The best options to keep cash safe, but still working hard for you.
This show is about the best places to keep your cash safe, yet still working hard for you.
Build Your Financial Moat
In the last episode I discussed the importance of building up an adequate emergency fund. I think about emergency funds as serving the same purpose as a moat that surrounds a fort or castle. This water-filled barrier fortifies and protects the structure from invaders. Emergency funds can help keep our household financially safe from harmful circumstances that might show up unannounced in the middle of the night as well.
The definition of an emergency is a sudden, unforeseen crisis that requires immediate action. So when we’re talking about money that you put aside for an emergency fund, there are some special considerations for the best way to handle those funds. If we’re ever faced with a situation such as the loss of a job or business, time is of the essence. Emergencies just can’t wait for a CD or bond to mature, or for you to sell a valuable asset. Emergencies also don’t want to hear that your cash may have shriveled up in a declining stock or mutual fund. The bottom line is that emergency reserves are a special kind of short-term savings fund that must be kept completely safe and secure for the unanticipated predicaments of life.
Emergency Fund Considerations
A useful emergency fund has three criteria:
It should be large enough to get you through the crisis
It should be easily accessible
It should be held in cash
So where can you stash your cash for the best combination of liquidity and safety? You could keep it in your mattress for the ultimate in accessibility. But that’s too accessible for most people. It might be too tempting to spend cash that you have sitting literally right under you! And remember that cash kept at your home is usually not protected against theft, fire, or other damage.
However, keeping a small percentage of your emergency funds at home can be a wise idea. Consider being prepared for a situation such as a natural disaster that could make getting to your cash difficult or impossible. For example, in a hurricane or flood, local banks could be temporarily closed. Or if there’s an ice storm that causes widespread power outage, ATMs near you may not be working. People who live in rural areas may have difficulty getting to banks during times of challenging weather. Mother Nature dishes out lots of reasons for us to keep a reasonable amount of emergency money in a safe place at home in order to survive her occasional tirades.