Brad Tinnon

Brad Tinnon

Where To Invest Your Emergency Fund

Last updated 8/18/2021

Have you ever wondered where to invest your emergency fund? We’ve all likely heard that we need to have a 3 to 6 month emergency fund, but where exactly should this money be invested. In this post, I’ll identify the journey that we’ve taken clients down and how we’ve recently changed the advice we give.

WHAT IS AN EMERGENCY FUND?

First of all, let’s define what an emergency fund is. An emergency fund is a pot of money that is set aside for a “rainy day”. More specifically, it’s money that can be used for any type of emergency that arises such as a job loss, car repair, house repair, vet bill, etc… And by having an emergency fund, you eliminate the need of having to put money on credit cards or borrow from an investment account.

HOW MUCH DO YOU NEED?

The amount you need in an emergency fund varies from person to person.

A single person may want to have at least 6 months of expenses saved in an emergency fund.

A married couple may only need around 3 months of expenses if both are employed. This is due to the fact that even if one person loses their income, there is a backup source of income from the other spouse. 

A person in an insecure job should err on the side of having a much larger emergency fund. Perhaps 6 to 12 months of expenses.

A person in a very high paying job may also want to have a larger fund as it would likely take them much longer to find an equivalent paying job.

As you can see, each person’s situation is unique. 

THE ADVICE WE USED TO GIVE

Once you’ve determined how much of an emergency fund you need, then you have to determine where to invest this money. Should it be in a checking account, savings account, CD, money market, investment account, etc?

We believe the best place to park this money is in an FDIC insured (or NCUA insured for credit unions) interest bearing account. Safety is of utmost importance. You wouldn’t want to expose this money to a volatile investment that could be significantly down right when you need it the most.

In the past, we recommended that clients put this money in the Capital One 360 Savings Account. At the time they were paying a very competitive interest rate. Today the rate is at 0.40%.

In addition, for some reason, Capital One decided that you cannot title or list a beneficiary in the name of a Trust. So, if you’ve spent money on a Trust to get your estate planning goals in order, then you would be out of luck with Capital One. 

THE ADVICE WE NOW GIVE

Based on that, we have started recommending that clients use an Ally Bank Online Savings Account. They are FDIC insured, are paying an interest rate of 0.50%, and you can title the account or list a beneficiary in the name of your Trust. 

CONCLUSION

Your primary goal is not necessarily to make money on the account, but instead it’s to invest the money in a very safe manner and to make sure you are not going to create any estate planning issues down the road. And for our clients Capital One was no longer fitting the bill.

Please feel free to share comments, questions, or experiences below.

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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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