Your emergency money can make money.

Build an emergency fund: That’s one of the fundamentals for all investors. An emergency fund can help keep you from liquidating investments or using debt to solve unexpected financial problems. When most of us think of an emergency fund, though, we consider high-yield savings accounts. These accounts are considered safe and the funds are liquid. But even “high” yields offered by traditional or online savings accounts don’t offer returns to get excited about. Instead, your money probably won’t keep up with inflation. But what if you could boost those returns a bit? Keeping your money elsewhere could help you prepare for the unexpected while providing better returns. Here are six alternatives to consider.

Next:Ginnie Mae bond funds Credit

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Ginnie Mae bond funds

Ginnie Mae bond funds are backed by the federal government, as they are securitized mortgages that are federally insured. As a result, many investors feel those are relatively safe – and they usually offer a higher yield than a savings account. You won’t have quite the same liquidity as with a cash account, but you can still access the funds; you have to plan to leave time to liquidate the bonds and have them delivered to your bank account, though. It’s possible to access Ginnie Mae bond funds through brokerages, and that can be a way to use your emergency fund more effectively.

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Next:

Your emergency money can make money.

Build an emergency fund: That’s one of the fundamentals for all investors. An emergency fund can help keep you from liquidating investments or using debt to solve unexpected financial problems. When most of us think of an emergency fund, though, we consider high-yield savings accounts. These accounts are considered safe and the funds are liquid. But even “high” yields offered by traditional or online savings accounts don’t offer returns to get excited about. Instead, your money probably won’t keep up with inflation. But what if you could boost those returns a bit? Keeping your money elsewhere could help you prepare for the unexpected while providing better returns. Here are six alternatives to consider.

Ginnie Mae bond funds

Ginnie Mae bond funds are backed by the federal government, as they are securitized mortgages that are federally insured. As a result, many investors feel those are relatively safe – and they usually offer a higher yield than a savings account. You won’t have quite the same liquidity as with a cash account, but you can still access the funds; you have to plan to leave time to liquidate the bonds and have them delivered to your bank account, though. It’s possible to access Ginnie Mae bond funds through brokerages, and that can be a way to use your emergency fund more effectively.

TIPS mutual funds

While you can invest in the Treasury's inflation-protected securities directly, and receive protection from inflation, the issue you run into is liquidity. That’s why some investors prefer to invest in TIPS mutual funds. You can reinvest earnings automatically when you receive payouts, growing your emergency fund, and when you need the money, they’re easier to liquidate than actual Treasurys. And, because the focus is on inflation protection, at least you know your money won’t lose value due to inflation. You do have to deal with higher fees when you invest in TIPS mutual funds, though, and there is volatility since you have to accept the current price, no matter what amount you originally invested.

Betterment’s Smart Saver

This is a taxable investment account that focuses on bond-related investments. The yield is higher than what you’d see in a savings account, but you run the risk of losing your principal. Smart Saver has the added advantage of automatic contributions and a “two-way sweep” program. You can set up your account so that when your checking is above a certain level, extra money is moved into the Smart Saver account. Likewise, if your account falls below a certain level, Betterment will automatically move some of your money from your emergency fund into your checking account. This can be one way to get a better yield while having some automation in shifting your money around.

Dividend aristocrats

Dividend aristocrats are companies with a long record of increasing payouts each year, providing the chance to receive capital appreciation and dividend income. The downside is you could lose principal or need to liquidate a portion when the market is down. In such cases, you could be stuck with losses. However, some of your losses can be alleviated through a tax deduction. With the right planning, you still get the capital you need and the emergency becomes tax-deductible. You can choose to reinvest the dividends, potentially boosting your account growth even more, or you can just let the dividends accumulate, and use them first when taking care of an emergency.

Roth IRA

Another little-used strategy is the Roth IRA. Because you can withdraw your contributions free of penalty, many people find this an attractive way to save for emergencies. You usually get a much better return on investment with your Roth IRA and if you don’t need to dip into the funds, you have the added bonus of building your nest egg with tax-free growth. You do have to worry about the earnings, though. If you withdraw earnings from your Roth IRA before you reach age 59½, there’s a penalty. A Roth IRA can make a solid backup emergency fund, but it’s a good idea to have other plans in place as well.

Tiered emergency fund

It’s possible to use a tiered strategy that combines the liquidity and safety of cash with the returns of investments. Some savers keep anywhere between one and three months’ worth (whatever is most comfortable) of expenses in a traditional high-yield savings account so they have immediate access. The rest of the emergency fund is kept in a taxable investment account using stocks and bonds. This setup allows immediate access to cash as needed, as well as time to liquidate assets if there’s a bigger expense. You still run the risk of loss with your investments, but you also reap the benefit of having greater returns on the portion in the investment account.

The best ways to invest your emergency fund.

Ginnie Mae bond fundsTIPS mutual fundsBetterment’s Better SaverDividend aristocratsRoth IRATiered emergency fund1 of 9Corrected on April 30, 2019: A previous version of this article misidentified Betterment’s Smart Saver.

Miranda Marquit, Contributor

Miranda Marquit has more than a decade of experience covering financial markets, investing, ...  Read more

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