Building An Emergency Fund – Where Do I Keep It?

As I mentioned in my recent post about what to do after getting out of debt, I like the idea of having an emergency fund.  After  a series of super-secret mathematical calculations – I pulled a number from a hat – and decided that $16,000 would be a good amount to have in ours.

Where do I keep our emergency fund?

Online Savings Account – $14,000

Online Interest Bearing Checking Account – $1,500

Cash In My Pocket – $500

(Currently, our online savings account is with ING DIRECT.  Open your account online today. No fees and no minimums!)

I like the idea of having some cash on me, at all times.  I also like to keep some money in a checking account, readily accessible for unexpected expenses.  The bulk of the money, in my online savings account, is for major, unforeseen life-events.  Should I need to withdraw the money, a transfer takes about two days.

(As a side note – I also have just about $2,000 in a brokerage account, invested in an index fund.  The money has been sitting in the account for more than two years and I never really do anything with it.  Eventually, after I fully-fund my ‘emergency fund’ and all retirement accounts, I’ll turn my attention to this brokerage account.  For now, I don’t include this amount in any of my calculations – and I consider it my super-secret, things-have-fallen-apart, emergency stash.)


Observant readers will remember that I’m not afraid to dip into my emergency fund.  In fact, if you are going to live ‘no credit needed’ (without borrowing money), then you’ll need an above-average cash reserve.  And, when it’s time to buy big-ticket items, you’ll have to use the money that you have ‘on hand’.

I would be interested to hear whether or not you have / want an ‘emergency fund’.  How much are you planing to save?  Is it invested in mutual funds / stocks or is it just sitting in an online account?

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26 thoughts on “Building An Emergency Fund – Where Do I Keep It?
  1. Master Your Card

    Hi – great read!

    I have a 3 month cushion at the moment, but am working to extend it to 6 months.

    By the way, what kind of interest are you getting on that online savings account?

    Jonathan

     
  2. Future Millionaire

    I currently have about $10,500 in a high yield money market. For me this boils down to about 5.5 months of living expense excluding retirement contributions (my monthly expenses are about $1,940 after retirement contributions). I’d like to eventually increase my emergency fund to cover 6 months worth of expense. But since I feel very stable in my current situation and 5.5 months is a good start I’m focusing my savings on other priorities first and will let my passive income build the last 1/2 a month – last year I earned over $600 in interest on my EF.

    My emergency fund is located in a physical bank with checks attached so I can have immediate access should anything happen. I think I’d be too nervous to put my EF in mutual funds or stocks because there’s always the possibility of it loosing money. And you never know, when you loose your job because of the economy might be just the same time the stocks in your mutual funds or the individual stocks you bought take a big loss then then you really have an emergency.

     
  3. ha3rvey

    I’m glad you posted this. I’ve been considering the same issue for some time now. I’ve been keeping my emergency cash-on-hand in my sock drawer since I first started building my emergency fund. This weekend, I plan to build an old-school book safe to keep it in.

    The real emergency fund is in a credit union savings account across town so I won’t be tempted to use it for a new ipod. ;) When I get it up to $2000, I plan to put half into a higher-interest online account.

     
  4. Brett @ Common Cents for Everyone

    You can also take advantage of higher CD interest rates by setting up different CDs to mature at different times. For example, you can set up 6 6-month CDs to mature a month apart by opening them one month apart and keeping the money in an online savings account until you open the CD. It won’t be as easily accessible as the online savings, but it will be fairly liquid once you’ve set it up.

     
  5. Curtis

    I’ve not gotten to that point yet, but it is in the plan someday. When I get there though, it will be a 2-fold plan. I plan on having both short-term savings and an emergency fund. The ST I will keep for stuff I plan on spending this year or for replacement of items I know will be coming up (such as cars) and the emergency fund will be much smaller and be just for unforeseen circumstances.

     
  6. Debt Free Revolution

    It’s interesting you post this :) I am now starting on my “big honkin emergency fund” and engaged in a lively debate about cash vs HELoC (as if I would be doing a HELoC with a blog named “Debt Free Revolution” LOL) as emergency fund.

    I use a money market with check writing for my emergency fund, although I try to keep cash in the account until the next payday before sending it off “on a mission” and have cash flowed car repairs without needing to touch my EF. After the incident with the furnace last year, I just don’t feel comfortable sending out “above and beyond” money before I have my next pay in the account.

     
  7. Mom

    I have about 4 months of bills saved up as our emergency fund. 6 months worth is the goal. I keep one months worth in our checking account, some is in a savings account, but the bulk is in a 6 month CD.

     
  8. Cameron Moore

    We’re not debt free yet, so we only have $1000 in our ING Direct savings account (which we setup in November, I think). I generally keep all of our money in the Orange Savings account and nothing in the Electric Orange checking account, but I’m starting to think I need to put at least a little into the Electric Orange account in case we get in a pinch and don’t have internet access.

