Where should you keep your Emergency Fund? I think you’ll do best if you keep it somewhere too difficult to access on a daily basis where it can earn a decent amount of interest. This eliminates anywhere in your house, your checking account, and, in most cases, a savings account associated with your local bank.
If you’re starting out from $0, consider a high-interest online savings account. On the plus side, you can earn around 4% interest (you earn less than 1% at most “real world” banks) and you usually don’t need a minimum balance. However, it may take several days for your deposits to show up on your account, you generally have to have a “real world” savings account to “attach” to the online account, and there have been cases where an online bank went under. If you go this route, do your research! ING and Citi are two examples of online banks with high interest rates. You can find a more detailed article (and a longer list of banks) here.
If you already have some savings, you may want to open a money market account. This is the route I picked. Money markets usually require a minimum balance, and you can earn a slightly higher interest rate (around 5%) than online savings accounts. Keep in mind that you will be investing your money. I know that can sound super scary, but this is an extremely conservative type of investment. It is rare to lose money, and you will regularly gain around the 5% interest rate. In fact, my money market regularly earns about $15 in interest per month. . .as opposed to the 50 cents it used to earn sitting in my local bank’s savings account. You can open a money market online at Charles Schwab, Vanguard, Fidelity, or a number of other places. For more information on money markets, click here.
Go you! You’ve opened your savings account and you’ve even started saving! But. . .what constitutes an emergency, and when is it legit to take money out of your account? Stay tuned for Emergency Fund How To, Part 3.
Thank you for posting all this information! I’ve been on my own for a few years now, and know that I spend too much money on some things without even noticing. I’ve enjoyed everything so far, and look forward to more. I’m working on tracking my spending now, and seeing what little I can set up in an emergency fund. I can’t wait to read more! Thank you again!
Thanks so much Angie!! I’m so glad this is helping you out. I totally know where you’re coming from, too. I only got myself on a budget about a year and a half ago, and I was horrified by how much money I’d spent without even really realizing it. Now that I’ve got my finances under better control, the difference is HUGE. I’m way excited that you’re tracking your spending and that you’ll be putting money toward an emergency fund
I tend to disagree with keeping all of your emergency fund where you can’t access it.
For example, Mark has bad luck with cars. If it breaks down on a holiday or on the weekend (when banks tend to be closed on Sunday and have limited Saturday hours), then he couldn’t access the savings account for the repairs. At that point, it’s better to have say $1,000 in checking so you know you can write a check or use the debit card it for sudden repairs or other emergencies. The rest can sit in a high yield savings account elsewhere.
Sure, this means that you could be easily tempted to use that $1,000 frivolously. But the point of having an emergency fund is having the funds when you need it. But if you can’t get to the funds, what’s the point?
Hi Jenn! Well, that’s the thing with managing your finances. .. you have to tailor it to your own lifestyle
If you have a history of needing large sums quickly for legit emergency purposes, then of course it is wise to keep some funds readily accessable!
I should have been a bit clearer about defining “hard to access” as well. It definitely does not mean you can’t get the funds, or that it takes weeks and weeks to get your money. For example, I can transfer from my money market to my savings in about 1 business day through an electronic transfer (although there is a small fee for this), and even if I have them generate a check it takes just about 4 days.
But what it boils down to is managing the emergency account so that you don’t spend it on non-emergencies, and there isn’t one-size-fits-all way to do that, since everybody (and their situation) is different