The Ultimate Guide to Handling Your Emergency Fund

03 Nov

1:09

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Unexpected expenses have a way of popping up at the worst possible times. A good way to be prepared is having an emergency fund. An emergency fund is money put aside to use when something comes up and you need money right away.

One example of an unexpected financial emergency is a car repair – and they are not cheap. The average cost of car repairs after an accident can range anywhere from $50 to $1,500+.

The Federal Reserve recently reported that 4 out of 10 people in 2017 would have difficulty paying for a financial emergency of $400. Instead of having an emergency fund to rely on, these people may use credit cards to pay off the bill, only racking up more debt, or asking someone else to fund them the money.

Don’t let an unexpected expense put your finances in jeopardy. In this guide, we’ll explain how much to save in an emergency fund and where to keep yours stashed.

What is an emergency fund?

An emergency fund is money put aside specifically for an unexpected financial emergency. These funds are there to help you tackle an emergency so you don’t have to take on debt to cover expenses.

There are many reasons why you might need an emergency fund. Some of the most common scenarios include:

Handle an unexpected medical cost
Pay for car repairs after an accident
Provide liquid assets in the event of a job loss
Use toward an unexpected home repair

And once you use your emergency fund, it’s essential to start saving again right away. You don’t want to be unprepared for anything else that can come up.

Deciding how much to set aside for a rainy day is a question with multiple answers. In the next section, we’ll look at a few different rules of thumb for saving amounts.

How much money you should save

When you start saving money for your emergency fund, you should strive to cover your financial needs that are based on your individual income and living expenses. Single-income families may differ from dual-income families, and self-employed may differ than those who have full-time jobs.

Here are a few good rules of thumb when determining how much to save:

3 months: Best for singles

If you are single with a steady job, saving three months can work well. You only have yourself to worry about so it’s only your living expenses that will need to be covered, rather than those of a spouse or children.

6 months: Best for married couples with kids

Those who have a spouse and children will likely need to save more money than those who are independent. Six months should cover the costs for those who are married with a stable income and have young children living with them.

9+ months: Best for the self-employed

Anyone who is self-employed or with infrequent income, such as freelancers, can benefit by saving more than those who have a stable income. Nine months is a good go-to target. This way you’re able to pay for any unexpected emergency, such as car damage, or the loss of a client or project.

Where to keep your emergency fund

Now that you know why you should have an emergency fund, it’s time to decide which accounts are best to stow away your cash.

Two popular accounts for emergency funds are savings accounts and certificates of deposit (CDs). A savings account at a financial institution allows you to earn interest on your funds. Savings accounts can be ideal for emergency situations because it’s easy to write a check and access funds via wire transfer or an ATM.

CDs are deposit accounts which require you to keep your money stowed away for a particular time frame. In return for keeping your funds tied up longer, you can receive a higher rate of return than you typically would with a savings account

There are also CD ladders, which should not be confused with CDs. A CD ladder a strategy used to open multiple CDs with different terms. The idea is that you’ll have a new CD maturing every few months or so, giving you more flexibility in how often you can access the funds in those accounts.

With all the different accounts out there, it’s hard to know exactly why a savings account or a CD is the best option for emergency funds. But there are some distinctions to watch out for.

Unlike stocks and mutual funds, which have principal risk so you can lose money, savings accounts and CDs do not. This is incredibly important for an emergency fund. You don’t want your emergency fund to go down when the market does and therefore, not be able to withdraw the exact amount you need.

Why checking accounts aren’t the best options for savings

A checking account is similar to savings and CDs because it doesn’t have principal risk. You can access your money freely without any limitations, which can also be a negative. If you can access your funds at any time, you may find yourself withdrawing from your checking when it’s not necessarily an emergency. Plus, the rates for a checking account are usually much lower than those with a savings account or CD.

You want to be able to access your money when needed, but you also want to be able to save it so it’s there should an emergency pop up. A savings account allows you to get your money fast while CDs can take a few days and with a penalty. As for CD ladders, the full balance is not usually available, only a portion of what’s in your accounts.

Savings accounts vs. CDs for your emergency fund

When deciding on savings accounts or CDs for your emergency fund, there are several factors to take into consideration. Let’s take a look at the pros and cons for these two accounts to gain a better perspective on which might work best for you.

When savings accounts make sense

A savings account is a viable option for an emergency fund because you are able to place your money in a safe place and have access to it when you need it. As long as you follow the transaction guideline limits, you will not have to pay a fee, and you still earn interest on your money as long as it’s in the account.
Pros

FDIC insured up to $250,000 per account
Deposit as much as you want without restrictions
You can withdraw from your account six times per month without any penalties
Online banks offer very competitive rates on savings accounts, many times more than traditional banks
As rates rise, online banks tend to offer higher rates on deposit accounts as well
Some savings accounts allow for check-writing abilities

Cons

Interest can be lower than some CDs
Traditional banks offer rock bottom interest rates
May get hit with excessive transaction fee if you make a withdrawal/transfer from the account more than six times per month

When CDs make sense

While a savings account may have an advantage over CDs when saving money in an emergency fund, there are times when CDs may work better, such as for overflow savings. Once you have met your goal with your savings, you may want to invest the rest of your money (or a portion of it) into a CD or a CD ladder strategy to earn interest.

