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Ask any qualified financial planner and they’ll generally tell you to have at least 3 to 6 months of living expenses set aside in order to fund a “rainy day” in the future. This emergency fund is there to help you pay bills such as your mortgage, utilities, and groceries in the event you lose your job, become disabled, or to pay for an unexpected emergency (such as a car or home repair). Some folks may need greater than 6 months expenses if they lose a job that may be hard to find again or a single income family that relies on one individual’s income.
The question then becomes where to invest that emergency fund. Generally, the fund should be liquid. That is, the individual should have easy access to the money without having to wait days, weeks, or months for to get access to cash. For example, one of the best places to put your emergency fund is in a checking or savings account. Many banks and credit unions offer separate account for various savings reasons. It’s also FDIC insured up to $250,000 and up to $500,000 in a joint account.
Don’t expect to earn a lot of interest on this money. If it’s deposited in a general savings or checking account expect anywhere from .10% to .25% on that money. The point is not to have that money earn high rates of return which generally means more exposure to risk – which is what the emergency fund should not be exposed to at all.
For example, if an individual held their emergency fund in an aggressive stock mutual fund (not recommended) the individual may experience better returns on their money, but they are also exposed to the risk of the fund declining in value during a market crash or correction.
If this was to happen and the individual needs access to the funds (say, for living expenses since they were laid off in the down economy) they may only have access to a fraction of the money they originally used to fund the account. This only adds to their stress.
Since it’s for emergencies only and not for your retirement, consider putting your emergency fund in safe, liquid, FDIC insured accounts at your bank or credit union.