In here, I share 4 ways to stash your emergency fund, and at least 2 of them you haven't heard of.
We all know that it's a good rule of thumb to set aside 3-6 months' worth of living expenses (eg. Food, bills, etc) for our emergency fund.
But have you thought about where is the best way to keep your most important pile of cash during a rainy day?
Many Financial Planners recommend leaving it untouched in your savings account which grows at a measly rate of about 0.05% per year.
With Inflation (the increase in the cost of living) at approximately 3%, we both know that your emergency fund is eroding day by day.
So, is there a better way to keep it safe yet growing at the same time?
First, we need to establish the main purpose of an emergency fund; which is to give you access to cash to tide you through in the event of an emergency such as a retrenchment.
This means the bucket your emergency fund is in should meet the following criteria:
1. Highly Liquid
This means easily accessible so that you can withdraw it quickly during emergencies.
2. Low Volatility
In other words, the value of your emergency fund isn't rising and falling sharply.
This means it has to be in a safe place. For example, if you leave your dollar bills under your mattress, it will burn in flames if your house catches fire! Holding cash on hand isn't the safest place!
With that being said, let me share with you 4 ways on where to keep your emergency fund besides your piggy bank, under your mattress and your regular savings account.
I'm confident you haven't heard at least 2 of them!
1. High Interest Savings Account
I know most of us know about this, but few of us act on it.
A high interest savings account no doubt meets all the 3 criteria and they pay higher interest than your regular savings account, some even as high as 4% by OCBC360!
Other examples include CIMB Bank's FastSaver account, UOB One account and OCBC Frank Account.
Do take note that some of these bank accounts require you to meet certain terms and conditions to get the bonus interest rates. Nevertheless, the minimum interest they give is still higher than 0.05%!
Learn more about savings accounts with the highest interest rates using moneysmart's comparison website here.
2. Singapore Savings Bonds (SSB)
At an average of 2.4% per year over a period of 10 years, the SSB is another excellent bucket to stash your emergency fund!
This bond is offered by the Singapore Government and with a "AAA" credit rating so you can be assured that your money is in extremely safe hands!
Each bond lasts for 10 years, but unlike a normal bond which usually only allows you to withdraw after the maturity date, the SSB allows you to redeem anytime even before the 10 years is up!
The only drawback is that you'll receive lesser interest, but you can be assured to receive higher than your regular savings bank account.
Also, take note that there's a $2 transaction fee for redeeming the bond and you can only redeem in multiples of $500. Learn more about the SSB here.
3. Cash Accounts of Brokerages
Most brokerages offer cash accounts for investors to hold their cash before they make their next investment move.
These excess cash are usually invested in money market funds.
Now this is where you might disagree with me as funds are not capital guaranteed. This means that you might get less than you what you invested.
However, I find money market funds relatively safe options as it is extremely rare that the value of a cash fund will decrease.
These funds are under the umbrella of mutual funds(unit trusts).
How it works is that the money is collected from thousands of investors and are invested into different financial instruments.
For a money market fund, it is invested in financial products like short term bank loans and bank deposits.
These funds are offered by financial intermediaries like banks, brokerages, online websites and insurance companies.
One thing to note is that before investing in a cash fund is to be aware if there's any lock-in period (a period of time which you cannot withdraw your money) and if there's any fees.
Both the lock-in period and fees depend on the intermediary you decide to invest with.
If there isn't any, I would say this platform meets the 3 criteria of a bucket of an emergency fund.
However, in most cases, there will be a lock-in period and fees.
The great thing about these brokerage cash accounts is that most of them have no lock-in period, no sales charges or admin fees and they yield much more interest than your regular savings bank accounts!
For example, Philip Money Market Fund and Excess Fund Facility. Learn more about Philip's cash account here.
The Bottom Line
Whether you choose to invest it your emergency fund or not, having one itself is a big step forward of having financial security.
If you are afraid of taking risks, it's advisable to stick to the traditional way of saving your emergency fund in a bank account, (preferably a high interest one!) as you can never go wrong with that.
Remember, the purpose of an emergency fund is so that you can have access to cash quickly during an emergency and no return should come at the expense of your peace of mind.