Be conservative when investing emergency funds

January 25, 2012

How much money should you save for when the unexpected happens?

Q: I've heard that it's a good idea to put aside some money that I could draw on in case I lose my job or some other emergency occurs. How much would you advise keeping in such an account?

Because you'll never know in advance when you might need this money, investing it aggressively would not be wise, because you could risk losing your principal. Instead, the most appropriate type of account for this portion of your financial strategy would be one that emphasizes liquidity and preservation of capital. Most often, this means using a checking, savings, or money market account.

Some people use certificates of deposit (CDs) for their emergency fund, but I believe they are not an appropriate tool. Although CDs are considered safe, often they require payment of a penalty if the money is withdrawn before the maturation date.

Answers to our readers' questions were provided by Jon C. Ylinen, a financial professional with North Star Resource Group, Madison, Wisconsin. North Star Resource Group offers securities and investment advisory services through CRI Securities LLC and Securian Financial Services Inc. Members FINRA/SIPC. CRI Securities LLC is affiliated with Securian Financial Services Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services Inc. North Star Resource Group is independently owned and operated. Send your money management questions to medec@advanstar.com
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