REVIEW: Where Should I Put My Emergency Fund? (Besides the Mattress)

You know you need an emergency fund. But how much is enough? And where should you keep it? If you want an answer that’s more than just a regurgitated rule of thumb, check out this article.

It is amazing to me how often we see emergency funds that are either insufficient, or far too large. Maybe more astounding is the sheer number of financial journalists and advisors who spout the “three to six months’ worth of expenses” mantra, as if it fits every single circumstance. The truth, of course, is that everyone’s situation is unique.

This piece does a nice job explaining why you need a rainy day fund, and it sets out some reasonable guidelines for how many months of expenses to target. The only addition I would make is that there are a lot of factors that have a strong bearing on how much you should set aside, namely:

  • Retired or still working
  • More than one family member earning income
  • Age/career, which both impact likelihood of finding a new job quickly
  • Other sources of funds (HELOC, credit cards, non-retirement investment account, etc.)
  • Insurance in place for disability, health, etc.
  • Size of medical deductibles

As for where to keep that emergency buffer, the author examines checking accounts (not much better than the mattress, really), high-yield savings, and CD laddering. He finishes with some sound warnings against over-reaching for yield.

Speaking of high-yield savings accounts (not to be confused with high-yield bond accounts), I discovered a terrific resource recently: Just enter your zip code, amount to invest, and time horizon, and it spits out a list of banks, minimums, interest rates, and links to apply online.

Yes, emergency funds are boring. But don’t fail to plan for this important aspect of your portfolio. It provides liquidity when you need it, and peace of mind even when you don’t.



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