It goes without saying that when Chelsea sent me this article yesterday, I was excited to share it, but was also just generally excited about the prospect of making money on my own emergency fund. First, before we get into the dirty details, I want to clarify up-front what an emergency fund is. Also called a “rainy-day fund,” an emergency fund is the stash of cash you turn to in case of an emergency, but it is separate from your actual savings, and definitely separate from your checkings. I store my emergency fund within my savings account (though I wish I didn’t), but I know exactly how much is set aside for emergencies that I absolutely cannot touch. Having an emergency fund is crucial because it saves you from running up a huge credit card billif you get hit with an unexpected expense.
One of the biggest problems people (or maybe just I) have with emergency funds is that your cash kind of just sits there. A recommended e-fund should include living expenses for three-to-six months, which means you could have anywhere from about $2k-$15k (depending on where you live, how many people you support, etc.) just sitting in your account. While it’s crucial to have it there in case something unexpected comes up (a medical bill, or job loss), it also means that your money is not necessarily gaining much interest. Most interest rates on savings accounts are very low (about .03%), and even high-interest rate savings accounts get you approximately a 1.05% return.
Recently, thearticle on Two Cents (which is part of Lifehacker.com) outlined this exact problem and provided a solution. The article says, “investing it [your emergency fund] is risky, because you need your funds to be liquid. One financial planner offers a solution: short-term bond funds.”
The piece cites a solution from Ellen Jordan, a certified financial planner and senior vice president at Bryn Mawr Trust, who spoke to Business Insider about the best place to put your emergency fund stash. On the subject of short-term bond funds, Business Insider says,
“They’re conservative investments that minimize the risk of losing money, and, unlike with some other investments, you can withdraw your funds instantly.
Quick access is essential, she [Ellen Jordan] emphasizes: ‘You don’t want to tie that money up. It literally is something that has to be available as quickly as possible, so putting it in something like a six-month CD doesn’t make sense.'”
For those who are interested in learning more about short-term bond funds, there are several articles that look further into which short-term bonds you should be buying now. Investor Place explains the value of short-term bonds, saying, “Conventional wisdom says that short-term bond funds are a smart fixed-income choice in rising-interest-rate environments. Interest rates and bond prices generally move in the opposite direction, and longer maturities typically have steeper price declines than shorter ones.”
Essentially, short-term bonds are a way to invest and make a smaller return (about 1.7%-3.6%, per Business Insider and Investopedia) while not overly exposing your emergency fund to the volatility of the stock market. It also means that your funds get to stay liquid, so they can be pulled immediately,which tying them up in a CD wouldn’t allow.
In the Business Insider article, Jordan also offers a solution for those who are very risk averse, but still want to put their emergency fund somewhere other than their savings account.
“‘If you are worried about price fluctuation of a short-term bond fund, then the most appropriate investment vehicle for your emergency reserve is a money market fund,’ Jordan says. ‘While money market funds are currently not earning much of anything, historically, that has not always been the case.'”
Overall, I think it’s exciting to consider the possibility of making some money off your emergency fund. If your emergency has $8k (which I’m just basing off my current emergency fund), and you earn a 3% return on it in the first year in a short-term bond fund, that’s about $240. The following year, if you earn another 3% — this time off $8,240 — you add an additional $247.20 to your e-fund. So, it has the potential to add up, if the interest stays comfortably between 1% and 3% without any dips. For those interested in making this money, I recommend sifting through as much research as possible, and potentially talking to a financial advisor, or someone at your bank (even on the phone) before transferring the funds, if possible. (And if you’re still working on saving your emergency fund, here is a helpful TFD article on specific ways to save for one.)
Image via Pexels
FAQs
Steps to Build an Emergency Fund
- Set several smaller savings goals, rather than one large one. Set yourself up for success from the start. ...
- Start with small, regular contributions. ...
- Automate your savings. ...
- Don't increase monthly spending or open new credit cards. ...
- Don't over-save.
Use Low-Risk Accounts: Place your emergency fund in a savings account, or short-term certificate of deposit (CD). These options offer both liquidity and safety. Avoid Risky Investments: Keep your emergency fund away from risky assets like stocks or long-term investments.
Is $5,000 enough for emergency fund? ›
For many people, $5,000 would be inadequate to cover several months' expenses in the event of job loss or an expensive emergency. If that is the case for you, $5,000 would not be considered an overfunded account.
Is $20000 enough for an emergency fund? ›
A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.
Is $100 K too much for an emergency fund? ›
It's important to have cash reserves available, but $100,000 may be overdoing it. It's important to have money available in your savings account to cover unforeseen expenses. Plus, you never know when you might lose your job or see your hours (and income) get cut, so having cash reserves at the ready is important.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What is a realistic emergency fund amount? ›
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
What is a good monthly emergency fund? ›
Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses. That doesn't mean 3 to 6 months of your salary, but how much it would cost you to get by for that length of time.
Is 10k enough for emergency fund? ›
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
How many Americans have $100000 in savings? ›
Most American households have at least $1,000 in checking or savings accounts. But only about 12% have more than $100,000 in checking and savings.
But despite the larger pressures, they're not satisfied with their situation; 57% of respondents said the current state of their savings is stressing them out. Nearly one in four (22%) of U.S. adults have no emergency savings at all, Bankrate found—the second-lowest percentage in 13 years of polling.
How much is 3 to 6 months of expenses? ›
As a general rule of thumb, many financial experts recommend setting aside 3-6 months' worth of living expenses. So if you generally spend $2,000 per month on rent, utilities, food, gas, healthcare, and other necessities, you should try to save between $6,000 and $12,000.
How much should a 20 year old have in emergency fund? ›
Aim to have three to six months' worth of expenses set aside. To figure out how much you should have saved for emergencies, simply multiply the amount of money you spend each month on expenses by either three or six months to get your target goal amount.
Is 3 month emergency fund enough? ›
It's difficult to predict how much these or other emergencies could cost — but three to six months' worth of expenses is a good goal. If that seems too steep, start with a number that seems more reasonable.
Is 25k in savings good? ›
The median saver has closer to $5,000 in the bank. So if you have $25,000 saved, you're on the good side of the middle by a comfortable margin. That's a lot of cash to leverage — but also a lot to protect. Here's how to utilize, preserve and grow the impressive financial cushion you've built.
Is $10,000 too much for an emergency fund? ›
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
Is $10,000 enough for emergency fund? ›
More than half of Americans don't have an emergency fund, and 40% of those who do have less than $10,000, the findings show. While experts often suggest keeping enough cash to cover three to six months' worth of living expenses, others have a more nuanced approach.
Is $30,000 a good emergency fund? ›
Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account.
Is $2000 a good emergency fund? ›
Figure out how much you need in emergency savings
Experts commonly recommend saving three to six months of expenses in case of emergencies. For example, if your monthly bills total $2,000 a month, saving $6,000 will allow you to pay your bills for a short time if you lose your main source of income.
