Emergency Fund, Anyone?
A study by the Consumer Federation of America shows that a mere 40% of Americans have a separate ”emergency” savings account. Are you part of that 40%?
While my wife and I do have some money stashed away for a rainy day, it’s not in a garunteed investment like a money-market savings account. While I’m not making excuses, it seems like a run of the mill money market savings account is a terrible place to put your money to work. Lousy interest rates, well below 1% in most cases, just doesn’t seem like an appealing place to put a stash of cash.
How much you need to put away for an “emergency” fund is a highly debatable topic, and is highly influenced by your own personal economics and life style.
“We’re talking about the $500 to $2,000 needed to pay for that car repair, the kind of money that can be built up easily, and which then keeps them from having a lot of other financial problems,” Stephen Brobeck says. -Source
It’s worth noting that this “emergency” fund is in addition to a “oh crap, I just lost my job” fund, in which you’ll want at a minimum of three months salary to live on while you rifle through the classifieds looking for a new cash-flow source.
So you’re going to establish an emergency fund.
Aside from opening another account at the local bank, it may be wise to look online. I just got a mailer today from ING Direct inviting me to open an online savings account at a modest 4.5% annual yield. They even threw in a $25 check to “get me started”.
It seems like a reasonable idea, and I know many other bloggers, likeJonathan at My Money Blog are taking advantage of the concept.
There are many other online banks out there with different rates and promotions, such as Emigrant Directamong others. I may just have to dive into the online savings world.
Got any tips, horror stories or comments on the online savings idea?
How much money do you have in your “emergency” fund? How much should you have in your fund?
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I’m like you grant I have a fund by not enuf in it. I think you should have more than 5k too. 10k sounds better, but I agree that money might as well be stuffed in a matrress than put in a bank.
nice blog, been reading a while and finaly commented
I have more money that I should in my “emergency fund”. Basically, I’ve been rate chasing so I have significant amounts spread across multiple accounts. At my current spending level, it would easily last me 18 months — in cutback mode, probably 24+. Where my cash is:
Citibank eSavings: 4.75% APY (was 5.00% when I signed up)
E-Trade Savings: 5.05% APY ($25 signup bonus)
Vanguard Money Market: 5.22% APY
11mo CD: 4.68% APY
6mo CD: 5.5% APY
13mo CD: 5.83% APY
Certainly better than mattress returns. The CD rates have dropped a lot so once my current ones mature, I will roll them into Vanguard MMF and start trimming off the top to go into my equities portfolio.
Getting a high yield online savings account for emergency funds is just a good idea. ING Direct is a great starter account, particularly if you plan on taking advantage of the referral bonuses. Another option is the 6% apy new money promo at HSBC direct.
Most of the horror stories I have heard have been nothing worse than difficulties with opening an account.
A general rule of thumb about the amount your emergency fund should be is three to six months worth of living expenses.
Don’t forget in your calculations that health care costs can go way up if you lose your job. Fortunately my wife has access to healthcare benefits in case I lost my job, but I have access to our benefits and the cost for two goes from about $100/mo now to around $600-700/mo if you are paying the full amount.
Don’t underestimate the security of having a nice big cushion. Sometimes knowing that you could walk away if you needed to without worry makes a job a lot more tolerable.
How are you going Grant? I try to have about 5K to 10K in short-term savings accounts. If I need more money, I would just sell off stocks to free up funds.
Mossy, I like the Vanguard MMF idea. I’ll look into that one a bit more.
Jon, I agree, the HSBC route does look attractive, but I think HSBC might be in a bit of hot water with some subprime notes going south.
I agree, ntguru, your insurance costs will skyrocket if you’re ever out of work, been down that road before. That’s why our “cushion” needs to be a bit thicker. Not that I plan on losing my job, but who does?
Also, I look at an emergency fund as a cushion IN ADDITION to a “oh crap I lost my job fund”. Six months salary should be the minimum in this case, but I think $10,000 or so would provide a solid emergency cushion should the car break down, the water heater go out, the furnace quit and the air conditioner blow up all in the same month…