If you don’t want cash just sitting in your checking accounts. You wonder what are viable and safe investment options that maintain liquidity (meaning you can withdraw and use them at any time)?
Do you wonder where to park your emergency funds?
In this article, I want to share my view on how I invest and grow my emergency funds in a safe way while still being able to withdraw them at (almost) anytime.
Mistakes About Emergency Funds
Mistake #1: I kept too much cash in emergency funds, way more than 3-6 months of monthly expenses. That money would have been better invested.
Additional Reading: How much should I save, and how? (Part 1). I talked about my money regrets regarding saving vs. investing.
Mistake #2: I put the funds in regular bank accounts, causing the money to deflate over time when considering inflation.
Mistake #3: The money sat in regular accounts for more than 5+ years. I lost the opportunity to invest that money during those 5 years.
Now that we’ve recognized what went wrong, what would be the correction?
Understand Your Monthly Costs and Spending Habits
Step 1: Do the basic homework first. Understand your monthly expenses, how much you spent, and your spending history over the last three months.
Step 2: Understand how you pay for those purchases. Are they paid by credit card or cash? Determine how much cash you need to pay by cash.
- Expenses that need to be paid in cash → Should be readily available.
- Expenses that can be paid by credit card* → Should be available when the credit card bill is due every month.
*Disclaimer: You must be very disciplined about paying credit card bills every month to make credit cards work for you.
Maximize the growth of your emergency funds with high-yield savings accounts or T-Bills
My current strategy is to keep enough cash, about 1-2 months of emergency funds, in my bank accounts.
The money for short-term needs, about 4-6 months of monthly expenses, is deposited into a high yield savings account. Alternatively, I purchase 4-week T-Bills from Treasury Direct.
In this way, I don’t leave too much short-term money uninvested, while maintaining the flexibility to use it when needed.
