Should You Invest Your Emergency Money?
Ask Money Girl: Should I Invest My Emergency Money?
A podcast listener named Joel has six months’ worth of living expenses in a savings account that earns 1.3% APY (annual percentage yield) and wants to know:
Q. Is it unreasonable to invest my emergency money in an index fund? If so, what should I do if I want the value of my emergency fund to keep up with inflation?
A. The goal for an emergency fund is to keep it super safe so it'll be there when you need it. The best place to stash your emergency cash is in a high-yield FDIC-insured bank account, just like you’re doing. As far as inflation goes, we’re not facing it in the short-term. In fact, deflation seems to be more of a concern. When we do see inflation, interest rates will go up, and so will the yields on bank accounts. So don't make any moves due to a fear of future inflation right now.
If you're bound and determined to get a higher return on your cash, I would invest no more than three months' worth of your living expenses in an extremely conservative investment and hold the remaining three months in cash. Another option might be to put half of your emergency money in a short-term CD, if you can find one with an interest rate that exceeds the rate of your current savings account.
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