- Do you have an adequate emergency fund?
- Is your cash earning at least 2.10%?
You’ve probably heard by now everyone should have an emergency, or “rainy day,” fund. Most people I talk to do have cash set aside in their savings or checking account, but the majority of them do not have their cash working hard for them. Let’s take 5 quick minutes and make you the master of your emergency fund.
How much cash should I have set aside?
While the need can vary per person, typically 3-6 months of expenses is appropriate. If you have two incomes in your household, you can lean closer towards the 3 month mark. (Two incomes meaning each spouse works, or only one spouse works but has two sources of income.) Think about these questions to help determine the amount of cash you need on hand:
- Do you have a spouse and children who depend solely on your income? Or, are you young, single, and could you move back in with your parents if you lost your job?
- Do you own a home and have a mortgage payment you’ll have to make? Or, are you in a month to month lease and could you leave with little financial obligation to your landlord?
- Do you own a rental property and might you be forced to cover expenses if your property goes vacant or your tenants don’t pay rent?
- How steady is your employment? Or you an entrepreneur or independent contractor and have unsteady income? Is your employment “at-will” and could you be let go tomorrow if your company had to downsize? Or, are you in the military and have a very stable paycheck?
Where should I keep my emergency fund?
I talk to so many people who have their rainy day money sitting in their savings account or primary checking account. There are two major downsides to doing this:
- Your money is commingled with your everyday spending funds
- Your money isn’t working for you. At best, a savings account at one of the top 5 banks is paying 0.30%.
This is why I encourage you to open a high-yield savings or money-market account, which as of Jan 2019, pay about 2.10%. It’s still less than the current inflation rate, but it’s significantly better than what Wells Fargo, Bank of America, and USAA pay in their savings and checking accounts.
High-yield savings accounts can be opened (and maintained with no monthly fees) with Discover Savings, Capital One 360, Ally Bank, American Express, and several other institutions. Many of the aforementioned banks will even give you a $200 bonus for opening a new account and depositing $15k-25k (current Discover bonus / Capital One bonus) These accounts can literally be set up online in less than 10 minutes and you can link your primary checking or savings account and transfer money via ACH using their app. I use Discover Savings and Capital One 360 and am pleased with them both. Discover doesn’t require a minimum balance to pay a competitive rate, while Capital One 360’s Money Market requires a minimum of $10,000 to unlock a top-tier rate. Capital One does have great “cafes” in major cities across the U.S. which can be used as a co-working space while on the road, so that’s a plus if you travel and want a nicer place than a coffee shop to work from. (They serve Peets coffee and often give free drinks too!) You can set up free sub-accounts too, and label them with their specific purpose.
Wherever you decide to keep your emergency fund, ensure it is liquid (meaning accessible within a few days without the potential of losing principal.) Some folks who have a Roth IRA established for more than 5 years may treat that as an emergency fund, but I’d recommend having cold hard cash that you can access within 3 days. I’ve used my emergency fund on several occasions and also simply sleep better knowing I have money in the bank I can tap if a true emergency comes up.
My first Coast Guard assignment after graduating the Coast Guard Academy was in lovely Portsmouth, NH. My good friend Andrew and I ended up buying a house together, which, after we finished our two year assignment, I kept and rented out. The rental was very smooth for about five years, at which point a new set of tenants moved in and promptly bounced their rent check. They ended up not paying rent for five straight months! It took that long to bring them to court and finally get them evicted. Meanwhile, I had to keep paying the mortgage, taxes, and condo fees without any rental income coming in. I was sure glad I had an adequate emergency fund!
Fireside Finances always puts the interest of our readers first. We do not have affiliate or advertising relationships, nor do we receive any economic or referral benefit, from any of the banks mentioned in this article.