The EMERGENCY Money Question

The other day I was emailed this question: "I'm looking to move my emergency fund. I'm thinking about opening a savings account with Goldman that pays 1.8% interest, would there be a better option? I'm still new to finance." - Katy S.

I've been asked the 'what to do with my emergency money question'  while in retirement and also during my professional days as a wealth manager many times.

It's also a question that people have various opinions on. Today, I'm going to share my opinion on emergency money, what I do, and why I do it.

Before sharing my answer to this question, I need to point out a few things first.

In an earlier column, I touched upon the importance of having savings and emergency money. I consider these things the first and most important things to do with your money. I don't care if you make $20,000 a year or $2,000,000. Life happens and it is just plain smart to be prepared for the worst.

So the fact that she has an emergency fund in the first place is a huge feather in her cap. More than 50% of all Americans have little or no savings. Even more people do not have an emergency fund.

It's also important to remind people what 'Emergency Money' is. Emergency money is the money you have saved for the sole purpose of using in absolute emergencies.

My answer to Katy's question, along with the other people who have asked it, has always been the same. It is the method I have used and still use today.

Emergency money should be in physical cash and it should ideally be stored in a hidden fireproof safe in your home. A savings or checking account at a local bank would be a distant second best.

Remember, this is for emergency money only. Other money is used for other purposes.

You do not invest emergency money under any circumstances including in securities that are deemed safer and liquid like a money market fund at a mutual fund company. This money is your last resort money, your safety net. This money is not money that you go looking for some rate of return on. This is money that you keep with you, just in case. And it's not money to borrow from for any reason other than an emergency. If you cannot afford something at a certain time, you just have to wait. This is the money you use when the s--t hits the fan or whatever that expression is.

Emergency money is your security. When an emergency happens, you need to take care of that emergency right away. It's something that cannot wait a day or even hours. Not being able to access  and use your money, here and now, is the biggest risk when an emergency happens.

If your emergency funds are invested somewhere, how are you supposed to use them right now? What happens if you are in an emergency situation where paying with a credit card or a check in not possible or not accepted? What if you cannot use your ATM card or cannot find an ATM to withdraw funds?  What happens if the investment firm becomes insolvent or if a bank is closed? The questions and scenarios go on and on.

In an emergency situation, your only real guarantee is physical cash.

I say it in that way because there is one other another guarantor that I use and most of my clients use. That is a topic for another time.