How Can You Maximize Your Emergency Fund's Earning Potential?
If you're saving toward retirement, you likely have at least some of these savings in the stock market. Stock growth and dividend reinvestment can significantly increase your long-term earning potential, helping you retire sooner. However, the level of short-term risk inherent with stocks and bonds can be too high for you to want to place your emergency savings in the market. What safer investments are available that will help you earn more than a few pennies in interest? Read on for several safe or protected investments perfect for storage of your emergency fund.
High-yield savings account
Lenders with a heavy online presence can offer very competitive interest rates for users who maintain a balance over a certain amount or have funds regularly direct-deposited (online transfers from another account usually fit the bill). If you're planning to keep your emergency fund in this account and (hopefully) rarely withdraw from it, it may make sense to compare rates at several banks that offer higher interest rates for balances around your level.
Credit unions can also offer higher interest rates than other banks. Because of their small size and localized nature, they're insulated from the larger economic risks (like major fines and lawsuits) and are able to more carefully screen and communicate with borrowers to ensure consistent repayment of loans and other credit.
Certificates of deposit (CDs)
If you'd like a higher interest rate than you're slated to receive by parking your emergency fund in an online savings account, a CD may be a good way for you to boost your earnings. These cash vehicles pay a specified interest rate for a stated term -- anywhere from a few months to a few years or more. After the CD ends, you can withdraw your funds or roll them over into another CD. If you cash out your CD before the end of the term, you can forfeit a portion of (or all) your earned interest, so if you're planning to spend your emergency funds soon, you may be better off staying in a more flexible high-yield savings account.
A slightly riskier proposition (and one that isn't FDIC-insured) is investing in short-term bonds. When interest rates drop, bond revenue rises -- and with interest rates recently at historic lows, bond funds are enjoying generous yields. Because interest rates are likely to go up over the next few years, long-term bond funds aren't the best investment -- but the much shorter term associated with these funds helps lessen this risk somewhat.
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