Emergency Fund – Where To Put It?

There are many places to keep an emergency fund, it all depends how you approach it.

We like to put ours in a Tax-Free Money Market Fund. Yes the interest is low but we view our emergency fund as a type of “Insurance” and not an investment.

Some people like to put keep there savings in a Saving Account at the bank, others in stocks, some even gold, and other mutual funds. Each place has a unique combination of the qualities you want – safety, liquidity, earnings rate and convenience. If you are smart, you probably won’t leave all your cash in a place where it is earning little or no interest. But neither will you put it all where it might be spanked if a recession hits.

The way you make up your mind depends on how conservative you want to be. Money in your checking account, strictly speaking, is working capital which you continually turn over as you pay bills. Still, there is a residual amount below which you seldom go, say $1000 or $2000. If you maintain such a minimum, this could be included in an emergency fund. However, I would never keep an emergency fund in the same account as a checking account. This makes it too easy to disappear. An Emergency Fund is for EMERGENCIES.

When you buy stock, you buy a share of a business for better or worse and take your chances on whether or not it thrives. Of course most stocks are extremely liquid, so you can always get back cash. How much cash, however, is never predictable. It always seems to turn out that when you have to sell a stock in order to obtain cash, the market is down at that particular time. Stocks, therefore, should probably not be considered as part of an emergency fund. But if they are, they should never be carried at 100% of their current price.

Cash reserves in life insurance policies are savings in one sense since you can get them back at any time. To do so, however, you either have to borrow the money back, usually at 5% to 6% interest, or you have to cash in the policy and lose its protection. One problem in borrowing the money from the account is that usually the amount borrowed is “unplugged” from the investment and stops earning interest.

There are other hard-to-measure assets that many families have that might be included in an emergency fund, for example, money built up in a 401K or IRA or ROTH IRA. This is definitely an asset under certain conditions. But there are penalties associated with taking the money out.

If you don’t know exactly how much of these assets to include in your emergency fund, try making up a report on your available resources. You might arrive at two figures, the first being bona fide cash reserves readily available, the second being your ultimate resources available in extreme emergencies.

Building up an emergency fund before you start to invest will save you worry and probably save you money. With such protection you can buy good quality growth stock mutual funds, sit back and let them appreciate in their own good time. You won’t have the haunting thought that you might have to dump them at a moment’s notice. And remember, fate often decrees that when you have to sell at a time not of your own choosing, that will probably be just the worst time – the time when the market is temporarily depressed.