You’ve Got an Emergency Fund — Now What?
Congrats! You’ve followed the suggestions you’ve seen all over the web and built up an emergency fund. But now what do you do with it?
If you’re like me, this may be the first time you’ve had a pile of cash just sitting there. It may feel like you should “do something” with it, but…don’t. (Unless you’ve stashed it under your mattress or something, in which case: put at least most of it in an FDIC-insured bank or an NCUA-protected credit union.)
First things first
You’ve got to protect your emergency fund from yourself, first of all. Clearly define what will constitute an emergency. In my case, that’s job loss or someone needing to be hospitalized if I can’t pay for that out of pocket first. That’s it. Nothing else counts as an emergency. So with luck, my fund will continue to sit there untouched for a long, long time.
Your definition may be different, of course, but make sure that you have one and that you stick with it. Otherwise, it can be tempting to decide that things like a new couch are an emergency. (And they’re not; not even if the cat scratches the heck out of your old one.)
Keep it safe
Once you’ve kept your emergency fund safe from your own fingers, it’s time to keep it safe from loss. Don’t try to make money from it. You want to keep it in a form that’s as close to no risk as possible.
Don’t invest it. Don’t use it for a down payment on your house, thinking you can pull out equity if an emergency happens. Don’t lend it to your cousin who promises to pay you 8% interest.
Don’t get greedy. Just keep it safe, in the bank. For an emergency fund, it’s not about making money, it’s about keeping money. Untouched, for as long as possible.
My emergency money
I have anywhere between 9 months and 18 month’s worth of expenses set aside in my emergency fund, depending on whether we’re talking bare-minimum expenses or what I really normally spend. I have some of mine in just a plain old online savings account, where it’s easily accessible, and then I have some in laddered CDs that come up for renewal at different points.
I’m not so sure having the laddered CDs was the way to go, either. But my though there was that the savings account would be for immediate emergencies, and the CDs for longer term ones like being out of work for a long period. (Since they come due at different times, I could just start not renewing them if I was in the midst of an emergency to avoid penalties.)
But that only works if your emergency fund is strictly for things like job loss — and most people’s aren’t.
The main thing is not to try to make money with your emergency fund; but just to have the money available. (And then hope you never have to use it.) You’re doing the right thing by keeping it safe.