If you have started the Dave Ramsey 7-step plan to wealth, you have most likely asked yourself, “Ok, I have saved up my emergency fund, but where do I put the money?” This is a great question that I have often asked myself as well. The current yield on an average checking account is something like 0.02%; meaning that if you have $1,000 in your account, the bank will pay you a whopping 20 cents for the year. Yep, that’s 20 pennies from the interest. Clearly, this isn’t a wise place to park your money.
Where can we put our money so that it yields greater interest? Well, this is a correct question to ask, but it’s not the only question. There is another portion to the equation. Not only do you want a high yield, but you also need your funds to be liquid in the event that there is an emergency. Let me explain. At this current moment in time, a house could be a great investment. The prices are rock-bottom and the interest rates for loans are at an all-time low. But, if you invest your emergency funds in a property, there is no quick way to retrieve that money. At the very least, your money is tied up for months, perhaps even years. This just isn’t a valid option for an emergency fund investment.
Another investment vehicle you may hear a lot about is mutual funds. Because they are naturally diversified, it is a much safer investment, but this is still not a place to park your emergency funds. Just like the stock market, mutual funds rise and fall and could leave you with fewer dollars than when you initially invested.
Your emergency fund should be making more than 0.02% interest per year, but don’t expect it to yield 15%. At this point in time, if your emergency fund makes more than 1.2% interest and is completely liquid, you have done well. Take a look at the money market and the best instant access savings accounts. Currently, Capital One Bank is offering 1.35% interest if you invest more than $1,000 with them. Likewise, American Express Bank is offering 1.3%, but there is no minimum investment.
Online savings accounts are great too, but make sure you do your research. You may find some excellent rates, but you may also never see your money again.
Also, make sure that your account offers you the option to write at least two checks a month without penalty. For most money market accounts and online savings account, this shouldn’t be a concern, but if you decide to venture into Certificates of Deposit (which may be another good option, but most do not offer the ability to remove your money without penalty), you will most certainly want to make sure that you look into this.
If you follow this advice, as well as the advice within my related articles, you will certainly be on your way to becoming debt-free.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.