Find out how much emergency money you need, the best places to put it, and whether investing it is a smart financial move.
Free Resource: Online Bank Comparison Chart (PDF) - includes high-yield savings options
Should You Invest Emergency Funds?
Since you don’t know whether you might need to tap your emergency fund next week, next year, or in 10 years, I recommend that you keep your 3-month living expenses amount as pure savings. Once you save more, you can consider investing amounts above that threshold.
Brittany didn’t mention her household income or monthly expenses, but let’s say their living expenses are $6,000 per month. In that case, their emergency fund of $40,000 would last over 6 months.
My recommendation is that they keep at least 3 months’ worth, or a minimum of $20,000 in their current savings account. If she and her husband both feel strongly about getting more return on the remaining $20,000 (even if it means taking on more risk), they could consider some conservative investing options.
Where to Invest Emergency Funds?
One suitable place to invest emergency funds is a short-term CD or certificate of deposit. They give you a guaranteed rate of return, but don't allow you to access the money during the term, such as 3 months, 6 months, or 5 years.
In general, the shorter the term the less a CD pays. So only put your emergency money in a CD if it pays much more than your current savings rate.
I created the Online Bank Comparison Chart (a free PDF download) that includes some high-yield savings accounts. They're great options for your emergency money and pay more interest than most short-term CDs right now!
In How to Invest Money in Your IRA or 401k Retirement Account, I cover how to choose investment funds for your retirement account. The same concepts apply when picking funds for a non-retirement account.
Stock funds are the riskiest type of fund, so look for more conservative options, such as balanced funds or bond funds to get some account growth, while you keep it fairly safe from potential losses.