How Much to Save and Where to Grow It
We all know we should have an emergency fund. But once you’ve stashed away those initial savings, the big questions hit: How many months of expenses do you really need? And more importantly, how can you keep that money safe and still let it grow?
If the thought of locking up three to six months of expenses in a traditional savings account—barely earning a penny—makes you cringe, you’ve found the right spot! We’re here to talk about liquid, high-growth options for your financial safety net, so your “compounding snowball” doesn’t get slowed down.
How Big Should Your Emergency Fund Be? (The 3-Month vs. 6-Month Debate)
The answer truly varies from person to person, which is why you hear different advice.
- 3 Months of Expenses: This is often suitable if you have a very stable job (think civil service), low debt, or a two-income household. It’s a great baseline.
- 6 Months (or More!) of Expenses: This is the safer harbor, especially if you have an unstable income (commission-based or self-employed), a large family, or significant financial obligations.
The key takeaway? Don’t stress over a perfect number. Start small and build up until you feel truly secure. Now, let’s talk about where to put it.
Where to Grow Your Emergency Cash: Beyond the Basics
Traditional savings accounts and Certificates of Deposit (CDs) just don’t cut it for a high-performing emergency fund. CDs lock up your money for a set term (sacrificing liquidity), and traditional savings accounts offer a rate so low it barely beats inflation.
Here are four options to keep your money liquid and working for you:
1. Money Market Funds (MMFs): Stable and Growing
Money Market Funds are a fantastic option for emergency savings. They are mutual funds managed by professionals who invest your money in short-term, low-risk debt securities, like Treasury bills.
- The Key Benefit: MMF managers seek to maintain a stable Net Asset Value (NAV) of $1.00, meaning the value of your shares generally won’t fluctuate like stocks or bonds. They are governed by strict SEC rules requiring high liquidity and short maturities, making them reliable.
- Who is it for? Anyone with a low tolerance for risk who needs a stable, accessible account that offers a better return than a standard savings account.
2. Treasury Bills (T-Bills): Backed by the Government
If you know you won’t need a portion of your emergency fund for a few months, Treasury Bills are a highly secure choice.
- The Key Benefit: They are backed by the full faith and credit of the U.S. government, making them arguably the safest investment available. They often pay a higher interest rate than basic bank accounts and come in short-term maturities (weeks to months), providing some liquidity.
3. The Roth IRA: Your Secret Emergency Fund
This one is a little less common, but powerful. A Roth IRA is a retirement account, but it has a unique feature: you can withdraw the contributions you’ve put in (the principal amount) at any time, tax-free and penalty-free.
- The Key Benefit: It lets you supercharge your compounding! If you are highly unlikely to need your emergency fund, you can invest it in a tax-advantaged account. If a true catastrophe hits, you can pull out the contributions.
- A Word of Caution: Only do this if you are comfortable with this money being invested (and thus fluctuating in value). For minor emergencies, consider using a HELOC, loan, or credit card temporarily to avoid messing up your precious compounding snowball, which, as the great investor Warren Buffett said, is the “eighth wonder of the world.”
4. Robo-Advisors (e.g., Betterment,Fidelity, Vanguard, Schwab): Set It and Forget It
For those of us who prefer to set it and forget it, a Robo-Advisor can be a great option.
- The Key Benefit: These platforms automatically allocate your money into a diversified, low-cost portfolio based on your risk profile. They can often be customized to have a highly conservative (mostly bond or cash) allocation specifically for emergency funds, giving you a balance of growth and stability without having to manage it yourself.
The Bottom Line: Prioritize Liquidity
When planning your emergency fund, remember that liquidity is king. Choose an option that offers a better return than your old savings account while ensuring you can access the cash quickly and without penalty when life throws you a curveball.
Which of these high-yield options are you considering for your safety net? Let us know!
Want to save some extra $$$? Check out the referrals below.
https://www.schwab.com/client-referral?refrid=REFER64W7HD23
https://www.rakuten.com/r/TTIME29?eeid=57122
Wealth, Health,& Fitness 