No one will argue that having money put aside for a rainy day is not a bad idea. Cars break down, tires need to be replaced, medical bills come up. Life happens, and when it does, we should be ready for it.
When we first started our journey to financial freedom, we knew we needed a little bit in savings before we started working our hineys off to pay all of our debt except the mortgage. If we put everything extra to debt and something came up with nothing in savings to pay for it, we would have been forced to use credit cards to cover it. Which was something we didn’t want to do.
Instead, we put a little bit in a savings account as a buffer for life’s little emergencies. To see what really counts as true emergencies and what does not, read this post here. When unexpected things came up, we just pulled money from savings and continued to put extra towards debt.
Now that our debt is paid off, we are working on our emergency fund. In our last post, we wrote that our goal is to put about six months’ worth of expenses into our emergency fund. If you are trying to figure out how much you need to save, click here.
Here are four things to keep in mind when thinking about your own emergency fund.
- An emergency fund is different than a savings account. You can start a savings account to save for a vacation, or your next car, or any other big ticket item. Any big expense that you know will be coming up should be put into a savings account. An emergency fund is only for unexpected expenses. Things like car problems, medical problems, job loss problems. Anything you aren’t really planning on.
- An emergency fund should be liquid. Liquid is a fancy bank term for “really easy to get to.” Stashing money in your sock drawer is very liquid. You can get to it right away. But honestly, that’s a little TOO liquid for me. Savings accounts are liquid. You can access funds from an ATM or make online transfers if needed. A money market account is also liquid. Most money market accounts have check writing privileges and it would be fairly easy to access.
- An emergency fund is not an investment. You are trying to save money, not earn money. It might be an investment as far as giving you peace of mind that when emergencies come up, you will be prepared for them. But it is not an investment that will earn a ton of money in interest. (Most accounts that earn more interest are not liquid.)
- The place to keep an emergency fund is an online savings account. Or a higher interest rate money market account. There are pros and cons to both. A money market account usually has a lower interest rate right now than an online savings account. But it comes with check writing privileges that do not come with an online savings account. An online savings account has a little bit higher interest rate, but everything is handled online. Funds can easily be transferred online to other bank accounts or to pay certain bills. And they have echeck deposits that make it easy to put money into the account.
What We Decided to Do With Our Emergency Fund
When we first got serious about an emergency fund, we did a ton of research, Because that is what I do, friends. All banks have savings accounts but their interest rates are about as low as it gets. You could also do a money market account. It is higher interest rates than traditional checking accounts, and most MMAs come with check-writing privileges.
Ultimately, we ended up going with an online savings account. Being able to write a check with a money market account would be nice, but with an online savings account, we can transfer money to our regular checking to do the same with the click of a button.
At the time we needed to open our account, most money market accounts were only earning 0.85% APY (Annual Percentage Yield – how much we earn in interest in one year). We were able to find a few online savings accounts with an interest rate of 1.0%. It’s not a ton of interest, but again, we aren’t trying to make money. We are trying to keep some set aside in case of emergencies. Online banks are able to offer a higher interest rate since they have lower overhead fees. No brick and mortar building to pay for, less employees, etc.
We went with Ally Bank to open an online savings account. (Not an affiliate link btw – just a happy customer!) We also had a few friends recommend Barclays Bank. Both Ally and Barclays had 1.0% APY, no minimum balance, and no hidden fees.
There were a couple of other banks that offered slightly higher interest rates, but we weren’t very comfortable putting our money into an institution neither one of us (or any of our friends) had heard about. If that’s your thing, go for it! I’m sure as long as they are FDIC insured it will be fine.
If you made it all the way to the end of this post, congrats on being just as much of a nerd as I am. Feel free to reach out if you have any questions or thoughts.
Has anyone else had experience with online savings accounts or money market accounts? Where do you keep your emergency fund?