Safe and Liquid Options for Your Emergency Fund (2024)

An emergency fund can help you stay on good financial footing when you face unexpected costs like medical bills or car repairs. But if you want to invest these funds so that they earn money, you'll also want to ensure you can access them quickly and easily so that you can use them for emergency expenses.

Liquid assets like money market accounts, high-yield savings accounts, and CDs are among the ways you can invest your emergency fund money so that it can grow and remain accessible. Learn more about your options for investing emergency funds.

Key Takeaways:

  • An emergency fund should ideally be enough to cover three to six months' worth of necessary expenses.
  • Emergency funds should be easily accessible so that you can use them to cover unexpected expenses.
  • You can invest emergency funds in more liquid assets so that you can earn money and convert the assets into cash quickly.
  • Consider avoiding more volatile investments with emergency funds because you may be forced to sell at a loss when you need the money.

Benefits of Liquidity for Emergency Funds

When considering investment options for your emergency fund money, aim for assets that are more liquid, or ones that you can convert into cash quickly and easily without a withdrawalpenalty.

Emergency funds that are easily accessible will ensure you can use the money when you need it. You can keep your money in a checking account or savings account, so you can pay for an emergency expense immediately. But there are ways to invest emergency funds so that they can earn returns.

If you invest in less liquid assets like real estate, it can take time to access the cash. You may not be able to sell non-liquid assets quickly enough to pay for an emergency expense. You may have to sell at a loss or incur penalties to access your money.

Most financial professionals recommend that you avoid investing youremergency fundin stocks because they are fairly volatile. So, if you need to sell your stocks to use the money for an emergency expense, you may be forced to sell at a loss. Bonds are generally less volatile than stocks, but they may take time to sell.

Let's look in more detail at ways you can invest your emergency fund for safety, liquidity, and returns.

Ways to Invest Emergency Funds

Keeping your emergency fund in a traditional checking or savings account can be an ideal way to protect your money so it will be there when you need it.

However, if you want to try to earn returns, which can help prevent losses due to inflation, you can consider other investment choices like a money market account, high-yield savings account, or CD.


Interested in more guidance about investing for your future? Order a copy of Investopedia's What To Do With $10,000 magazine.

Money Market Accounts

Money market accounts are interest-bearing accounts at banks or credit unions that are a sort of mix between a checking account and a savings account. They are considered low risk so they can be ideal for an emergency fund. Money market accounts can provide APYs of about 3% to 4%.

Most money market accounts areinsured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA), which means your money will be protected up to $250,000 per account.

Some banks offer money market accounts that come with debit card and/or check-writing privileges, which gives you instant access to your funds. You often can make a certain number of free withdrawals per month as well.

High-Yield Savings Accounts

A high-yield savings account, often offered through online banks, can also provide returns while keeping your emergency fund safe.

These accounts generally provide higher interest rates than traditional savings accounts. You can earn 3% to 4% from many high-yield savings accounts compared to an average APY of about 0.3% from traditional savings accounts, according to the FDIC. Money in a high-yield savings account, including online-only accounts, is typically FDIC-insured.

You can usually access the money through an online funds transfer, outgoing wire transfer, telephone transfer, or check request.

Be aware that if you use an online-only account, you cannot access your funds at a branch location. Some methods of accessing emergency savings in an online-only account may take several days.

Certificates of Deposit (CDs)

A certificate of deposit(CD) can also provide more interest than keeping your money in a checking account. Like a money market account and high-yield savings account, a CD offers FDIC protection for up to $250,000 per account.

Generally, CDs with longer maturities (such as five years) have higher interest rates. However, one drawback with keeping an emergency fund ina CDis that you usually must pay a penalty to cash out a CD before it matures, which makes it more difficult to access your money if you need it immediately.

For example, the early withdrawal penalty on a five-year CD might be six months’ worth of interest. If you cash out the CD before you have even earned six months’ worth of interest, the bank may take the penalty out of your principal.

Creating a CD ladder, where you buy several smaller CDs that mature at different intervals instead of one large CD, can help you increase liquidity and avoid or minimize early withdrawal penalties.

Some banks offer no-penalty CDs that let you withdraw your money without sacrificing any of the interest you have earned. You may earn a lowerinterest ratethan you would with a regular CD, but your funds will be more liquid.

How Much of My Emergency Fund Should Be Liquid?

