It goes without saying that when Chelsea sent me this article yesterday, I was excited to share it, but was also just generally excited about the prospect of making money on my own emergency fund. First, before we get into the dirty details, I want to clarify up-front what an emergency fund is. Also called a “rainy-day fund,” an emergency fund is the stash of cash you turn to in case of an emergency, but it is separate from your actual savings, and definitely separate from your checkings. I store my emergency fund within my savings account (though I wish I didn’t), but I know exactly how much is set aside for emergencies that I absolutely cannot touch. Having an emergency fund is crucial because it saves you from running up a huge credit card bill if you get hit with an unexpected expense.
One of the biggest problems people (or maybe just I) have with emergency funds is that your cash kind of just sits there. A recommended e-fund should include living expenses for three-to-six months, which means you could have anywhere from about $2k-$15k (depending on where you live, how many people you support, etc.) just sitting in your account. While it’s crucial to have it there in case something unexpected comes up (a medical bill, or job loss), it also means that your money is not necessarily gaining much interest. Most interest rates on savings accounts are very low (about .03%), and even high-interest rate savings accounts get you approximately a 1.05% return.
Recently, the article on Two Cents (which is part of Lifehacker.com) outlined this exact problem and provided a solution. The article says, “investing it [your emergency fund] is risky, because you need your funds to be liquid. One financial planner offers a solution: short-term bond funds.”
The piece cites a solution from Ellen Jordan, a certified financial planner and senior vice president at Bryn Mawr Trust, who spoke to Business Insider about the best place to put your emergency fund stash. On the subject of short-term bond funds, Business Insider says,
“They’re conservative investments that minimize the risk of losing money, and, unlike with some other investments, you can withdraw your funds instantly.
Quick access is essential, she [Ellen Jordan] emphasizes: ‘You don’t want to tie that money up. It literally is something that has to be available as quickly as possible, so putting it in something like a six-month CD doesn’t make sense.'”
For those who are interested in learning more about short-term bond funds, there are several articles that look further into which short-term bonds you should be buying now. Investor Place explains the value of short-term bonds, saying, “Conventional wisdom says that short-term bond funds are a smart fixed-income choice in rising-interest-rate environments. Interest rates and bond prices generally move in the opposite direction, and longer maturities typically have steeper price declines than shorter ones.”
Essentially, short-term bonds are a way to invest and make a smaller return (about 1.7%-3.6%, per Business Insider and Investopedia) while not overly exposing your emergency fund to the volatility of the stock market. It also means that your funds get to stay liquid, so they can be pulled immediately, which tying them up in a CD wouldn’t allow.
In the Business Insider article, Jordan also offers a solution for those who are very risk averse, but still want to put their emergency fund somewhere other than their savings account.
“‘If you are worried about price fluctuation of a short-term bond fund, then the most appropriate investment vehicle for your emergency reserve is a money market fund,’ Jordan says. ‘While money market funds are currently not earning much of anything, historically, that has not always been the case.'”
Overall, I think it’s exciting to consider the possibility of making some money off your emergency fund. If your emergency has $8k (which I’m just basing off my current emergency fund), and you earn a 3% return on it in the first year in a short-term bond fund, that’s about $240. The following year, if you earn another 3% — this time off $8,240 — you add an additional $247.20 to your e-fund. So, it has the potential to add up, if the interest stays comfortably between 1% and 3% without any dips. For those interested in making this money, I recommend sifting through as much research as possible, and potentially talking to a financial advisor, or someone at your bank (even on the phone) before transferring the funds, if possible. (And if you’re still working on saving your emergency fund, here is a helpful TFD article on specific ways to save for one.)
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