March 2nd, 2013
What issues should you consider when selecting where you place your emergency savings?
What issues should you consider when selecting where you place your emergency savings?
Emergency savings is intended to be accessed quickly. You need to think about what type of emergency you want to prepare for. Most often placing money in investments yield a great long term return, but even non-aggressive investments can fluctuate in value greatly compared to savings accounts. On the other hand placing a large amount of emergency money in low interest bank account could end up costing you a lot of money due to inflation. My strategy is to have tiers of emergency funding. I have funds that I can access same day 10-20%, funds that i can retrieve within a week. 20-40% and the rest in stable investments that I’m prepared to liquidate within 30 days. One might consider using collateral to secure an emergency loan but this can be risky and end up costing a great deal.
You raised some really good points, Aaron. Thanks for sharing. Here are a few basics to keep in mind. (1) It must be liquid which means it is easily transferred to immediate cash. (2) It should have little to any volatility. This eliminates stocks, real estate and long term bonds. (3) It should have a chance to grow and it must be kept away from calamity. This means no mattress, sock drawer, or hiding place in the house. This also eliminates many low interest bank accounts. (4) It should be moderately safe from risk. Besides considering market risk (ups and downs of the bond market in this case), you must also consider event risk (fire, tornado, hurricane, theft, etc.), and maybe the biggest risk of all that Aaron discussed, and that is inflation risk (if your money is not earning roughly 3% or more then it is shrinking because of inflation). So now what.
Go to my website under saving and review the information available on this subject and make the best decision that fits your time horizon, risk tolerance, and goals. Good luck.