Keeping an Emergency Fund: 5 Tips for How to Do It
Do you have an emergency fund? Financial experts agree that having money set aside for unexpected events – like car repairs, medical bills, a job loss, or other emergencies – is a smart financial strategy. How much should you have in your fund? Many financial experts suggest that you have enough money to cover three to six months of living expenses.
Where should you keep your emergency fund? You want ready access to cash when you need it, but you also want to keep your money secure. We’ll look at where you should – and shouldn’t – keep your emergency fund and options for growing your savings.
Keeping Your Emergency Savings Safe
Your emergency fund should be kept separate from your other savings. Setting aside money for unexpected events, especially through automatic transfers, lets you take control of your finances and gives you peace of mind. While it might be tempting to dip into your emergency fund for other needs, it should be used only for true emergencies. It’s not a vacation fund or backup cash for nonessential purchases.
Places You Shouldn’t Keep Your Emergency Fund
1. At Home
While you don’t want to keep all your savings stashed at home, having some available cash is a good idea. During an emergency you may not be able to get to an ATM, banking systems could be down, or you might not be able to use apps like Venmo or Zelle. Having cash can help you buy emergency supplies, gas, medicine, food, or other necessities. You don’t need to keep a ton of cash at home. Some people choose to keep a small amount of cash on hand (for example, up to $1,000), depending on their personal needs and circumstances.
Don’t hide your cash under your mattress or in the cookie jar. Cash should be kept in a fireproof and waterproof safe, which can protect your money and other valuables from fire, flood, or other damage. Make sure, too, the safe is bolted down so it can’t be carried away in a burglary. You don’t want to be the target of theft, so only share information about your stash with people who really need to know about it.
2. Checking Account
Your checking account is also a less-than-ideal home for your emergency fund. While the account comes with government insurance up to $250,000, you typically won’t earn interest on your deposits. Because a checking account is so accessible with your debit card or checks, it’s easy to dip into it to cover regular expenses. Again, your emergency fund should only be used for emergencies.
Places You Should Keep Your Emergency Fund
1. Savings Account
A savings account at your financial institution is a safe option, since all accounts are insured by the FDIC up to applicable limits. You’ll earn interest and your money will be easy to access.
2. Money Market Account
A money market account typically earns higher interest than a traditional savings account and gives you access to funds through checks, debit cards, and online transfers when you need emergency cash fast. Most money market accounts are also insured by the federal government for up to $250,000 per depositor, so you can count on your money being safe.
3. Certificate of Deposit
When you put money in a certificate of deposit, you’re saving for a set period. You’ll usually get a fixed rate of interest and can withdraw your money at the end of the term when the CD matures. You’ll typically earn higher interest rates than a savings account or money market account, and your rates are locked in for the entire term.
CD terms generally range from three months to five years, and you’ll typically pay a penalty and forfeit interest if you withdraw money before the maturity date. If you’re interested in using this type of account for your emergency fund, look for no-penalty CDs. Also, you can do what’s called “CD laddering” where you open multiple CDs with different maturity dates. This helps you maximize interest while avoiding penalties.