Living your best life is often tied to how well you can access adequate funds to pay for your needs and desires. You could be the best planner alive, but life is too unpredictable to avoid unexpected financial setbacks. That’s why the best plan is to prepare for things not going according to plan. Emergency funds act as a financial safety net that ensures you’re covered when surprises arise. But instead of just saving, you can use low-risk online investing to grow and sustain a reliable emergency fund. In this article, we’ll explore how to do just that.
What Is an Emergency Fund?
An emergency fund is money set aside for resolving unexpected financial needs. These unexpected needs are often expensive and, if not adequately prepared for, can alter your normal life activities. The aim of an emergency fund is to enable you to cover these needs without taking up loans or selling off your assets or businesses. These needs are necessities such as home repair, health, and financial stability during sudden unemployment. They are not meant for wants like vacations or buying expensive jewellery.
Emergency funds can be kept in traditional savings accounts or in investment-based emergency fund accounts. With emergency savings accounts, funds can be easily withdrawn, but they are often prone to devaluation from inflation because they generate no interest. Investment-based emergency funds generate interest and protect your funds from inflation, and if done right, they can cover unexpected events as many times as possible. This article will focus on investment-based emergency funds.
Why Are Emergency Funds Important?
Security from Sudden Job Loss
Without an emergency fund, it could get really difficult to pay utilities like phone, water, and gas bills without borrowing or using a credit card after a job loss. It even gets emotionally tougher when the job search that ensues takes longer than expected. However, an emergency fund provides adequate financial and emotional security till you figure out what to do next without losing a good quality of life.
Health Bills
Health challenges or accidents often occur unannounced. Sometimes, they incur exorbitant financial expenses that may not be covered by health insurance, or that may take a huge chunk of your credit card. This is where emergency funds play the role of a superhero coming along to save the day.
Home and Auto Repairs
Our homes or automobiles often incur unplanned expenses when they require repairs or overhauling of some parts. While some of these only cost a small amount, some cases can see us max out our credit cards or take a biting loan. This can easily be sorted out with emergency funds.
Choosing the Right Online Investment Options
The right online investment option depends on your needs, desired upside, and risk management habits. However, here are some popular options to consider when building an emergency fund.
Certificate of Deposit
Certificates of Deposit, or CDs, are investment options that work similarly to placing your money in a savings account, but with CDs, the returns are higher. Certificates of Deposit are highly insured, so they generate secure, predictable returns, although they can only be accessed after a given time agreed upon between the investor and the bank. This investment opportunity only requires you to purchase a CD from a bank and agree on the rate and timeline of your investment.
High-Yield Savings
Many platforms offer this opportunity, as they have lower operational costs than conventional banks. With high-yield savings, you can pursue a short-term savings plan and earn more returns than conventional savings could produce. High-yield savings are favoured by emergency fund enthusiasts because, unlike other low-risk investment options, they provide both security and liquidity. This is because banks offering this option are insured, and you can withdraw funds anytime.
Government Bonds
Government bonds are a viable online investment option you could use to save emergency funds. Government bonds are basically money you loan to the government in return for some interest. The government keeps paying the investor till the time for maturity, when the government returns the money borrowed. The likelihood of the government defaulting is slim, so this option is safe, and the regular paid interest could offset some unplanned dire expenses.
Treasury Notes
Treasury notes offer a low-risk investment opportunity for investors who want to lock up their money without exposing their funds to the effects of inflation. These short-term investment options are the shorter forms of Treasury bonds, which take longer maturity periods. They are issued by the government with predictable interests that are usually paid every six months till their maturity date.
How To Grow Your Emergency Fund
One of the easiest ways is to set up automatic transfers from your paycheck to a high-yield savings account. This ensures you’re saving without even thinking about it. Another great strategy is to save any unexpected income, such as work bonuses, tax refunds, or even cashback rewards.
It’s important to note that saving becomes much easier when you have more money coming in. This is where side hustles and online investments can help. A side hustle, like freelancing or selling products online, can provide extra income that goes directly into your emergency fund. If you’re open to investing, growth stocks, which are shares in companies with strong potential for expansion, can help your savings grow faster over time. Trading forex (foreign exchange) is another option, where you buy and sell currencies to profit from price movements.
If you’re new to online investing, platforms like TradingView can make the process easier. It offers market insights and analysis tools to help you learn and make informed decisions. When you combine smart saving habits with extra income sources, you can grow your emergency fund faster and build a stronger financial safety net.
How To Start Investing In an Online Investment Fund
We have explored some reliable online investing options that can meet your emergency fund needs. When it is time to start using one, the ultimate guide is to “choose you.” This is because financial decisions are not just about numbers; they are more about your needs, your perseverance, expected returns, and your ability to bear risk. Although the highlighted options above carry little to zero risks, one should consider other factors such as liquidity, security, and returns (interest).
While some options, like high-yield savings, can be accessed via fintech apps or specialised brokers, others, like government bonds, can be accessed directly from government directories. After selecting an option and agreeing on the rates and maturity time, it is advisable to automate payments if your investment type follows the recurrent payment path. If this works for you, you can invest with small amounts that can grow over time; otherwise, you could purchase securities with a huge chunk of cash while you earn interest till it matures.
Building a Secure and Flexible Emergency Fund
Investing online in a bid to create a reliable emergency fund is widely preferred to traditional savings, mainly because they generate returns and may hedge against inflation. Emergency funds can come to the rescue in the case of sudden job loss, medical expenses, or home/automobile repair. Ultimately, whichever investment option you choose for your emergency fund, ensure that its liquidity, security, and potential upside favour your interest.
