Dear Carrie,
I just lost my job and received my final paycheck with a small amount of severance money. I’ll probably need the money over the next few months, especially if my job search takes a long time, but would like to invest it in the meantime. Where’s a good place to put it?
–A Reader
Dear Reader,
I’m sorry to hear about you losing your job. It’s a difficult time for so many right now.
Thankfully, though, the severance you received is a bit of a life raft. And although I understand your desire to invest these funds, my sense is that it would be better for you to prioritize safety over growth. Let’s walk through your options while you’re between jobs and may need access to the funds.
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 below, 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
The following are all insured by the FDIC up to $250,000 per account holder, per bank, per ownership category and therefore considered very safe. The National Credit Union Administration (NCUA) insures checking and savings accounts at credit unions up to the same limits.
- 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.
Alternatively, if you have a brokerage account, you could consider investing your money in a money market fund. Technically, these are a type of mutual fund that primarily focus on stability and capital preservation. The underlying investments are conservatively invested in very short-term IOUs. It’s important to note that money market funds are not insured by the FDIC so it’s possible to lose money, but they generally offer higher yields than the accounts above.
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.
A look to the future
Although it’s understandably tempting to want your money to grow, my advice to everyone is to always maintain an emergency fund that will cover a minimum of three to six months’ worth of necessary expenses. And in times like the present, when we’re facing exceptional challenges, a bigger fund that will cover a longer period of time may be even more prudent.
For now, I strongly advise you to consider stashing your emergency fund cash in one of the accounts we’ve discussed. In the future, once your career is back on track and we’re past the COVID-19 emergency, it will be time to consider putting your extra savings (beyond what you’ve earmarked for emergencies) in investments with more potential for growth.
Despite the current crisis, I remain a firm believer in the power of investing to achieve our long-term goals. We will get past this crisis. But in the meantime, best to focus on keeping our families and essential savings safe.
Have a personal finance question? Email us at [email protected]. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.
Originally published on schwab.com