How to make more money with your emergency fund?
A prudent financial plan will always include setting some money aside as an emergency fund. Emergencies can happen at any time and having a little money set aside for them is extremely important. While many experts debate on just how large your emergency fund should be the generally accepted amount is between three and six months worth of income.
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This money needs to remain liquid; the funds should be readily accessible in the event of an emergency. But just because these funds need to be liquid does not mean that you should be content to receive no return on your money.
You can make more money on your emergency fund! The need to keep these funds liquid will limit your investment options to be sure, but there are still things that you can do.
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While in the process of building your emergency fund a savings account should be sufficient. A regular savings account will not pay a very large amount of money in interest, but as you are building the account your concern should be on accumulation, not growth.
As you build your emergency fund and eventually fully fund it you have a few more options. A money market account will offer a higher rate of interest while still allowing you complete access to your funds at any time. These accounts are actually more liquid than regular savings accounts, allowing you to access them by check as well as through withdrawals at your financial institution.
A relatively new certificate of deposit option, the “liquid CD” may also serve as a convenient place for your emergency fund. They earn a higher rate of interest than a savings account; they actually earn CD-like rates, with the unique advantage of being liquid.
Generally these certificate of deposit accounts allow you a one-time withdrawal of all or a portion of your money with no penalty. While these are a newer bank product not every financial institution offers them. In the event that an emergency occurs and you have need of some of the funds take all of them out and put them back into a savings account or money market. Do not allow your emergency fund to be tied up where you cannot access it.
Having an emergency fund is a vital part of your financial picture. The funds must be kept completely liquid- in the event of an emergency these funds cannot be tied up. Although the funds need to be kept completely liquid they need not sit without earning you some money. Look for a decent return, but remember to keep the funds liquid, and that it never makes sense to pay fees on these funds.