One standard piece of advice you see all the time on financial sites is to have an emergency fund. The idea is, you set aside enough money to cover all your living expenses for three to six months, and that way if you lose your job or have some other sort of crisis, you don't have to go into debt to stay afloat.
Well, I follow that advice, sort of. We currently have enough money in savings to cover our present living expenses for...let's see here...about 4.7 years.
Partly, this is because our living expenses aren't that high. We only spend about half of our after-tax income, so what's an overstuffed fund for us would be more reasonable for a family living up to its income, as most American families do. But partly, I admit, it's because I'm financially... er... conservative. Well, okay, paranoid. I just don't feel secure unless I have a huge sum set aside for a rainy day, because what if it turns out to be a hurricane?
The problem is, according to the experts, I'm actually costing myself money by keeping this much in the bank. That's because interest rates, right now, are so pitiful that the money you keep in savings doesn't even earn enough to keep up with inflation—so over time, your nest egg actually loses value. Ten years ago or so, I could just stick my money in my online savings account and earn a nice, steady 4 percent interest on it, but now the interest on that account has dropped to less than 1 percent. So on the one hand, I need this big pile of cash to feel financially secure, but on the other hand, keeping that much in cash is actually making me less secure, because inflation is eating away at my savings.
What I really need is somewhere to stash all this money where it's reasonably safe, but can still earn enough interest to keep up with inflation. So, for my latest Money Crashers article, I did a little research to see if any such investment exists. And what I found is that there are quite a lot of different accounts and investments that can keep your emergency fund secure—but right now, most of them only pay a pittance.
However, I found that municipal bond funds actually show some promise. Unlike a bank account, these investments aren't guaranteed; you can actually lose your principal, because it's possible for a town or city to go bankrupt and default on its loans. But that's pretty rare, and the risk is minimized by choosing a fund with lots of different bonds, since it's unlikely they'll all go under at once. And according to my research, municipal bond funds have returned an average of 4.87 percent over the past ten years—even in the present low-interest environment. And, as a bonus, municipal bonds are exempt from federal taxes, and some are free of state and local tax as well. So in theory, I could not only earn 4.87 percent but actually get to keep all of it.
So I'll definitely be looking into stashing at least a portion of my extra-large emergency fund in some sort of municipal bond fund. Not all of it, because as I said, I'm paranoid, and I'll want to make sure at least some of my savings is not merely safe but guaranteed, in an account where I can get at it instantly when I need it. But I can probably pare down the amount I have in the bank to the more normal three to six months' worth of expenses that experts say you should have, and invest the rest where it can actually earn its keep.
If you'd like some more details about this kind of investment, as well as about the other options for stashing your emergency fund, you can read the full article here: 7 Safest, Low-Risk Investments for Your Money. It compares the risks and benefits of seven types of accounts—savings, reward checking, money market accounts, CDs, Treasury securities, money market funds, and bond funds—so you can find the one that fits your needs.