On my previous post, Why you need to establish an emergency fund, we’ve discussed the reasons why. Well, this time let’s discuss what are the important things to consider when establishing one. Below are some of the valuable tips that my wife and I followed when we establish our own emergency fund:
How much to save
I work both in healthcare and accounting field, both are so called economic recession proof careers. But that does not mean that I don’t need an emergency fund. Currently, I have six months worth of emergency fund and I am currently working on making sure that I have one year’s worth. I purchased both the short-term and long term disability coverage from my work so I do not have to worry about any lost income in case I get sick or become disabled. So my emergency funds are really geared towards lost of my job or major car or home repairs.
The old recommendation by a lot of people is 6 months worth of your monthly expenses. But with the most economic downturn when people lost jobs and have been unemployed for more than a year, six months worth of emergency fund does not seem enough anymore. You should try considering saving for at least one year’s worth of your monthly expenses. I say expenses instead of your monthly income because the goal here is to really cover your mandatory expenses. However, if you are aggressive enough, then you can shoot for your annual salary’s equivalent as your emergency fund so you really can cover all of your monthly expenses and still have extra to put away.
Where to Keep The Fund
Right now, our emergency fund is saved in a low yield money market fund that we can access right away. It is with our credit union so that I have easy access whenever I need the money. Although online accounts may provide a little higher percentage, it is a personal preference of mine to have it in the credit union because I’d like to withdraw cash right away without the hefty fees and limitations of an ATM if I have to use the online banks. So to me, it is a preference of accessibility rather than earning an extra interest.
The best place to keep your emergency fund is putting it in a money market fund that has a checking feature. Money market funds have a higher interest rate than the regular savings account. These funds are also insured by FDIC so your money is safe in case the bank shuts down. The money is very accessible whenever you need to access it since most money market funds have an atm and checking feature associated with the account.
Money market funds are offered both by your local banks and online banks. Online banks  like ING and E-Trade offer savings that have interest rates similar to the money market funds. Nowadays, the current interest rate is between 1-4%. It is low because majority of them are tied on the the current Federal Reserve Interest Rates.
Keep Credit Cards With High Credit Limit
We keep a lot of credit cards with zero balance just in case our emergency savings run out. We’ll just never know when we’ll need it. In addition, credit cards are very flexible and we can use it whenever  we need. This is like the back-up to our back-up.
Most of us don’t have the emergency fund initially. While you are still saving up for your emergency fund, you should try to keep your credit cards especially the ones with a high credit limit. I don’t like to use credit cards on a regular purchase but they are very useful tools to provide you some peace of mind knowing that the money would be availabe in case of emergencies.
Use only in case of Emergency.
I have never touched our emergency fund because I am afraid that I won’t be able to pay it back. Â I truly believe that emergency funds should be used for emergency purposes only and not for an emergency luxury expense. The best thing to do for me is to think that I don’t have an emergency fund at all.
It is sometimes very tempting to touch our emergency fund when we know that we have that kind of money sitting in the bank. Buying non-emergency items such as furniture or a new TV using the emergency fund and promising ourselves that we are going to put the money back. But what happens if are unable to do so? We sometimes procrastinate until we end up not replacing the funds. That is why you should only use the fund strictly for emergency purposes only. You need to pretend that the money does not exist at all so you don’t come into a situation where you have to dip into it for unnecessary expenses.
So, your advice is to put a year in a place earning no interest vs an online savings account (earning a little) so you can remove it all as quickly as you want? How about some at home, some at the credit union, some online and some in bonds? That way you are at least not loosing money on your EF.
I guess you misread it. I did say it is a personal preference and not an advice. BTW credit union banks pays some interest and not 0%. The idea of putting it in bonds defeats the purpose of liquidity. Once you invest in bonds, can you take it out immediately?
I did mention this on the post:
“Money market funds are offered both by your local banks and online banks. Online banks like ING and E-Trade offer savings that have interest rates similar to the money market funds. Nowadays, the current interest rate is between 1-4%. It is low because majority of them are tied on the the current Federal Reserve Interest Rates.”