Keep it simple and safe
Dear Dave: My husband and I finally have our full emergency fund in place. Like you recommend, we’ve kept it in a money market account with check writing privileges for easy accessibility. Recently, we heard about short-term bond funds with a higher interest rate than our current money market account. Our money would be available for withdrawal if needed, and we would only lose the interest. Is it OK to move half of our emergency fund into one of these bond funds to take advantage of the higher interest rate?
— Ferisa
Dear Ferisa: Absolutely not! Under no circumstances should you do something like that. An emergency fund is not an investment. You’ll never build wealth and get rich off your emergency fund. That’s not what it’s there for.
I understand this might be the first time in your lives you’ve had a nice chunk of cash in the bank. I also get that it’s hard to let it just sit there and make no money.
But an emergency fund is insurance, not an investment. It’s a rainy day fund, and its whole purpose is to sit there safe and wait until life throws unexpected expenses in your face.
Think about it this way. Insurance costs you money to protect things that make you money — like your home. It’s also there to cover things you otherwise would not be able to afford. When you have an emergency fund in place, you don’t have to dip into your 401(k), your IRA or go into debt. Why? Because your emergency fund provides insurance against those kinds of things.
Let your emergency fund sit right where it is, Ferisa. Besides, it’s a really bad idea to buy bonds in an environment where interest rates are increasing. Bonds have an inverse relationship to interest rates. So, as interest rates climb you’ll lose out if you’re playing around with bonds!
— Dave