Life is full of unexpected surprises — and sometimes the unexpected can be costly.
That’s why it’s crucial to save for a rainy day in the form of an emergency fund.
Where is the most efficient place to stash that three to nine months of living expenses?
They’re conservative investments that minimise the risk of you losing money, and, unlike other investments, you can withdraw your funds instantly.
Quick access is essential, she emphasises: “You don’t want to tie that money up. It literally is something that has to be available as quickly as possible, so putting it in something like a six-month CD doesn’t make sense.”
With short-term bond funds you’ll also earn more interest on the money than you would if it were sitting in a checking, savings, or money market account, Jordan explains.
According to Investopedia, the top short-term bond funds have 10-year annualized returns ranging from 1.7% to 3.6%. To put that into perspective, the “big banks” out there — Bank of America, Chase, Citibank, and Wells Fargo, to name a few — usually offer an interest rate of 0.01% on savings accounts, while high interest savings accounts typically offer rates around 1%, up to 1.25%.
Short-term bond funds are going to be a slightly riskier option than a traditional checking or savings account, or a money market fund.
“If you are worried about price fluctuation of a short-term bond fund, then the most appropriate investment vehicle for your emergency reserve is a money market fund,” Jordan says. “While money market funds are currently not earning much of anything, historically, that has not always been the case.”
If interest rates move back up, money markets will start to yield more and can be a perfect place to put your emergency fund, she notes.
The bottom line: Stash your money in a short-term bond fund — you can do so with Vanguard, Fidelity, or Charles Schwab — unless you’re “very risk-averse,” Jordan says. In that case, go with a money market fund. Above all, she says, avoid putting your emergency fund in savings and checking accounts, where it will grow by a negligible amount.