Smart Ways To Invest Your Rainy Day Fund

It's important to have an emergency fund to fall back on when unexpected costs arise, such as medical bills or home repairs. While it's a good idea to keep your emergency fund in a savings account, you might want to consider investing it so that it can earn money. However, it's crucial to weigh the risks and ensure that your emergency fund remains easily accessible. Here are some options to consider for investing your rainy-day fund:

- Money Market Accounts: These accounts, offered by banks or credit unions, combine features of checking and savings accounts. They are considered low-risk and typically offer APYs of around 3% to 4%. Additionally, most money market accounts are FDIC-insured or NCUA-insured, protecting your funds.

- High-Yield Savings Accounts: Online banks often provide higher interest rates than traditional savings accounts, allowing your emergency fund to grow while remaining safe and accessible.

- Certificates of Deposit (CDs): CDs offer higher interest rates than regular savings accounts, especially for longer maturities. However, early withdrawal usually incurs a penalty, making it challenging to access your funds immediately. Consider building a CD ladder to increase liquidity and avoid penalties.

- Ginnie Mae Bond Funds: Backed by the federal government, these funds are considered relatively safe and typically offer higher yields than savings accounts. While they have slightly less liquidity, you can still access the funds with some planning.

- TIPS Mutual Funds: By investing in Treasury Inflation-Protected Securities (TIPS), you can protect your emergency fund from inflation. TIPS mutual funds offer easier liquidity than direct investment in TIPS, but they come with higher fees and volatility.

- Dividend Aristocrats: These are companies with a consistent record of increasing payouts annually, offering the potential for capital appreciation and dividend income. However, there is a risk of losing principal or needing to liquidate during a market downturn, which could result in losses.

High-yield savings accounts

When choosing a high-yield savings account, consider the interest rates offered, as well as the level of accessibility. You'll want to be able to withdraw your money quickly and easily in case of an emergency. Additionally, look for accounts with no fees to save more money. If you're worried about losing money, consider opening an account at an FDIC-insured bank or NCUA-insured credit union, which will protect your funds up to $250,000 per depositor and per institution.

Some high-yield savings accounts to consider include SoFi Checking and Savings, EverBank Performance Savings, and Barclays Tiered Savings Account. These accounts offer competitive interest rates and may help you grow your rainy day fund over time.

It's important to note that while high-yield savings accounts offer higher interest rates than traditional savings accounts, your money may still lose value due to inflation. To combat this, consider dividing your emergency funds between a high-yield savings account and other investment options, such as CDs, money market accounts, or brokerage accounts. This will provide you with immediate access to cash while also protecting your funds from inflation.

Money market accounts

In addition to the higher returns and FDIC protection, money market accounts also come with the convenience of debit cards and check-writing privileges. This means that you can easily access your money when you need it, without having to worry about withdrawal limits or fees. The ability to write checks can be especially useful for larger purchases or transactions where a debit card may not be accepted.

However, it's important to consider the potential drawbacks of money market accounts. These accounts often have high minimum deposit requirements, which may make them inaccessible to those who are just starting to build their savings. Additionally, there may be fees associated with the account, which can eat into your returns. It's important to carefully review the terms and conditions of the account before opening one.

Another factor to consider is the limited number of withdrawals that are usually allowed per month. This may not be an issue if you are using the account solely for rainy-day funds, as you shouldn't need to access the money frequently. However, if you anticipate needing to withdraw funds regularly, you may want to consider a different type of account or look for a money market account with more flexible withdrawal policies.

Overall, money market accounts can be a great option for those looking for a safe and convenient place to store their rainy-day funds. With higher returns, FDIC protection, and the convenience of debit cards and check-writing, they offer a number of benefits that can help you effectively manage your savings. Just be sure to carefully review the terms and conditions of the account before opening one to ensure that it meets your needs and that you are comfortable with any potential fees or minimum balance requirements.

Certificates of Deposit (CDs)

When you put your money in a CD, you earn a fixed interest rate for a specific amount of time on the money you deposit when you open an account. Term lengths typically range from three months to five years, and you can't touch your funds in your CD for the length of that specified term length unless you pay an early withdrawal penalty fee and possibly lose out on accrued interest.

CDs are one of the safest savings vehicles as your money is federally insured. They are also a good investment because your money grows without the risk of your rate dropping, and you're guaranteed a return without worrying about stock market volatility.

However, CDs are not always ideal, especially if you need access to your money. With a CD, you can only deposit money once at the beginning of the term and you can't make additional contributions over the CD's term. There is also usually a minimum deposit requirement, and you can't access your money before your term ends or you'll be charged a penalty fee.

Pros

• Fixed interest rates (a good thing when rates are high)
• Can't touch CD funds until the term is up (a good thing so you're not tempted to spend)
• Different CD types allow you to have options, such as bump-up CDs (for raising your rate), no-penalty CDs (for easy withdrawals), add-on CDs (for making additional contributions), jumbo CDs (for large deposits) and IRA CDs (for retirement)

Cons

• Fixed interest rates (a bad thing when rates are low or if rates go up while you're in the middle of a CD term)
• Can't touch CD funds until the term is up (a bad thing if you need that money)
• Early withdrawal penalty fees
• Can generally only deposit money into a CD once at the beginning of the term and can't make additional contributions
• At times there's a minimum deposit requirement, usually $500 and up

Ginnie Mae bond funds

Ginnie Mae, or GNMA, is short for the Government National Mortgage Association. This agency promises investors the payment of principal and interest from residential mortgage loans insured or guaranteed by federal entities, such as the Federal Housing Authority and the Department of Veterans Affairs. Ginnie Mae mortgage bonds are the only mortgage securities with full federal backing.

Ginnie Mae securities are often considered the "safe option" for retirement investing. They typically pay one to two percentage points of yield more than Treasuries. This is because, unlike conventional bonds, rising interest rates can cause a slowdown in mortgage pre-payments, as borrowers are less likely to refinance their loans. This means that Ginnie Mae investors have less money to reinvest at higher yields.

Ginnie Mae funds can be accessed through brokerages. However, they do not have the same liquidity as a cash account, and you will need to plan to leave time to liquidate the bonds and have them delivered to your bank account.

Stocks

While it is generally recommended to keep rainy day funds in savings accounts, you may want to consider investing in stocks to earn higher returns. However, it is important to remember that stocks are fairly volatile and there is a risk of losing money. Here are some things to consider if you are thinking about investing your rainy-day fund in stocks:

Risk Tolerance

Investing in stocks carries a higher risk than other investment options. The stock market can be volatile, and there is a chance of losing money if the market takes a dip. You need to assess your risk tolerance and decide if you are comfortable with the potential for higher returns, as well as the possibility of losing money.

Diversification

To mitigate the risk associated with stocks, consider diversifying your portfolio by investing in various companies across different sectors and industries. This helps to reduce the impact of any one stock or industry on your overall investment. Diversification can provide a level of protection against significant losses.

Time Horizon

Amount to Invest

When investing your rainy-day fund in stocks, consider allocating only a portion of your total fund. This ensures that you have some liquid assets readily available for emergencies, while also allowing you to benefit from the potential returns of stocks. A common recommendation is to keep at least three to six months' worth of expenses in liquid assets, such as a savings account, and invest the remainder in stocks or other investments.

Research and Due Diligence

Conduct thorough research before investing in any stock. Study the companies you are considering, analyze their financial statements, and assess their growth potential and risk factors. Diversifying your stock portfolio across different sectors can also help manage risk. Additionally, consider seeking advice from a financial advisor who can provide personalized guidance based on your financial situation and goals.

Frequently asked questions