Emergency Fund Part 2: Put it in the Right Place

Great job!

You’ve put in the work, watched your spending, and saved consistently in order to establish an emergency fund. You did this because you want to have security, right? You want to know that regardless of what happens, your family will be covered in the event of a major unexpected expense. You even want to know that you can keep up with expenses for several months if you get laid off.

You better not screw it up.

You worked hard and saved some money. Congratulations. Where are you going to put it? If you put it in the wrong place, your fund might lose value and leave you unprepared for an emergency. Put it somewhere that seems safe and you might not even be able to access your money.

So, if you don’t care about the financial security of you or your family, go back to watching ESPN, Netflix, Dora the Explorer, or whatever else floats your boat.

But, if you want to make sure you don’t squander all the work you put toward building an emergency fund, you should probably keep reading. In part 1, we explored exactly why you need an emergency fund; now it’s time to make sure you do it the right way.


Where do I Put my Emergency Fund?

2 keys for an emergency fund are stability and liquidity; you want the money set aside to keep its value, and you want to maintain easy access to it. 3 initial options come to mind: checking accounts, savings accounts, and cash.

A checking account is a great option. As long as you have a debit card attached to the account, you can spend money from your emergency fund almost anywhere. Additionally, you can use your debit card to withdraw cash from an ATM if you need cash for anything.

There are really only 2 reasons why you wouldn’t be able to access money from a checking account. First, a debit card becomes almost useless if there is a major power outage. In that situation, you wouldn’t be able to withdraw money from an ATM or scan your card for a purchase. The second situation would be a major banking collapse like the country saw during the Great Depression. However, the likelihood of a similar event is much lower now because checking accounts are secured by the Federal Deposit Insurance Commission (FDIC) up to $250,000.

Neither of the scenarios I just described should impact your ability to access your emergency fund when necessary. Remember, I’m teaching you how to prepare for a personal finance emergency, not a zombie apocalypse. (If you’re looking for information on preparing for doomsday, you should probably look at this website instead.)

The next option is a savings account. Like a checking account, your money is FDIC insured. The added benefit of a savings account is that you will earn more interest. However, you won’t be able to access it via a debit card. As long as you have internet connection, this isn’t a problem because you can transfer money from a savings account into a checking account almost instantly online.

The other thing to consider with a savings account is that you can only withdraw money from it a maximum of 6 times per month. This shouldn’t be an issue either because you can transfer a large chunk of money into a checking account and make individual purchases from there.

The final option for your emergency fund storage is cash. This provides you with a tremendous amount of flexibility because almost any establishment will accept cash for an in-person transaction, and you don’t have to worry about accessing an online bank account. However, you can’t make online purchases or transfers with cash. Additionally, holding cash has its risks. The money could get stolen during a break in or destroyed in a fire or flood. While you hold cash, it won’t earn any interest either. This isn’t a very big deal right now, but it could become a major factor when inflation and interest rates increase again.

So, which of these options should you choose?

If you have an extremely secure storage location in your home, such as a high level safe, then I recommend keeping approximately 10% of your emergency fund in cash, securely locked away. This prepares you for unexpected travel, a power outage, or a lack of internet connection.

With the rest of your emergency fund, I recommend splitting it between a checking account and a savings account. You want to make sure that these are separate from the banking accounts you normally use so that you can keep track of the money in your emergency fund and you aren’t tempted to use it on an ordinary purchase.

You can either put the entire fund (minus the cash) into the savings account and transfer some of the money into the checking account if you ever need it, or you can put a specified amount into the checking account in case you need immediate access to it and then put the rest into the savings account. If you want to minimize the number of credit and debit cards you have, then you can keep your emergency fund in a separate savings account and transfer it into your day-to-day checking account if you ever need the money. Both of these strategies work, but make sure that your accounts are separate enough that you only use your emergency fund when you have to, which is a topic I’ll cover in the final installation of this series.

So now you know. The ball’s in your court. Maybe you’ve saved money for an unexpected expense, or maybe you decided on Monday that you’re ready to start. Don’t screw it up and squander all of that work. Make sure that you protect your emergency fund by putting it in the right place so that it will be ready for the moment you need it most.

Do you have an emergency fund in place? If so, what type of account do you keep it in? If you don’t, what is your plan for building one? Leave a comment below – I’d love to hear from you!

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