    We’re Dave Ramsey disciples, so we do plan on having a large emergency fund once we are debt free. At this point, I don’t see any viable alternatives to high yield money market accounts. Everything else is either too risky (mutual funds and stocks), ties up your money (CDs), or lags behind the inflation rate (low yield money market).

     
  9. Frugal pursuit

    I have six months worth of emergency savings. The money is distributed among a savings account and CDs at a local bank and two online savings accounts. I do keep some cash but the amount is small (

     
  10. Geoff Cauble

    Great post! We just recently paid off the last of our credit card and auto debt and we have started our emergency fund (3,500 so far). We have been using Dave Ramsey’s 6 baby steps so we have had a 1,000 emergency fund for about a year and a half. I’ve kept that money in a Money Market account at a small local bank across town. I’ve got immediate access to the money but I have to drive 30-40 minutes to get to it. The drive really helps me with my impulse buying, so far we haven’t had to touch the EF, even when we had to replace the HVAC unit.

    I hadn’t thought about keeping a small amount of cash on hand at the house but that is probably a good idea.

     
  11. Wayne

    We have an Emergency Fund of $12,000, a small portion of which we used in in combination with our Car Replacement fund to get my wife a car. We should have it back by the end of the month.

    We choose to keep it all in ING Orange, because the fact that it is an emergency fund necessitates that it be extremely liquid (IMO). When you combine this with the no-fees attached Electric Orange checking account, you have instant spending power out of your savings account (since transfers from one to the other are immediate). Debit card or ATM both have access to that money right then.

    Even if you lose internet access at your home, you can (in emergencies) use the internet at the library, your work, your friends’ house, etc… You may be able to call ING to have them move it from one to the other via their customer service line. Even if it takes a day or two to get the money over, most services you need will give you time to pay your bill, if they know you’re paying cash (and up until the last 20 years or so, that’s how many businesses regularly operated).

    Other options, like mutual funds, make withdrawing money too time prohibitive to make it simple. I imagine someone who had to wait a week or so to get their money would be tempted to get a credit card for emergencies.

     
  12. Jennifer

    Our magic number is $10,000. To pay for the bare minimums this would last us 4 months, maybe 5 depending on utility bills. We are 1/3 of the way there and try to save each month towards it. Some months are better than others. We are like you – we keep having to use parts of it for things, including a transmission replacement.

     
  13. kevin

    Our emergency fund was $10,000 and it was in a CD until we recently loaned it out to family for a real estate venture with the hopes of making a profit on it. As to whether or not we succeed you’ll have to get back to me in a couple weeks. They never close until they close.

     
  14. Tim

    since you presumably won’t need the entire e-fund all at once, i’d take advantage of the better cd rates over savings rates and ladder the cd’s. i still believe you should maintain at least 1 or 2 months of expenses liquid in a savings or money market account, with some cash on hand. the rest, i would ladder in cd’s or tax advantaged t-bills.

    HELOC is simply a bad idea for emergency funds as it relying on credit cards. Taking on debt or more debt to finance an emergency will compound the financial problem. Moreover, getting a HELOC in this environment isn’t assured, and it wasn’t necessarily assured in the past either. It would really suck if you couldn’t get a HELOC when you had an emergency. You shouldn’t rely on anything that requires borrowing to fund an emergency since you aren’t 100% guaranteed to get the financing or get enough financing.

     
  15. Tim

    second thing, you should also re-evaluate your emergency fund needs every so often, especially with the current economic environment. you may need less or more depending on your employment risk. emergency fund is also based on the chance of other things occurring besides employment risk. your emergency fund may need to be boosted during hurricane season if you are in the zone, may need boosting if there are increased health, etc.

     
  16. Jay Barrow

    I too keep my emergency fund in a paypal account. It gives me instant access via their debit card in case of a roadside emergency or one where I am away from home.

    It also is invested in a money market, which, as mentioned earlier has declined in interest rates. Today my account shows 3.35%, and paypal charges a 1.1% annual fee much like a mutual fund would, so the adjusted rate after the fees are somewhere just barely past inflation.

    This is fine by me as I am more concerned with being able to get to the money quick as emergencies love to sneak up on us. :)

     
  17. Cameron Moore

    Tim,
    Your second comment does a good job of explaining why not to do your first suggestion. Putting your EMERGENCY fund in laddered CDs is a bad idea, IMHO. In that scenario you only have access to one rung of the ladder at a time without the bank charging you fees.

    Jay & Odnal,
    Paypal doesn’t seem like an overwhelmingly great deal to me. You can get the exact same rate in an ING Electric Orange account that includes a debit card. You could keep a small portion of your emergency fund there and keep most of it in an ING Orange savings account and get an extra 1% APY over the Electric Orange and PayPal rates.

