- Do you have an adequate emergency fund?
- Is your cash earning at least 1.90%?
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 Nov 2019, pay about 1.90%. 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, Marcus, 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. 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.
FAQs about Emergency Funds
1. Is it a hard pull or soft pull to open one of these high-yield-savings (HYS) accounts?
Typically opening a bank account does not result in a hard pull on your credit, but it can vary per bank. Credit Unions on the other hand often do complete hard pulls when joining, I've found. Banks sometimes do pull what is called your ChexSystems report, which is similar to a credit report but specifically for banking institutions. You can request a free copy of your ChexSystems report if you'd like on their website.
2. How hard is it to transfer my money from a HYS account to my local bank account?
Quite easy! When you open your account at any of the above institutions, you'll have the option to link your local bank account via ACH. Sometimes you can instantly verify the connection and other times you'll have to wait 2-3 business days for two trial/micro deposits to show up in your local bank. You'll then enter the amounts of these micro deposits at Discover/Ally/Capital One and then be free to transfer as your wish between accounts. I typically push money from my Emergency Fund to my local bank when needed, as opposed to initiating the transfer from my local bank. I do this because the above banks don't charge a fee for transfers nor do they have transfer limits typically, whereas I've seen Bank of America charge for outgoing electronic ACH transfers, and Citibank cap outgoing ACH transfers at a low $1,000. It is quite obnoxious and cumbersome, so that's why I initiate transfers from Discover, Cap One, or Ally.
3. How can banks offer these rates?
For one, most of the above banks don't have physical branches, so they save a lot of real estate and overhead. Think about all the money Chase and Bank of America have to pay to keep their branches functioning. Also, these banks use their HYS accounts as a loss-leader to attract new clients. (Just like the grocery store can offer a pineapple for 99 cents.) They make may not make money on a deposit-only client, but they can then lend out that money at a higher rate for a mortgage, or earn fees from banking clients who later turn to them for investing.
4. What are the downsides of a HYS account?
There aren't many! One restriction, which applies to all savings accounts, is you only get six withdrawals for free from your savings account per calendar month. You shouldn't be transacting that frequently in your savings account anyways though, that volume should come from your checking account.