Given the recent global economic downturn and the difficulties that come with it – such as layoffs, which could result in several months of unemployment. A contingency fund can come in handy and is something that you will agree is worth the hard work and dedication it takes to build it. Without a moments notice, you can find yourself in a situation where having money set aside to help pay for expenses during a time of unemployment, illnesses or any other emergency will give you something to live on until you are back on your feet again.
To an extent, credit cards have been the go-to solution for many people in turbulent financial times. Using credit is simply not a good idea because credit cards can set you back even further. Many financial experts suggest having emergency funds that you can use to cover three to six months of expenses is necessary. The thought of living on credit cards for that amount of time is frightening and for many people could be impossible based on how much credit one has available to them and ability to make payments on their credit cards. Having credit cards shouldn’t dissuade you from building an emergency fund. Especially if you need funds for more than one month, you will need to come up with cash to pay your credit card bills to continue to use them.
A common concern most people have is the question of where to stash this emergency fund. The key elements of an emergency fund are liquidity and accessibility, not returns. That means stocks and mutual funds don’t always meet the needs of people in these situations. That doesn’t mean the funds can’t earn some interest while locked up somewhere! Here, we detail some of the most profitable places to keep your emergency funds
#1 Open a Savings Account
Your safest bet. Stashing your emergency funds in a traditional savings account is advisable if you’re not at ease with the risks that come with the other options. Since the risk is small, so are the rewards. You would virtually earn nothing as far as interest goes. But your funds are safe, reliable and accessible. Before opening a savings account with your bank, call them first to make sure they don’t have any monthly fee’s and to ensure that they do not set it up as an overdraft account.
Something else that some banks offer is to have your bank set up your checking account to round your purchases to the next dollar and deposit the difference. For example, if you buy something for $20.10, the bank will turn that into $21 and take that difference of 90 cents and move it into your savings account.
#2 Consider Online Banks or Credit Unions
Online banks and credit unions usually offer a slightly higher interest rate compared to the traditional brick and mortar bank in your neighborhood. The services fees are considerably lower with online banks as they have less overhead costs. Typically, with credit unions, the service fees, many times are nonexistent, but they may require an initial deposit between $25 and $100. Both options give you a little more growth opportunity for your funds, while the funds are still safe and reliable. Most online banks allow you to withdraw funds from an ATM, and some will even reimburse you for your ATM fees. If you don’t need more than your daily limit after business hours, you should be in good shape.
#3 Money Market Accounts
For a better interest rate, investing in a money market is an option you should consider. They have a relatively higher interest rate when compared to a typical savings account because the bank invests your savings in several types of funds, rather than just sitting in a savings account. Money market accounts have a considerably higher minimum deposit, and you may incur higher fees in service costs. You can withdraw money, but the frequency and amounts can be restricted to ensure funds stay in the account and the account continues to work for you.
#4 Certificates of Deposits
Some banks offer rates greater than one percent in Certificate of Deposits (CD). The major snag involved when dealing with CD’s is that you keep your funds for a definite period in the account. Terms are generally between one month to five years. And as we are expecting, the longer you keep your funds in the CD, the better your returns on investment will be. While this set-up doesn’t entirely fit with our core elements of emergency savings, there is an option known as CD Ladder.
CD Laddering is only buying at staggering maturities over several months or years. Creating a CD ladder helps make a little cash available in an online savings account or money market account for unexpected expenses. By setting up a CD Ladder, every six months or so each CD renews and is available to cash out, and if you need the money before your renewal date, the CD can typically be broken up for a small penalty.
#5 Treasury Bills
If you have a considerable amount of emergency funds and would like to diversify a little. Investing in a Treasury Bill is an option that can have a decent return. Treasury Bills allow you to purchase at a discounted rate and cash in on the full value after the maturity period. Typical treasury bills mature between 4 to 52 weeks. There is also a minimum amount you can start investing which is usually around $100.
#6 Savings Bonds
Compared to other forms of investment, savings bonds are commonly understood to be a long-term investment. The minimum period you can act before cashing in is typically one year. The minimum amount to get your account set up is considerably low at $25. Interest rates are usually attractive but can be with negative inflation. Another thing worth bearing in mind is that interest is taxable. There is a penalty for cashing in before the duration. Which is usually the forfeiture of the last three months of interest earn.
#7 Mutual Funds
The stock market comes with higher risks and greater returns when compared with the other options available. It can be volatile and certainly not advisable to put all your emergency funds into mutual funds. Mutual funds are much easier for beginners if you’re not too familiar with the dynamics of the stock market. And typically they require a smaller deposit amount than stocks do.
All of the above strategies involve some level of risk to earn better returns. What is most important is that you have funds readily available to fall back on if things turn sour. Consider diversifying your savings, so you have some immediately accessible. And some accessible within a few days and others maybe a few weeks, months or years.