Three places to keep your emergency fund

Sunday, October 21, 2018

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Most personal financial experts will tell you that building an emergency fund is one of the first steps toward financial independence. However, the question that most people often ask is. “Where should I keep this money?”

Rose Miller, grants manager at JN Foundation, who explains that an emergency fund should make provision for a variety of situations such as job loss, a pay cut, medical bills, or car and home repairs, advises that the fund be kept separate from regular chequing and savings accounts, earmarked for crisis situations only.

“If any of those unfortunate situations occur, your emergency fund will provide you with a welcomed financial cushion and several months' support, while you organise to get your finances back on track,” she said.

Miller, who also heads the JN Foundation's BeWi$e financial empowerment programme, recommends that the emergency fund be able to cover at least three to six months of normal living expenses.

“Therefore, with thousands of dollars in play, you'll want to ensure that you keep your emergency fund in a safe place and that you're earning a return on your cash reserves. However, since you will need to access this cash on short notice, then you should make a wise decision about where you will keep your emergency fund,” she advised.

Here are three different types of accounts, she recommends.

1. High-yield Bank Accounts

A high-yield savings account is easily accessible and will earn more interest on your deposits than in a regular savings account. “To find the right high-yield savings account for your emergency fund, look for options with a competitive interest rate and low-to-zero monthly fees,” Miller said.

2. Money Market or Investment Accounts

“Money market accounts are similar to savings accounts; however, they usually offer higher yields. You can open a money market account at a local bank, and then access your money through a web-based account management or at an ATM,” she explained.

“Since money market accounts are easy to use and your funds can be withdrawn at any time, they can be a good option for your emergency savings,” Miller added.

However, she cautioned that one should be mindful of money market fees, as they could chip away at one's returns. “Therefore, as with any other account, it pays to shop around and compare fees and features prior to selecting where to keep your emergency fund,” she advised.

3. Certificates of Deposit (CDs)

Certificates of Deposit, or CDs, offer a fixed rate of return for a specific period of time. Since the rate of return is guaranteed, opening a CD could be one way to earn extra interest on your emergency fund.

However, CDs tie up your money for a specific period of time. This means that in the vent that your emergency occurs before the date of maturity of the fund, one may have to pay a penalty to close the account earlier than was agreed. To combat this, many people opt to “ladder” their CDs, a term that describes opening multiple CDs with different maturity dates, so that a certain amount of cash is more readily available. This strategy also hedges or smooths-out the effect of interest rate fluctuations.

The BeWi$e manager explained that there are advantages and disadvantages to each option, and further noted that a wise move would be for persons to put their emergency fund in a combination of all of these accounts.

“Your emergency fund is there to protect you and your family from financial stress caused by unexpected expenses. But while you're not using it, your money needs a safe place to grow,” she said.

“Stashed away in a high-yield savings account, certificate of deposit (CD), or money market account, your emergency fund will continue to grow until the day you need to access it,” she reiterated.

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