April 3, 2013 Admin | April 3, 2013 When contemplating where to put your emergency savings, what should you consider?
3 thoughts on “April 3, 2013”
You should consider the risk associated with where you are considering putting your emergency savings.
Short-term and fully liquid security. (No annuities, tax shelters, Roth IRAs or equities).
Thomas and Steve both provided valuable insights. Let’s take a closer look at the issue. We should always focus on liquidity. This means we must be able to access the money quickly and easily when an emergency pops up. Steve was exactly right to tell us to stay away from annuities, tax shelters that tie our money up and equities (stocks). The Roth IRA may be an exception. While I do not use the Roth IRA as my emergency account, some folks put a portion of their Roth in ultra safe bonds or cash and access their contributions tax-free and penalty free if needed. One needs to fully understand the rules of the Roth IRA before following this method. Next up is risk.
How much risk is one willing to accept in their emergency account? This is subjective and each person must come to their own answers based on their particular situation. Just keep in mind their is more than one risk involved. You have market risk (bonds in this example) and inflation risk (cash in the bank in this example). You can choose to increase your market risk (price fluctuation) and reduce your inflationary risk (hidden, but real rice in consumer prices over time) by selecting a short to intermediate term bond index fund or you could increase your inflationary risk and reduce your market risk by selecting a money market fund or account or simply keeping your money in the bank. There is no perfect answer here. Each one of us must make the best choice based on what type of risk we choose to accept. What about me?
I keep my emergency fund in the Total Bond Market Index Fund at Vanguard. It is fully liquid and not invested in annuities, tax shelters, a Roth IRA or equities as Steve would recommend. I choose to see inflation as the real risk to my money, not market risk, so I select the most aggressive bond index fund that I recommend for the average person (stay away from long term bond funds and high-yield bond funds). Some folks would be happier with a lower risk bond fund (shorter maturities) and that is just fine. The short-term bond index fund at Vanguard would serve that purpose just fine. You can read more on my website by hitting on the savings tab. Now go out there and take some risk!