How to Invest an Emergency Fund for Safety and Return

Starting an emergency fund is one of the most difficult steps to financial freedom but one of the most important. Learn why you need an emergency fund and how to invest.

Starting and maintaining an emergency fund doesn’t have to be a pain and you can actually make a decent return on your funds. 

Follow these steps to determine how much emergency fund you need and how to invest your money. 

Why do I need an emergency fund?

An emergency fund is money set aside to pay for living expenses or special bills in the event you are unemployed or have a health emergency. 

The rule of thumb has always been to have three to six months worth of your normal expenses set aside in a savings account or money market account. 

How to Invest your Emergency Fund

Some emergency fund purists will disagree with me but I like a different approach for my own fund investments. 

While bond investments can lose value if interest rates increase, you lock in a return if you hold the bonds until they mature. The problem is that you don’t know when you’ll need your emergency money and might not be able to wait until your bond investments mature. 

This is fixed with a Laddered Bond Investment Strategy where you invest in bonds with different maturities. This is a strategy we talked about in our Guide to Bond Investing and is a strategy that most should use even if they are not using bonds for their emergency fund savings.

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