Financial advisors often recommend keeping at least three to six months' worth of expenses in cash in highly liquid assets so that you can use them in an emergency, although the amount will vary depending on your situation.

Is $10,000 Too Much for an Emergency Fund?

The more money you have in an emergency fund, the better protected you will be if you face unexpected expenses. The amount you need for an emergency fund will depend on your own personal circ*mstances and financial obligations. If you have $10,000 in monthly expenses, it likely won't be enough as financial advisors recommend you have from three to six months' worth of expenses in an emergency fund. However, if your monthly expenses are $2,000, a $10,000 emergency fund may be more than enough.

Can I Put My Emergency Fund in Stocks?

You can put some of your emergency fund in stocks to try to earn money if you have a significant amount saved. However, keep in mind that stocks are fairly volatile, so you may have to sell at a loss if you face an emergency expense. Also consider that selling stocks can typically take several days, so you won't be able to access the cash instantly. Consider keeping some of your emergency fund in a more liquid asset like a money market account.

The Bottom Line

Emergency fund money should be safe and easily accessible. So, if you want to invest these funds, aim for lower-risk investment choices.

For more guidance on how to invest your funds according to your personal situation and goals, consider consulting a professional financial advisor.

As a financial expert with a comprehensive understanding of investment strategies and emergency fund management, I'd like to delve into the concepts discussed in the provided article about investing emergency funds. My expertise stems from years of practical experience in the financial sector, guiding individuals towards making informed decisions to secure their financial well-being.

The article emphasizes the importance of maintaining an emergency fund to cover unexpected expenses like medical bills or car repairs. It suggests that an ideal emergency fund should be enough to cover three to six months' worth of necessary expenses. Furthermore, the funds should be easily accessible to be used when needed.

One key aspect highlighted in the article is the concept of liquidity for emergency funds. Liquidity refers to the ease with which an asset can be converted into cash without significant loss. The article recommends investing in more liquid assets to allow for quick access to funds. The mentioned liquid assets include money market accounts, high-yield savings accounts, and Certificates of Deposit (CDs).

Let's break down the concepts mentioned in the article:

  1. Liquidity for Emergency Funds:

    • Liquidity is crucial for emergency funds to ensure quick access to cash when needed.
    • Easily accessible funds can be kept in checking or savings accounts.
    • Non-liquid assets like real estate may not provide quick access to cash during emergencies.
  2. Ways to Invest Emergency Funds:

    • Traditional checking or savings accounts are considered safe for emergency funds.
    • For potential returns and to combat inflation, other investment options include money market accounts, high-yield savings accounts, and CDs.
  3. Money Market Accounts:

    • Interest-bearing accounts with characteristics of both checking and savings accounts.
    • Low risk and considered ideal for emergency funds.
    • Often insured by the FDIC or NCUA.
    • Provides APYs of about 3% to 4%.
    • Some offer debit card and check-writing privileges for instant access.
  4. High-Yield Savings Accounts:

    • Offered by online banks, providing higher interest rates than traditional savings accounts.
    • Typically FDIC-insured.
    • Accessible through online transfers, wire transfers, telephone transfers, or check requests.
    • Potential drawback: Some methods of accessing funds may take several days.
  5. Certificates of Deposit (CDs):

    • Offers more interest than keeping money in a checking account.
    • FDIC protection for up to $250,000 per account.
    • Early withdrawal penalties may apply.
    • CD ladders can increase liquidity and minimize penalties.
    • Some banks offer no-penalty CDs for more immediate access.
  6. How Much of Emergency Fund Should Be Liquid:

    • Financial advisors recommend keeping at least three to six months' worth of expenses in highly liquid assets.
    • The amount varies based on individual circ*mstances and financial obligations.
  7. Consideration for Investing in Stocks:

    • Stocks are considered volatile, and selling them may result in losses during emergencies.
    • Accessing cash from selling stocks typically takes several days.
    • Suggested to keep some of the emergency fund in more liquid assets like money market accounts.

In conclusion, the article underscores the importance of safety and accessibility for emergency funds. While investments can provide returns, lower-risk choices are recommended to ensure the availability of funds during unforeseen circ*mstances. Individuals seeking personalized advice are encouraged to consult professional financial advisors for guidance tailored to their specific situations and goals.

Safe and Liquid Options for Your Emergency Fund (2024)


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