Emergency fund with better returns yet safe
It is a common rule-of-thumb to keep 6 months of expenses in cash as emergency fund. Sometimes the recommedation is 3 or even 12 months. Is there a better way than parking that cash in the bank?
Savings and checking accounts pay very little interests while guaranteeing that every dollar stays a dollar regardless of what the stock market does, i.e. FDIC1 insured. How can we have both FDIC and higher interest rates?
One solution (for a 6-month fund) is to setup six auto-renewing 6-month-maturity certificates of deposits (CDs) of same the balance, each maturing on the same day of the month for 6 consecutive months. For example, Jan 28, Feb 28, March 28, …, and June 28. CDs are FDIC insured. The liquidity issue is solved by:
- Having staggered maturity dates mean each month there is one month worth of fund available in case of emergency.
- If more than one month of fund is needed, CDs can generally be cancelled without losing the principle, but just some or all of the accrued interests.
This post is part of an ongoing series on my investing career, which consists of three stages: design, grow and withdraw.
I am not a financial advisor. Do not take my words as financial advice, ever. Please do your own research and/or consult a professional before making any financial decisions.