How should I invest my emergency fund so that I keep earning interest on it?

I have established a solid emergency fund. I know that it needs to remain liquid, but I still want to earn interest on the amount. Where do you suggest I invest the money?

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November 2017

Stewart, Dan

Dallas, TX

You can open a brokerage account at a discount brokerage firm like Schwab and then invest in a laddered short term CD portfolio. So if the emergency fund is $45k, then invest $15k in a 1 month CD, another $15k in either 2 or 3 month CDs depending upon the interest rate offered, and then a final $15k in 6 month CDs and keep rotating. This will maximize your interest.

Here's one hint though, the brokerage firms get their new inventory of FDIC insured CDs usually either Monday midday or Tuesday morning and that is when you will get the most offerings and best rates. Again, depending upon what the rates are would depend upon the ladder. I just recently purchased some CDs at Schwab for a client and I found a 2 month CD just as high as the 3 month CDs, so there was no reason to go out 3 months.

This is still not much, 1% to 1.5% currently, but much better than a money market, and a short term bond fund can flucuate. Now if you sell before maturity it is a bid-ask quote so you might have a very marginal loss, but if you hold to maturity, there would be no loss and it is FDIC insured. So this could also affect how you create the ladder for highest interest and adequate liquidity. Unfortunately, with the Central Banks manipulating interest rates down to almost zero, there are not many alternatives that are 100% liquid and pay anything worth while. This will remain until rates "normalize."

Hope this helps and best of luck, Dan Stewart CFA®

November 2017
November 2017
November 2017
November 2017