An emergency fund provides a cushion of cash that can make life a little easier if unexpected or tragic circumstances arise. A lot of people use emergency fund cash in the following situations:
- Job loss or reduction in pay
- Unexpected or significant medical expenses
- Emergency travel to visit a sick or ill family member
- A car accident or house repair
Most People Don’t Have an Emergency Fund
You might think that going without any spare cash isn’t a big deal. After all, you’re pretty normal. A lot of people struggle to maintain an emergency stash of cash. Two thirds of Americans would struggle to come up with $1,000 in an emergency. [Source]
However, even just one of the situations above could cause severe financial interruptions to your life (and your family’s life). If you don’t have emergency money, you might:
- Take on extra debt that could take years to pay off
- Miss precious time with a loved one because you can’t travel
- Pay higher interest because you can’t keep up with credit payments and your credit score suffers
- Fail to help a child with college expenses because you can’t afford it
- Find it very difficult to cope with the tremendous financial anxiety and pressure that comes with not having an emergency fund
One of the biggest benefits of an emergency fund is the peace of mind it gives you that you’ll have enough to cover your bills during a stressful time.
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How Much Should You Have in an Emergency Fund?
Most financial experts recommend you keep at least 3 to 6 months’ expenses in an emergency fund. [Source]
The amount of money you keep in an emergency fund depends on a lot of factors.
- How comfortable you are with risk
- The amount of your monthly expenses (if you have a lot of credit payments or bills, you might save more in an emergency fund than someone who has very low monthly expenses)
- Whether you have other financial goals you’re prioritizing (you might choose to prioritize a debt payoff plan over emergency fund savings, for example)
One useful tool I’ve found to determine how much my family should be holding in an emergency fund is this free online Emergency Fund Calculator by Ally Bank.
You simply enter your income, expenses, and emergency fund goal and it tells you a recommended emergency fund amount.
On the same page, you can check out Ally Bank’s high interest savings account paying 1.75% annual percentage yield (APY) as a place to stash emergency money. Ally is strictly an online bank with no physical locations, so their overhead costs are lower. They don’t have a minimum balance and they don’t have maintenance fees. Also, Ally is well known for having a fantastic digital experience with an easy-to-use website and mobile app.
It’s a super easy to access place to keep your emergency fund.
How to Keep Track of Your Emergency Fund
Now that you’ve figured how much you have to save to protect yourself in an emergency, how should you keep track of how much you’re saving?
If you don’t feel like messing with spreadsheets or need some help managing your finances online, check out Personal Capital. Personal Capital is free, takes only about 30 minutes to set up, and allows you to easily track your income, expenses, savings, and net worth.
You simply enter your bank account and credit card info one time, and then the online app updates your debt and income automatically. It also offers super cool graphics and charts to help you manage your money problems.
Just knowing, in black and white, how much of an emergency cash fund you have can relieve some stress over money problems. Now that you know how much you need for an emergency fund and how to track it, you can choose where to put your emergency cash.
Where to Put Your Emergency Fund
There are several options for stashing your emergency fund cash.
- High interest checking: A high interest checking account is a great place to stash an emergency fund. In today’s connected world, you can have your emergency fund cash deposited to your normal checking account within a day or two. High interest checking accounts also keep your emergency fund cash separate from your everyday expenses. And the big draw is that they usually pay significantly better rates than your local bank or credit union.
Best high interest checking account: Check out Ally Bank’s high interest savings account paying 1.75% annual percentage yield (APY). They’re a super easy to use online bank with a simple user interface and they pay top interest rates for your emergency fund account.
- Local bank savings account: If you want immediate access to an emergency fund, a local bank savings account may be the place for your emergency fund. The benefits are you can have same-day access to your emergency funds. The downside is that these institutions may pay very low interest rates on your fund money, compared to high interest checking accounts.
- Money market account: A money market account is another type of emergency money account. Like high interest checking accounts, you can get better interest rates for storing your emergency funds in this type of account. Money market accounts may require a higher minimum balance, however, so they may not be for you if you’re just working on building up your emergency fund balance.
- Roth IRA: Some people plan to use their Roth IRA as a way to deal with emergencies. You can withdraw your contributions without penalties or taxes if an emergency arises. However, you might be missing out on future investment gains if you use this account for emergencies and pull this money out.
- Credit card: If you have good credit and significant amounts of open credit, you might consider using a credit card as an emergency cash stash. After all, you can typically charge unexpected expenses like car repairs or plane tickets. Or in case of a job loss or reduction in income, you could charge food and other essentials. But for most people, using a credit card as an emergency fund can be a problem. In some circumstances, you may need cash for an emergency. And that credit card debt must be paid back, and in an uncertain job situation, you don’t know how long until you are generating income again. A cash emergency fund in a savings account or money market avoids this problem.
- Taxable investment account: Some people prefer keeping their emergency fund in a taxable investment account, such as those through Vanguard or Fidelity. They invest the money in shares of stocks or bonds. Depending on the stock market returns, their money may earn more interest than a high interest checking account (or it may lose money as well). If the money is needed for an emergency, the shares can then be sold.
Even if you’re cash strapped you can start an investment account. With as little as $0.01 you can use an easy app to get started investing with an app called Acorns.
You start by linking your Acorns account to your banking account or credit card. Then when you purchase something, the app will round up the purchase and add micro-amounts to your taxable investment account. Every time you buy something, your change will automatically be invested for you. So when you buy something for $0.97, for example, the Acorns app could put $0.03 in your investment account for you.
- HSA: Some people use health savings accounts, or HSAs, to hold a portion of their emergency cash fund money, since these accounts can be used to pay medical expenses, a very common type of emergency. HSAs also offer significant tax advantages.
Where do you keep your emergency fund? Do you have any tips and tricks on building emergency financial reserves? Let us know in the comments.