“Peace of mind” funds? Now what’s that?
Maybe that’s the first question that comes to your mind. I’d gleaned that term after reading Darren Hardy’s book – The Compound Effect. Darren had shared an anecdote from someone he’d interviewed on finances. The interviewee, being very positive, had refrained from using the term “Emergency Funds” but instead prefers “Peace of Mind Funds” which is more positive. And that’s how I dropped off the term “Emergency Funds” from my vocabulary as well.
So what’s this “Peace of Mind Funds” (or “Emergency Funds” the ‘negative’ version)
Personal finance experts recommend maintaining at least between 3 – 6 months’ worth of expenses set aside to give peace of mind. Most times people are nervous and stressed because they have little to no money in their bank account to take care of unforeseen events. Hoping is fine but will be stronger if indeed one has a good chunk of money one can reach for when needed. The money in this fund is liquid or at least very close to that such that it can be retrieved in a timely manner whenever the need arises. ‘Peace of Mind’ (PoM) account isn’t meant for investment (you should consider opening a seperate account earmarked for that) but for peace of mind as the name implies and for that reason the value/principal deposited is expected to be preserved .
Ideally, to avoid falling into the temptation of tampering with your PoM funds, it may even make sense to have this funds outside of your primary bank account.
That said, here are some ideas of possible accounts where this PoM funds can be stashed:
High interest savings account
Instead of having your PoM funds sitting in a chequing account or even a regular saving account where there’s lots of temptation, a high interest savings account won’t be a bad idea. This is at least better than the 0.01- 0.05 % interest you’d have received on the fund if it were in a regular savings account. Obviously, the higher the returns on the savings account the happier your PoM funds.
You can shop for high interest savings accounts here .
Guaranteed Investment Certificate
GIC is another option. In here, your money is held in place for a short to long term period of say 90 days – 5 years possibly. The longer the term, the higher the returns on your PoM funds. The catch here is that you are not allowed to withdraw money from the funds before the maturity period otherwise you’ll get hammered a fee. The rate of returns for GICs can range between 1 – 2%.
To learn more about the GIC types and possible options, visit here.
Money market
Since the PoM fund is meant to be accessed in a timely manner when needed, it may not be advisable to invest it in risky investments (e.g. high risk stocks). Doing this can result in a huge loss especially when the market tanks and obviously it won’t be fun. Of course, one can choose to invest in high risk securities here so long as the money is not going to be needed any time soon and one can ok with taking a hit/loss.
What do you think?
For more on personal finances, be sure to visit Top 7 must-read books on Personal Finances
To your ‘Peace of Mind” !!!