Emergency Fund
Followers of Dave Ramsey are no doubt familiar with the importance of an emergency fund and his prescription to ensure that 3-6 months’ of expenses are safely stashed away. Unfortunately, that goal is still out of reach for many Americans. In fact, a 2011 study published by The Brookings Institution found that nearly half of employed Americans were probably or certainly unable to come up with $2,000 cash in 30 days or less.
P.S. These were not poor people, nor were they talking about money sitting around in a savings account somewhere. Study respondents were given options such as selling their home, taking a 401(k) loan, borrowing from a family member, or even going to a pawn shop, and still came up short.
For those of us on the other side of this reality, however, just having emergency savings isn’t enough. To really maximize our financial efficiency and make sure we are not only secure, but not losing money, we also need to make moves to manage those savings. While putting your emergency fund into a bank-sponsored savings account is a viable option and especially helpful for those just starting out, smart money management and real financial stability is about making moves to do more than just have money available, but to put the money you have to its most efficient use.
Do You Need to “Manage” an Emergency Fund?
From a very literal perspective, emergency funds are sort of an anti-money management element of your finances. Their entire purpose is to sit there in liquid form for easy, immediate access. However, there is one big problem with doing that through a traditional savings account or money-under-the-mattress method – your emergency fund shrinks. As of April 2016, the rate of inflation in the U.S. was 1.1%. While this is by no means a high rate or something to be overly-concerned about on a daily basis, it is 1% higher than the standard brick-and-mortar bank’s savings account yield. That means, in essence, your emergency fund sitting in a savings account is losing 1% of its value each year, requiring you to continue to add to it to keep it consistent with your actual expenses and savings needs.
And while you don’t need to add a lot of money – a $10,000 savings account would need an extra $110 added to it this year, for example – it is an additional burden in your budget that does not need to be there. In fact, a smartly-managed emergency fund can easily take care of itself and grow at a safe, reasonable rate that ensures you maintain its value without taking too great a risk.
Cheaper, Safer Ways to Keep Your Emergency Fund
As we’ve established, using a traditional bank’s saving account to keep your emergency fund actually costs you money each year through inflation. The flip side to this is easy liquidity. You simply cannot beat walking into a bank and walking out with a stack of bills. Fortunately, the number of times anyone will need to produce a large amount of cash that quickly is extremely limited.
In most, if not all cases, you have a few days or even weeks to generate the funds needed to pay for life’s unexpected expenses. Therefore, most times you can pay for an emergency indirectly, through use an emergency credit card for example, which you can then pay off with emergency fund cash before interest rates accrue. Even if you don’t have an emergency card, realize that most bills have a due date that is at least 3-5 business days away, if not a full 30 days. That means you can easily access emergency fund money to pay for these expenses in cash, even if the funds themselves take a few days to get to you, allowing you to use one of these other emergency fund savings options allows you to earn more than the standard 0.01-0.03% interest from a traditional savings account and still access your cash quickly and easily when needed:
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Internet Savings Account
Brick-and-mortar banks that have massive overhead costs associated with physical locations and a ton more staff. By eliminating some of these costs, online banks are able to pass on advantages to their customer in the form of higher yield savings accounts. Currently, both Ally Bank and Barclays are offering a 1% return on their high yield savings accounts.
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No or Low-Penalty CDs
Certificates of Deposit or CDs, though incredible secure, are not often great options for liquidity since they require investors who already invest in Bitcoin to keep their money in them for a set period of time. The longer that time, the higher your interest rate. However, some CDs offer investors no penalty for early withdrawal or only charge 1-2 month’s interest for it. Give this binance review a read to be informed about its pros and cons. Additionally, explore a Kiana Danial review for insights into financial education, investment strategies, and expert analyses. And while these CDs offer lower rates than their fixed counterparts, they are available at rates approaching 1%.
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Money Market Accounts (MMAs)
Money market accounts are actually Ramsey’s favored storage spot for the emergency fund, however they tend to have a higher buy-in than a savings account or even a CD. Once you have a substantial emergency fund, generally at least $1,000, interest rates of 1% or more are easy to find, especially on higher balances.
