Investing’s big three

There are three major variables to consider any time you invest money: your natural ability to deal with risk, the amount of risk you can afford to take, and the amount of time until you will need your money. All three are important considerations.

Therefore, even though you may temperamentally take risk in stride, you have to think about what it could mean to your finances if you lost some (or all) of this money. Also consider that the shorter your time frame, the more careful you have to be because you may not be able to ride out a decline.

As you review your options, your goal is to find the best balance between liquidity (how quickly and conveniently you can access your cash), safety (the return of your money), and yield (the return on your money).

In general, the safer and more liquid the account, the lower the rate of return. And in your case, my feeling is that you should accept a lower return in order to safeguard what is now your emergency fund.

Where to stash your emergency fund cash

  • Interest-bearing checking account—You can write checks and may have easy ATM access to your cash.
  • Savings account—Withdrawals are typically limited to six per month (unless you go to the bank in person). These usually pay more interest than checking accounts.
  • Money market deposit account—A high-yield savings account that may offer limited check writing privileges (over certain minimums) while generally providing higher yields than a checking account.
  • Short-term certificate of deposit (CDs)—These offer higher yields, the longer the term to maturity. Penalties apply if you withdraw early.

Whatever type of accounts you use, each company’s products differ, so it’s important to ask questions to understand fees, interest rates, minimums, risks, and potential withdrawal restrictions.

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