    PayPal: 3.35% – 1.1% = 2.25%
    ING Electric: 2.25%
    ING Savings: 3.40%

     
  18. Odnal

    Historically, PayPal has been a pretty good deal. Up through about September 2007, the interest rate was consistently above 5%. Most of the 1.1% annual fees were waived with the actual fees being only 0.33%. The prospectus lists the 2006 actual investment income at 4.81%. I’d suspect 2007 to end up around 4%.

    The last 6 months though, the return has dropped considerably to mid 3%’s, so I’m considering moving to something like ING or eTrade instead.

     
  19. Cameron Moore

    Odnal,
    I’ve only had my ING account since September, but I believe the APY was 4.30% on the savings account when I opened the it.

    Everyone,
    While we’re talking about all this, I was wondering if anyone is using EmigrantDirect? They appear to provide similar services to what ING does but with better interest rates. Anybody?

     
  20. Wayne

    I’ve heard some good things about Emigrant, but other than the interest rate (which it seems is always poised just above ING’s) there isn’t too much else compelling about them. Last I checked, they don’t offer a checking account and I’ve heard that ING’s UI is superior to theirs.

    Like I said earlier, I prefer to have the debit card from the ING checking, since transfers are immediate.

     
  21. Future Millionaire

    Odnal,

    I just recently opened up an Emigrant Direct savings account to start saving for a future car (like 6+ years away). So far I have to say I’m really happy. I look at ING but since the services I needed were offered by both I went for the extra interest. I didn’t need a debit card since speed of transfers didn’t matter to me since I won’t be taking any money out for years to come. I do have to say it takes about 3 days or so for transfers to register, but I just account for that with my automatic transfers by doing them a few days before I want it debited from my regular checking.

    Over all I’m pretty happy. Let us know if who you decide to go with and why. I’m curious myself, since I just embarked on the internet banks.

     
  22. KC

    This is basically how I do my emergency fund – just like yours in checking, Money Market (savings) and cash. My numbers are a bit smaller, but that’s cause I have abosolutely no plans to buy anything expensive in the near future (course I didn’t plan on someone totaling my husband’s car last year either, but that’s another story).

    I know people highly discourage non-discretionary, non-retirement money being kept in stock, but some of my emergency fund is there, too. I figure if I have no source of income I’m not going to burn through my money market in a week. That would give me enough time to sell the securities I needed to pay the bills – this money is fairly liquid unlike equity in my home, as an example. This money is also not in speculative securities at all. If the stocks I own go bankrupt we’re all in for a world of hurt, not just me. But I certainly wouldn’t recommend keeping any emergency funds in securities unless you have thoroughly researched the companies you’re buying AND you have enough money in them to take a drop in the market like we’re experiencing now.

     
  23. karla (threadbndr)

    The total of my efund is about a year of take home. Yes, I’m cash heavy, but I’m single (widowed) and in an area/market where I might have trouble instantly getting another job at my current pay.

    Half is in laddered CDs at my credit union, with one month in the MMkt saving account attached to my check book and four months in ING. There is some cash on hand and I budget based on last month’s wages, so most of the time, there is about a month’s worth in my interest bearing checking account.

    My biggest issue with the efund is my reluctance to dip into it. I HATE it when I do. I’m trying to get around that by setting up some ‘future spending’ sub accounts in ING and funding them now that the e fund is more than flush. Probable categories are “household improvements/appliances/repairs” and “auto repair/replace”. Knowing that they are accrual accounts that are MEANT to be spent should help me actually be able to spend them.

     
  24. Derrick F

    Hey,

    I am working on a $12,000 emergency fund right now. It will all be kept a couple of clicks away in a Money Market account. I do carry travellers cheques when I travel which serves as an additional emergency fund. For day to day activities, I have cash on hand, but it is not really an emergency fund per se.

     
  25. Jhonty Rhodes

    Nice article. I started thinking about emergency fund and credit card debts soon after i graduated with 40k credit card debt in 2005. Me and my wife (we both are electrical engineers) cleared the debt in 2006, paid off my car loan in 2007 and have saved about 120k in emergency fund (40 months)(in multiple cds). I have about 70k in investments (stocks, mutual funds and options) and about 25k in checking and savings accounts. The goal is to have 5 yrs of emergency fund and maintain the amount in checking and savings by the time i’m 30 next year. After that it will be the time to start saving for vacations, college education for kids (to be born) and a home (to be bought in 2012).

     
  26. Mary H.

    I didn’t actually count, but I think the majority of contributors keep 6 months emergency funds. Given the economy and the fact that my husband has just gotten a job after being unemployed for 9 months, we are in the process of building a 12 month emergency fund. Fortunately we had paid off our mortgage 5 months before my husband lost his job, so we managed the unemployment period without having to dip into savings. I encourage readers to lengthen their emergency fund time period from 6 to at least 9 or 12 months.

     
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