Every financial advisor recommends having an emergency fund, but in what type of account or investment vehicle should you keep this emergency fund? Money guru Suze Orman, who encourages people to set aside 12 months of living expenses in their emergency funds, has some stern tips on where to avoid storing them.
A brokerage account is an investment account that allows you to buy and sell different types of investments, including stocks, bonds, mutual funds, and ETFs. This is a bad place to put your emergency fund because it ties up your money in investments, leaving you unable to access it in, well, an emergency. This type of account is better suited for a long-term investment strategy.
Long-Term U.S. Treasuries
Long-term U.S. Treasuries are fixed-rate U.S. debt issued by the U.S. Treasury, with maturities greater than 10 – and up to 30 – years. These can be great vehicles in an investment portfolio that feature long-term assets and strategy. It’s not good for an emergency fund, because again, it’s long-term and the whole nature of an emergency is that it can happen out of nowhere. Short-term U.S. treasuries, on the other hand, may be a good idea, in Orman’s opinion, the Ascent, A Motley Fool service, reported. Treasury bills (also called T-Bills) can have very short terms – as minimal as 4 weeks.
Don’t Let Your Emergency Fund Get Too Big
Keep in mind that emergency funds can actually get too big, and Orman is particularly conservative in her recommendation that people save up to 12 months of living expenses. Once you’ve set aside 12 months in emergency savings, it’s important to take the next step, and that’s to begin putting your money to work. Savers may want to start paying down debt (prioritizing high-interest debt), as well as focusing on their 401(k), IRA or other tax-advantaged accounts. They should also look at stashing extra cash in Certificate of Deposit accounts (CDs) and I bonds.
Additionally, once your emergency fund begins to overflow, you can safely explore some of those longer-term investment vehicles that Orman cautioned against — for the safekeeping of the excess amount.
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