A CD or CD ladder strategy makes the most sense for those who don’t need the money right away or want ongoing access to it. If you take the money out before the CD term is up, you are at risk of paying a penalty fee. And remember, if you leave your money in there, you can get a higher rate of return.
Pros

FDIC insured up to $250,000 per account
Interest rates are usually higher than regular savings accounts
Rates are locked until maturity so they won’t fall

Cons

Rates are locked, which means they can’t rise
Possible penalties for early withdrawals
Restrictions on deposits

Best savings accounts for emergency funds

A savings account can be a good option for an emergency fund. MagnifyMoney has its own savings account marketplace to help compare and find the right account for you. Simply add your zip code and account balance to review your results instantly. To help get you started in your search, here are some of the best online savings accounts that may help you stow away cash for an emergency.

	Marcus by Goldman Sachs Bank USA	Ally Bank	Synchrony	MySavings Account from MySavingsDirect
APY	2.05%	1.90%	1.90%	2.25%
Linked debit card?	No	No	Yes	No
Ways to access your funds	– Funds transfer with linked account – Wire transfer	– Funds transfer – Wire transfer Phone transfer -Check request	– Online transfer – Phone request – ATM withdrawals	-Transfer funds electronically
Time to transfer funds	Next business day	3 days; can also be expedited for 1-day transfer	Immediately for outgoing transfers	2-4 days

What to look for when vetting emergency savings accounts

When searching for a savings account, it’s smart to check out online banks. Many times you can find higher yields without monthly maintenance fees tacked on.

Keep an eye on savings accounts that can offer limited check-writing abilities for easy access to your money. Also, look into the bank’s transfer requirements and restrictions.

“If you need to move money from the savings account to your checking account to cover an emergency bill, you’ll want the transfer to be fast without small-dollar limits on the transfer,” said Ken Tumin, editor of DepositAccounts.com (also owned by LendingTree).

Best CDs for emergency savings

If you’re looking for CDs to help keep your emergency fund on hand, there are also many to choose from. Find some of the best CD rates directly on MagnifyMoney’s CDs marketplace by putting in your zip code and the amount you’d like to deposit.

Here are a few CDs you may want to keep an eye on as you begin your search.

	Goldman Sachs Bank USA	Synchrony	Barclays Bank	Ally Bank
Terms available	6 months — 6 years	3 months — 5 years	1 year — 5 years	3 months — 5 years
Deposit required to earn starting APY	$500	$2,000	No minimum deposit	No minimum deposit
APY range	0.60% APY — 3.15%APY	0.75% APY — 3.10%APY	0.35% — 3.10% APY	0.75% APY — 3.00% APY
Early withdrawal penalty	For a CD term of less than 12 months, there is “90 days simple interest on the principal at the rate in effect for the CD”	Starting with: 12 months or less terms are charged 90 days interest at “current rate”	Less than 24 months, there is a penalty equivalent to 90 days interest	There is an early withdrawal penalty for both high-yield CDS and raise your rate CDs; penalties vary and are determined on your CD term

What to look for when vetting emergency CD accounts

As with savings accounts, there are many options when shopping for CDs. Be sure to seek out banks that offer competitive rates, low early withdrawal penalties, interest withdrawal without penalty and bank-to-bank transfers that are done electronically so you can get your money the fastest.

6 tips for saving money for an emergency

Saving money for an emergency fund can seem daunting, especially when you are first starting to save. However, there are a few easy tips to help pave the path for a solid fund.

1. Make your emergency fund a priority

Start saving for an emergency immediately. Once you have reached your emergency fund goal, work on other financial plans and investments.

2. Adjust your budget

Cut down your spending habits and try your best to stick to a budget. Be truthful about your financial situation and don’t spend money you don’t have.

3. Use other cash sources

Try to put away cash received from other resources before you even miss it, such as work bonus, a raise or additional income from another resource. This way you won’t be worrying about trying to nickel-and-dime your paycheck to add money to your fund.

4. Don’t use your emergency fund for just anything

As your emergency fund grows, be sure to keep it there. You don’t want to use it on something else, such as a big, lavish purchase and then need it for a future emergency only to find it’s no longer there.

5. Be diligent about saving

Try to stick to your savings goal. Put away the same amount every month no matter what else may come up.

6. Pay down your debt

If you have a lot of debt, you’ll want to get that paid off as fast as possible. It’s hard to save when you have high bills (with high-interest rates) to pay off every month. Treat debt payments as a form of savings — just think about all the interest charges you’ll avoid by paying it off quickly.

You never know when a financial emergency might come up. Try your best to be well-prepared with an emergency fund. This fund will keep your money in a safe place so you can access it if an emergency should happen.

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