How Engineers Can Make The Most Out Of Their Emergency Fund

Emergency funds: it’s one of the basic things we’re told to do once we begin having a stable source of income. Usually, you’d set aside 3 to 6 months of expenses, all for that “just in case” moment that no one can predict will happen, i.e. medical bills, unexpected taxes, or a sudden job loss. And the more unstable your job is, the higher you’d want that emergency fund to be. And it makes sense. Your first financial line of defense is having money on hand with you to spare. It always comes in handy in times we least expect events to go down.

However, this doesn’t come without drawbacks. A lot of financial experts argue that leaving quite a lot of money in the bank means it isn’t going to grow. And that goes against every principle of investing and earning. If that fund is any more than $5,000 in cash, you’re literally just leaving money on the table.

Source: Business Pundit

Take this, for example: if you have a $15,000 emergency fund, leaving it in a current savings account usually earns only 0.01% annual interest. So in the next year, you’ll only have $15,001.

However, if you leave that money on an investment account with a 7% return, that $15,000 this year will become $16,050 next year. That’s more than $1,000 extra! And the year after that, it’ll grow to $17,173.50! It stacks up over time, and you’ll end up earning so much extra by just leaving it there for a few years.

So now that we know this, how do we make money off of our emergency funds? Well, the answer is simple: keeping that cash on a high-yield savings account. It’s safe, easy to access, and skips the risks long-term investment accounts have, such as mutual funds.

Sadly though, unlike the previous decades, it’s rare to find banks with high-interest savings accounts that offer more than a 1% interest. Still, 1% is better than 0.01%, and you might find some that offer just a little higher than that.

Source: LifeHacker: Two Cents

Before you apply for this kind of account though, keep in mind these 5 things to look out for, just so that you know you’re getting the most out of your money:

1. Does the bank require a certain initial deposit amount? Also, does it have a minimum amount you can have in your account, and will you be charged once your balance goes below that?
2. Is the interest truly a permanent rate, or is it just an introductory rate. Make sure to read the fine print. You never know when that 5% interest only holds true for the first 6 months.
3. Is it easy to access these funds once they’re in there? Emergency funds need to be easy to access at any given time, so don’t compromise that.
4. Are there any other specifications you need to be aware of? Like being able to only withdraw a maximum amount or a certain number of times from that account? Again, read all the fine print.

Now that that’s out of the way, it’s time to get investing!

Sources:

Forbes