Dear Dave,
What do you think about the idea of putting your emergency fund into bonds?
Ryan
Dear Ryan,
I think that’s a really bad idea, and here’s why. Bond values and prices go down as long-term interest rates rise. Right now, long-term interest rates — a good example would be mortgage rates — are ticking up. They’ve moved up a quarter of a percent recently. So, as this happens, the value of bonds goes down. If these interest rates spiked, you could lose half your emergency fund.
Never, ever put your emergency fund into things where risk and volatility are factors. An emergency fund isn’t an investment. It’s there to help protect things that are investments and your life. Keep it in something safe and simple, like a money market account where there’s no penalty for early withdrawal.
We’re not looking to make money with an emergency fund, Ryan. It’s insurance. Just let it sit there, safe and sound, until it’s needed.
Dave
A squirrel fund for slower months
Dear Dave,
My husband works construction, so we barely scrape by during the winter months. Should we build an emergency fund for the slow times?
Cathy
Dear Cathy,
I think that’s a great idea. Although, I’d probably call it something other than an emergency fund. How about a squirrel fund? Squirrels need to have nuts saved up for winter, and in your case you’d be setting money aside during the summer to get you through the slow winter months.
You may think I’m playing games with the name, but really I’m not. This sort of saving isn’t for emergencies. It’s a budget issue, because you’re planning and setting aside cash leading up to the down time you know is coming. Keep your emergency fund of three to six months of expenses separate from this, and take a careful look at what he made this winter and how much that left you short each month.
Remember, we’re not talking about some random amount of money here. It’s an exact amount that you can budget for accordingly. Teachers can do the same thing if they’re not paid 12 months a year. It’s a simple matter of planning ahead for the down time, and setting aside enough during the other nine months to see you through.
—Dave
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