An emergency fund is a must-have before you start investing. In fact, you should have one even if you don’t plan on making an investment just yet.
This fund is kept as a fallback in case something unexpected happens and you need money to cope. That means that it should be very liquid, so you won’t have a problem accessing your funds fast. But where should you keep your emergency fund?
Deposited in a bank account
Bank accounts offer very high liquidity. If you need to use some of the money in your fund, withdrawal is just a trip to the ATM or bank branch away. You could even transfer money online.
Some banks offer accounts which come with an interest rate higher than the typical savings account. For more convenience, application for such accounts is usually fully online.
Many people keep their emergency funds in a bank account for the convenience, high liquidity, and the security (thanks to things like the mandatory deposit insurance from the Philippine Deposit Insurance Corporation or PDIC) they provide.
Invested in a money market fund
You may want to use your emergency fund to earn a little more without losing liquidity. If so, you can consider placing your money in a Money Market fund.
A Money Market fund is a pooled fund whose portfolio is composed of highly liquid underlying assets such as deposit substitutes and near-term government or corporate securities. Taking money from your investment in this fund can usually be done in the same day, depending on what time you transacted.
If you place your emergency fund in a Money Market fund, you may see it grow at a rate faster than that of a bank account. Though investments aren’t guaranteed or insured, you are taking on a very minimal amount of risk, especially if you choose a money market fund investing heavily in short-term government securities.
Split between the two
If you’re having a difficult time choosing between the two options, splitting your emergency fund between the two is a viable choice. You’ll not only enjoy the benefits of both, but also further diversify your emergency fund.
If you do this, you’ll have to assign an amount to each that would leave you comfortable with the balance of risk and reward.
Keeping an emergency fund in both a bank account and a Money Market fund is something that is increasingly being done by investors. Remember also that the latter is a good place to keep the cash component of your portfolio while you wait for good opportunities to invest in products that may give higher returns.
This will also help you compare their performance over time, which can help you decide better where to put more funds if you need to beef up your emergency fund.
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