Where to Stash Your Emergency Cash

An emergency savings account should be a first priority when setting financial goals. The concept of this particular goal was discussed in the previous post – Rule #1: Spend Less than You Earn. Now let’s cover the details of making this a reality.

The purpose of this savings safety net is to cover unexpected “emergencies” such as unemployment or loss of income, a major medical expense, an auto repair, a home appliance repair or replacement, etc. The primary function of this account is to provide liquidity and safety.

One option is to simply open a separate savings account at the same institution that you may already have a checking account. With the click of a mouse, use of an ATM card or even by phone, you will likely be able to move money back and forth with ease. However, this may also be a negative factor. The ease of money movement between accounts and the potential for ATM access may entice you to use the savings balance for things that aren’t truly emergencies. (A night out with friends does not constitute an emergency.)

A second negative factor may very well be the interest rate available on the savings account. While most brick and mortar financial institutions offer linked checking and savings accounts, the fees on checking accounts and interest rates on savings accounts are often unattractive. This is the price you pay for convenience and in-person services.

A better option for your emergency savings account is to utilize an online bank. Since they don’t have the physical infrastructure to maintain, they usually offer much higher interest rates on savings accounts. However, since they are regulated banking institutions, they still offer the same FDIC insurance protection which cover balances up to $250,000 per account holder. The interest rate on the savings account at my local bank is currently 0.01% APY (Annual Percentage Yield) whereas the interest rate on my Discover Bank online savings account is 1.40% APY and my American Express Bank online savings account is 1.35% APY. (All rates as of 1/23/18). You can research numerous other online savings account options at BankRate and NerdWallet. Besides higher interest rates, many online savings accounts are offered without monthly account fees or minimum balance requirements.

Once you establish an online savings account, you can link it to your primary checking account at any financial institution. Typically they will send small test deposits to your linked account that you must confirm in order to establish the link. Once that’s done, you can simply log into your online savings account and transfer money in either direction as well as set up scheduled or automatic transfers. Just remember that there is a limit on the number of withdrawals allowed from all savings accounts – six per month. (This is a federal regulation.) You can make deposits as frequently as you like. Be sure to read the specific rules that apply to the savings account at your financial institution.

Utilizing the automatic transfer feature is a great way to begin funding and growing your emergency savings account. Consider setting up an automatic savings contribution directly from your paycheck if your employer allows splitting of direct deposits. Alternatively, you can set up an automatic transfer to your savings account the day after your paycheck is deposited.

To get started, consider setting aside a set percentage (10% would be a good target) of each paycheck, or source of income, and directing it to your emergency savings account. The minimum goal should be to reach at least one month’s income in your account before you begin funding other financial goals. This will at least provide a minimum safety net should you need to cover something unexpected. However, the ultimate goal should be 3-6 months of living expenses. Automating the savings process will help you reach your goal more effortlessly.

If you haven’t already started on your emergency savings goal, don’t procrastinate, make a plan to open your new savings account and start funding it.

– Mark –