t risk your future by putting too much money in accounts that only keep pace with inflation. That’s a risk you don’t need.

*Disclaimer: This is not intended as specific investment advice. Meet with a Certified Financial Planner® professional to plan the best strategy for your emergency funds.