The All-Important Emergency Savings

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The All-Important Emergency SavingsIf you take in any financial advice, you’re bound to hear about it.  Some disagree on when to fund it and they all seem to disagree on how much you should put into it.

Either way, everyone agrees on one thing and we’ve all heard it a million times…

Make sure you have an emergency savings fund!

Dave Ramsey wants you to put aside three to six months for your emergency savings.  Suze Orman wants you to put aside an eight months of funds for an emergency.

Ok, that sounds easy enough… but if you’re not in a good position financially, that can be easier said than done.  Regardless, my feeling is that even if you have mounds of debt, you need to have something set aside.  I agree with Dave Ramsey that you need to at least start with $1,000.  He calls this a “baby step” but maybe this is a big deal for you.  However, if you don’t have an emergency fund yet, you need to just start it… today.  Put a tiny amount in if that’s all you have.  Add $5 a paycheck if that’s all you can.  Sell some of your stuff.  Do whatever you need to in order to get this rolling.  Eventually, you’ll look and think “wow!  How did I get to $1,000 already?!”  Then, just keep going – slowly but surely and it will grow!

Personally, it’s taken quite a long time, but we’ve gotten to the point where we now have a pretty good emergency savings.  Right now, it’s around $40,000.  Some of you might be thinking “holy %^&, that’s a lot of money!” while others might be thinking “um, that’s not nearly enough saved.

As I’m sure you already know, banks suck right now.  If you put your savings in a bank, don’t plan on making any money.  Really.  It’s stupid.  In fact, with inflation, you’ll lose a ton of money as the years go by.  We use a credit union which I’ll be talking about later, but the rate’s not any better (except you’re not letting the bullies that run the world hold your money!).

So where should you keep your money?  If you put it in the stock market, you can *hopefully* better keep up with inflation, but it’s not that liquid.  If you need the money, it could be a week or so by the time you can sell the stocks, transfer the money to your bank, and get it out… and liquidity is the key to your emergency savings, because you never know if you’ll immediately need it.  However, a lot of the financial pundits are now recommending putting your money in the market.  They say that you can use your credit cards right away (assuming you have breathing room on them) and initiate the stock sale to pay the credit cards off.

For us, we’re not that bold.  I really don’t trust the market that much – I think it’s a big old Ponzi scheme, but what can you do (that’s one of the reasons I’ve been going after rental properties)?  Regardless, our emergency savings is in an online savings account.  If you’re not familiar with the online savings banks, they’re basically what their name says – an online bank for your savings.  Most of them don’t even have a bricks and mortar location for you to visit.  Because of that though, they can usually pay a little more in interest than a traditional bank.

And when I say a little more interest, compared to regular banks, it’s actually a tremendous amount.  My credit union pays an interest rate of between 0.01-0.13% (I might as well put it under a mattress!).  On the flip side, my online bank pays about 1%.  That’s roughly 100 times better than a regular savings account… but still nothing like the rates you used to get in the 80’s when you used to get double-digit percentages!  Regardless, I’ve used Ally Bank for a few years now and I’ve been happy with them (back to the bullies of the world!), but there are a handful of them that seem to be pretty highly recommended.

The downside to the online savings accounts are that they are linked to your regular savings account.  In other words, to fund the account, you have to put the money into your linked account with your bank/credit union and then transfer it from your savings to your online savings account.  The process goes exactly the opposite to get your money out.  It’s actually very straight-forward and can even be scheduled, but you still have 2-3 days of waiting to fund or withdraw your money.  In my situation, I’m fine with that.  If I need money sooner, I can use credit cards to get by.

Another option is money market accounts.  They tend to pay in the same vicinity as an online savings account.  And because of that, I don’t really see the benefit.  Sure, you can write checks against it, but for me, the emergency savings is untouchable, so that doesn’t help me much.

Regardless of where you decide to keep it, having an emergency savings fund is critical.  If you’re in credit card debt, you might be wondering which is more important – save for emergencies or get out of debt.  The answer is both.  As important as it is to pay off your debt, you’ll want to get that emergency savings going as well… and it looks like Suze Orman agrees with this as well.  This will be tough at first, but if the $%^ hits the fan, you’ll be happy you did.

Do you already have an emergency savings fund?  If so, where do you keep it – if it’s under your mattress, what’s your address? 😉  And finally, are you comfortable with the amount you have in it?

Thanks for reading!!

— Jim

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3 thoughts on “The All-Important Emergency Savings”

  1. We have an emergency fund about the same size as yours, also in Ally. Before that, it was with HSBC, and before that with ING… we’ve chased the best savings account rates, apparently! Like you, we aren’t interested in investing our backup cash in the markets, even though we know the trade-off is that we’re missing out on some potential gains. The upside: we’re also protected from losses, and taking the money out doesn’t trigger a taxable event. Those factors matter, too!

    1. Like minds, huh? Well it’s always reassuring to hear other people on their way to financial freedom doing similar things!

      Excellent point on the taxes!

      I think we just made a decision today to touch the untouchable savings. I’ll talk more about that here shortly in my next post.

      — Jim

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