Saving up six to nine months’ income for an emergency fund is a significant undertaking. And, you’ll want to make sure that you invest your emergency fund-and all your money, for that matter, in the best possible accounts. Hopefully, we all understand that some accounts are better than others for maximizing your money.
The 1990s was a banner decade for the stock market. We sat back and watched it climb higher and higher and higher-knowing all the while that the high times couldn’t possibly last forever. They didn’t. The market dropped dramatically in 2000, hopefully sending the clear message to everyone that it’s important to diversify your investments. It’s really important, especially considering the present uncertainty of the stock market after the terrorist attacks in September 2001, to have some money in funds that aren’t subject to the whims of the stock market.
A client keeps his new car fund in an equity fund, also called a stock fund. This is a mutual fund that limits its investments to shares of common stock. The risk factor of these funds varies, depending on the type of stocks in which the funds invest. The fund had done well until 2000, when it tanked with a 19 percent drop. Goodbye Lexus, hello Honda.
Money such as what you have in an emergency fund, a new car fund, or new house fund, should be invested in a money market fund. A money market fund is a mutual fund with a nonfluctuating $1 investment value per share. That means that you buy a share at $1, and sell the share later at $1. Like a savings account, if you put $800 into a money market fund, you’ll get $800 out-plus the interest.
Money market funds are good, safe choices for short-term investing. Your original investment is fairly secure, while you earn competitive interest rates. Money market funds aren’t the most exciting investment vehicles, but they assure that your money will be there when you need it. That’s why they’re desirable accounts for money such as an emergency fund, which needs to be kept at a constant value.
Money market accounts usually pay more interest than savings or checking accounts at the local bank. And most money market funds permit some check writing, though they may set a minor check minimum-$500. Some money market funds are now insured, so be sure to check with your bank or credit union.
Certificates of deposit (CDs) typically pay higher interest than bank accounts, and some pay more than money market accounts. The problem with using CDs to store your emergency fund account is that, if you need the money and have to withdraw it from the CD before the specified investment time ends, you’ll be penalized-perhaps severely. If there’s a hefty penalty, it’s possible that you could end up with less money than you had invested.
There are various types of money market funds. Some are invested in only U.S. Treasury obligations and are not subject to local income tax liability. Some are invested in municipal bonds and similar investments, so they are known as tax-free investments. If you purchase a tax-free mutual fund that participates only in investments within your state, the fund is called a triple tax-free fund. That means it is not subject to federal, state, or local income tax. If you’re in one of the higher tax brackets, this kind of money market fund might be something you’ll want to consider.
Current Savings Account Rates: