Monday, July 11, 2011

Emergency Fund

I need to build my emergency fund back up before I start investing again. Various websites recommend from three to six months of living expenses. Right now I'm nowhere near that. So why not mix the two (investment and emergency fund) by building up an emergency fund in a profitable investment vehicle?
I'm guessing there are probably a lot of people who do this, but it doesn't suit me. I subscribe to the conventional line of thinking that says emergency funds should be placed in very low-risk vehicles like bank savings accounts. Even a slight, short-term dip at the wrong time could be disastrous.
Another concern is liquidity. In an emergency quick and easy access to cash is important. Even a one-week holding period would be too long. An ATM account, on the other hand, earns virtually no interest but is easily accessible.
It may seem like a lost opportunity to put three to six months worth of living expenses in an account that earns very little, but the security of having ready cash more than makes up for it.
You might decide to keep your emergency savings smaller or larger depending on your circumstances and preferences. The important thing is to get it set-up as quickly as you reasonably can.

1 comment:

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