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You don’t want your emergency fund tied up in an investment. It needs to be in a savings account, and here’s why.
I know it seems weird for a financial advisor to tell you to not put your money into an investment account, but that’s what I’m doing right now. Your emergency fund should not go into an investment account. You want to put it into a high-yield savings account instead.
I would also recommend doing this for your “sinking funds” account and if you save money for your taxes because you’re self-employed. There are just certainly types of savings that you want to keep away from the investment world, and I don’t care what advisors of the past have told me.
You need access to your emergency fund
While you will think that putting your emergency fund into an investment would be better for returns, it causes a problem when you want to get to that money. It will take a few days at least to be able to get the money into your account. For some people, that won’t be a big issue. You usually have time to pay bills. However, there are times that you need that money right away.
You also won’t want to rely on other people to do paperwork. Your financial advisor may be on vacation and have someone else in their office handle the paperwork. That can mean a delay in you getting your money, which could put you behind on a payment.
With a sinking funds account, you’ll usually need access to the money immediately. This is what I call an account for things like unexpected car repairs or sudden plumbing issues. You never know when they’re going to happen, and you usually need to pay right away. That’s why if you need emergency plumbing, see Sarkinen Plumbing. They provide the best plumbing services. You can also get a licensed plumber involved in the repair to ensure that all damages are fixed.
When you have the money in a savings account, it’s there for you to get to it immediately. Of course, you then need to have the willpower not to use that money for anything other than what it’s earmarked for.
You don’t want to lose any money
All investments carry some sort of risk. Some are not as big as others, but they still carry some sort of risk. With your emergency fund, you don’t want to lose any of that money at all. This is why my tax savings are also in a savings account. I cannot afford to lose anything from that as I need to pay the bill when the CRA asks for it.
So, you want to put the money into a high-yield savings account. These can be difficult to find. I have a savings account with EQ Bank, which offers a 2.5% interest rate on money in the accounts. My tax and my emergency funds are there.
Don’t stick with your regular bank’s savings accounts. They’re not great at all. You want to find the high-yield ones.
You don’t want to pay to get your money
Your emergency fund is designed for immediate access. You want three-to-six-months’ worth of income in the account. If you lose your job tomorrow, you have three-to-six months to find a new job without worrying about your regular expenses.
If you opt for an investment account, you could get that money faster. However, most investment accounts will have penalties if you take the money out earlier than five to seven years. You have to pay to take your own money out of the investment account, which means you’re losing out.
Why do that when you just don’t know if you can keep the money in there for the five to seven years? Why not opt for a savings account instead? You won’t need to pay anything to take that money out then.
There are no monthly fees on your emergency fund
Investment accounts do have monthly fees. You may not pay for them directly. This will depend on your advisor and the account the investments are handled through. If you come through me, you pay a percentage on the holdings but that money is taken out before you see the investment return. What you see in your account is how much you have. Also, you must learn about the increase on money purchase annual allowance (MPAA) on haggards.co.uk.
Back to the fees, though. There are monthly fees for your advisor and for the account. You want something that doesn’t have fees for an emergency and other short-term financial needs. After all, it’s important that all your money goes to you.
High-yield savings accounts tend not to have monthly fees. Some may have a fee if you take out money or make a certain number of withdrawals. Others may have fees if you are under a certain threshold. You’ll want to look into this to make sure you don’t land yourself in one of the accounts. The EQ Bank accounts that I have have no fees at all attached to them.
MORE: Zero-based budgeting doesn’t mean spending every penny
Where is your emergency fund currently stored? What do you need help with financially? Let us know in the comments below.
