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Every financial advisor recommends having an emergency fund, but what type of account or investment vehicle should you keep this emergency fund in? Money guru Suze Orman, who encourages people to set aside 12 months of living expenses in their emergency fund, has some strict suggestions on where to avoid storing them.
brokerage account
A brokerage account is an investment account that allows you to buy and sell a variety of investments, including stocks, bonds, mutual funds, and ETFs. This is a bad place to keep your emergency fund because it ties your money up in investments, leaving you unable to access it in an emergency. This type of account is better suited for a long-term investment strategy.
long term us treasuries
Long-term US Treasuries are fixed-rate US debt issued by the US Treasury, with maturities ranging from 10 and up to 30 years. These can be great tools in an investment portfolio that includes long-term assets and strategies.
This is not good for an emergency fund, because again, this is long-term and the whole nature of an emergency is that it can happen out of nowhere. On the other hand, in Orman’s opinion, short-term US Treasuries may be a good idea, according to Ascent, a Motley Fool service report. Treasury bills (also known as T-bills) can have a very short maturity – a minimum of four weeks.
Don’t let your emergency fund get too big
Keep in mind that an emergency fund can be very large indeed, and Orman is particularly conservative in his recommendation that people save up to 12 months of living expenses. Once you’ve set aside 12 months for emergency savings, it’s important to take the next step, and that’s to start putting your money to work.
Savers may want to start paying off debt (preferring high-interest loans), as well as focus on their 401(k), IRA or other tax-advantaged accounts. They should also focus on storing excess cash in certificates of deposit (CDs) and I-bonds accounts.
Additionally, once your emergency fund starts to overflow, you can safely explore some of the long-term investment vehicles that Orman cautioned against to keep the extra money safe.