6 Best Places to Put Your Emergency Account:
According to a recent survey conducted by the Federal Reserve, 49% of Americans don’t have cash reserves equal to three full months of their household expenses. This is totally unacceptable, but it’s not surprising. As the economy continues to improve, the Federal Reserve is expected to raise interest rates soon. This will cause savings to yield less interest than before. For example, you might earn 1.5% now. In any case, your emergency account should contain enough money to cover your living expenses for at least six months. For many people, building an emergency fund is the first step in their journey out of debt.
Before you start to rescue yourself from debt, you need to determine where you will keep your emergency fund.
Online Bank Accounts
These are all FDIC insured.
Your Local Bank
Do not keep your savings emergency account in your checking account.
If you get in a pinch, you may be tempted to drain down your checking account to a negative balance to purchase something when you can’t afford to pay for it in cash.
That will cost you a ton in bank fees. And you may even be subjected to overdraft fees that will negate any savings you’ve made from the interest.
So what’s the alternative?
Consider keeping an emergency checking account – similar to a normal checking account but with a zero or negative balance – at your bank or credit union. You can either open a special type of checking account or you can simply have a sub-savings account. No matter how you “nudge” your money, having a separate location for your emergency savings will help you put away money without spending it.
US Treasury Bills
The best place to keep your emergency fund is in US Treasury Bills. Because it is a safe investment, the Treasury Bill rate is low. The bills are also shorter-term investments (generally 12 to 52 weeks), making it possible to avoid interest rate fluctuations. The best part is that you can purchase Treasury Bills directly from your bank.
The following is the current rate of return for Treasury Bills:
3 Month 2.5%
6 Month 2.80%
1 Year 2.85%
2 Year 2.85%
5 Year 2.85%
I personally have all of my emergency accounts in Treasury Bills, and I have never felt like my money was safer anywhere else. If you’re just starting out saving for an emergency, start with Treasury Bills.
Laddered Certificates of Deposit
If you’re saving for a major financial goal, such as a down payment on a home, there’s no time like the present to start building up your savings. While many people opt to combine their savings goals with their checking account, there’s an alternative that may be worth considering as another option for safeguarding your nest egg.
Certificates of Deposit (CDs), also known as time deposits, offer more savings security than a traditional savings account, and may prove to be a good match for your financial goals. CDs are accounts offered by banks or credit unions where all you have to do is deposit your money into an account and let it grow. On top of providing a higher interest rate than what you can get from a traditional savings account, CDs also help lock in that interest rate no matter what the market does.
You can also establish CDs that mature at intervals, giving you more flexibility to manage your retirement funds based on your savings needs and time horizon. For example, put down your down payment on a home within the first 12 months and then fund your other goals with CDs that mature at staggered dates later on.
The downside of CDs is that penalties are usually associated with early withdrawal. However, if one of your goals is to build additional savings for retirement, the longer term offer more safety net from the market volatility and the potential for losing your savings.
These are three companies who handle your investments, and they have a lot in common. They all have low fees, they let you invest in a variety of assets, they offer various risk levels, and they let you easily monitor your investments. But each company has their own strengths and weaknesses.
Wealthfront is the better option for new investors with small accounts, while Betterment and Future Advisor have similar offerings.
Wealthfront has a simple, easy to navigate interface, and a great mobile app. It also has the highest level of individualized coaching and is a good option for those who don’t mind putting in a little initial effort.
The Future Advisor has an automated investing function that will put your money to work for you, and it is a good alternative to Wealthfront.
Betterment is a good option for investors who are looking for hands off investing, and new investors who are looking for a simple online investing experience.
So, which one should you choose?
It depends on your specific needs. And before I get to that, you should know that I am an affiliate with Betterment and will get paid commission if you open an account through the link on this e-book.
Where You Should Put YOUR Emergency Fund?
You’re saving for the future. You’re doing everything right. No matter what happens, you have enough money for a rainy day, and you won’t have to borrow money when everything goes wrong.
You’ve got your emergency fund, and you know where to keep it. Now the real question is: where should that money be.
For convenience purposes and having your financial ducks in a row, it may seem logical to put that money in your regular checking or savings account.
But, the truth is—that is not the best place for an emergency fund.
Instead, you should set up a dedicated, separate account to hold that emergency fund money.