Where Should I Keep My Emergency Fund – And Why?

Where Should I Keep My Emergency Fund – And Why?

By Trent November 25, 2013

I consider an emergency fund to be an essential personal finance tool. Everyone needs to have some cash reserves for those unexpected moments so that you’re not living off of a credit card due to an unexpected unemployment or illness or automobile repair or emergency travel or any of a million other emergencies that can take us by storm.

(If you don’t have an emergency fund and would like to get started, I highly suggest reading this detailed guide to starting an emergency fund that I wrote a while back. It’s easier than you might think to get started!)

One of the most common questions people ask me is where to store their emergency fund.

When people look at the interest on savings accounts today – usually around 1% – they understandably feel underwhelmed when they see stocks returning 10% a year and reaching all-time highs. They think to themselves – again, understandably – that if they have this lump of cash sitting around, they should have it sitting somewhere where it can earn a better return than the 1%, and they usually eye the stock market.

Other people have other ideas. Maybe they should store it in their mattress. Maybe they should buy gold with it. Maybe they should have it in certificates of deposit at their banks.

I’m going to walk through some principles of a healthy emergency fund that should help you to eliminate some of these options and give you a healthy place for your emergency fund.

It needs to be liquid.
In other words, you need to be able to actually convert it to cash in your hand extremely quickly.

This is why investments like real estate tend to be poor uses for an emergency fund. You can’t simply sell a property extremely quickly without taking a loss on it because that’s not how the real estate market works.

The king of liquidity is having cash in your hand. After that, having cash available at any ATM is pretty good. Almost everything else is less liquid. For example, stocks generally have to be sold, then cash has to be transferred away from your brokerage, which can take a few days. Gold or precious metals require you to have a broker who will buy it from you.

For this, cash and a savings account come out on top, real estate comes out near the bottom, but many other things are pretty solid.

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