For the longest time, it was ingrained into me to keep at least $1k in a savings account for an emergency. I used this principle for the last three years of my life while in student loan debt. In hindsight, I was taking a risk by only having $1k saved for emergencies. Now that I am finally debt free (Finally!!), my priority is to increase my emergency fund.
Related Post: How I paid off $55k in Student Loan Debt in 3.5 years
The Standard Emergency Fund Advice
The standard advice from all the famous financial gurus is to keep 3 – 6 months expenses in an emergency fund. This information is very general and is intended for the masses. In my opinion, your emergency fund should be personal to your situation.
Ask Yourself These Questions
Below are the things you should be asking yourself to determine how much you need in your emergency fund:
- Do you own property?
- Do you have dependents?
- How long would it take for you to get a new job with similar pay if you lost your job?
- How much income could you produce if you lost your job?
- Do you have debt?
- What type of insurance do you have?
- Do you have a reliable car?
Depending on the answers to the questions above, you might conclude you need way more than six months of expenses.
I also know very smart people who have over two years’ worth of liquid cash. Although having that much cash on hand is inefficient (losing $ to inflation each year), it can also provide you lots of security and freedom. I noticed a lot of self-employed people typically keep high amounts in their emergency funds.
I also know very smart people who have a more secure situation or they are more risk averse and only have a month or 2 worth of cash for emergencies.
People in Debt
I think having an emergency fund of at least $1k is ok while you are aggressively paying off your debt. Over the last year I started contributing a small amount every two weeks via my automatic savings plan but never got to the point of 3 – 6 months of expenses saved. I survived about 3+ years with ~ $1k in my emergency fund. It was a decision that helped me get out of debt quicker, but I still recognize it was a risk. If $1k seems like too much of a risk for your situation, consider prioritizing a bigger emergency fund.
Where to keep your Emergency Fund?
Regular Savings Account
Regular savings account at your bank is the standard option for most people. The advantage of keeping your money in a regular savings account is that you have access to the full amount at any time. However, most regular savings accounts are earning less than .1% interest. There are many other options where you can receive more bang for your buck.
High-Interest Savings Account
Online banks like Ally and Capital One 360 offers “high interest” savings accounts. I use Capital One 360 savings* (earning .75% interest) and love it for the ease of use and the ability to have multiple sub-accounts. I have automatic transfers to each of my savings accounts every two weeks, so I never miss “paying myself first.” I don’t think you can go wrong with either Ally or Capital One 360. One difference (other than the interest rate) is typically it takes 48 hours to withdraw your money. Waiting 48 hours isn’t a big deal for me because I only withdraw from my 360 savings account for something intentional like gifts or travel.
In case you didn’t know, there are savings accounts available that can earn you 5% interest. I found out about “NetSpend” and “Insight” savings accounts through the following articles by $$ blogger the “Financial Panther.”
If you’re interested in earning 5% interest (in a FDIC insured account) read the links below.
Insight Savings – receive 5% interest up to $5000
NetSpend Savings – receive 5% interest up to $1000
It takes a little extra “work” up front, but it isn’t that bad in my opinion. I opened an Insight account a few weeks ago, and I’m very excited to start earning a guaranteed 5% on my money. (That’s $250 interest earned in a year if you open an Insight account and contribute the max).
(One thing to note, apparently you can only withdraw $1500 in a 24hr period)
Roth IRA
Since contributions to your Roth IRA are after tax, that means you can withdraw your contributions any time you want. I just opened up a Roth IRA with Vanguard last week and plan to hit the maximum contribution for 2017, $5,500. I plan not to take any of this money out because I want my money to grow tax-free, but it gives me some peace of mind that I could withdraw my contributions if I needed to.
Investment Account
A regular investment account is another option as well. Many people that don’t like to have a lot of liquid cash use this avenue for an emergency fund. With a regular taxable investment account, you can transfer money out whenever you want by selling your investment shares. An investment account is another option, but personally, I like the idea of keeping my emergency fund in something that is a 100% guarantee. I would consider this avenue as a 3rd or 4th choice for an emergency fund.
My Emergency Fund
I currently have saved up four months expenses in my emergency fund. This amount is personalized for my current situation. The size of my emergency fund is based on my prediction of a few things:
How long I think it will take for me to get a new job if I were to get let go
I started a new job back in April and now have an opportunity to have a more marketable/in-demand skillset. With my previous job, I always had a little bit of fear that if I got let go, it would take a while to find another opportunity, due to my lack of experience (being relatively new to the workforce out of college).
With my new job, I am more confident that if I were to get let go, I now have more marketable skills to where I could find another job relatively quick.
How much income I could produce without a full-time salary
Since the introduction of the “Sharing Economy,” it’s easier than ever to make extra income outside you full-time job.
Related post: Earn Extra Income
Some options I could see myself doing to produce extra income if I ever lost my job:
Drive Uber/Lyft, Dog Sit with Rover, Deliver food, spend more time monetizing the blog, freelance services from Fiver/ Upwork, or flip physical items on Ebay.
I feel confident that I would be able to produce at least half (or more) of my monthly expenses if I lost my job tomorrow. That would help get through a tough situation. Over time, I expect the income outside my salary to increase as I continue to do side hustles and generate multiple streams of revenue.
Insurance is in place to protect me against any major catastrophe
I have health, auto, and renters insurance in place to protect myself against anything over a few thousand dollars.
Don’t currently own a home
Owning some property is in my future but getting out of debt and investing have been my priorities recently. With owning a home, you have many things that could go wrong with your property -which means you should keep a bigger cash reserve.
Due to currently renting an apartment, I don’t have to worry if an appliance breaks or the AC goes out. I simply have to submit a service request, and the issue gets fixed within a few days.
However, when I buy property in the future, I plan to increase my emergency fund to meet the need.
I don’t have dependents to support
Dependent care is another big one. Once you have dependents to support you are responsible for more than yourself. I will keep that in mind for the future.
Where I keep my Emergency Fund
Checking Account – I always keep a buffer of $500 in my checking account at all times
Capital One 360 savings* – At least $1k is always held in my emergency fund account gaining .75% interest. I utilize this account to keep from touching my Insight balance if possible. Withdraw time is within 48 hours
Insight Savings Account – The remaining of the 4-month expenses is kept in my Insight account gaining 5% interest. If I need to increase my emergency fund amount I will most likely open up another Insight card first.
Roth IRA – I don’t plan to touch this money, but if needed I can withdraw my contributions at any time.
If I ever needed to pull money out for an emergency, it would be done in this order.
- Checking Account
- Capital One 360 Savings
- Insight Card
- Roth IRA Contributions
- Investment Account (future)
- Family Member or Friend
- Credit Card
Final Thoughts
Emergency funds are intended to protect you in case life throws you a curve ball. Over the course of our lives, odds are something will happen where you will need to tap into this money. It’s important you have it in place to avoid debt. The amount in your emergency fund is unique to your situation. Be aware of all the options out there and come up with a plan of how you would withdraw your funds in the event of an emergency.
Question for You:
- Where do you keep your emergency fund?
- How did you determine how much you needed in your emergency fund?
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Gary is the author behind Debt Free Climb, a blog that shows how to live intentionally, pay off their debt, build a side income, and travel the world
Gary's favorite free financial tool he’s been using since 2017 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments.
His favorite way to save automatically is Capital One Performance Saving, a bank that allows him to create multiple high-interest savings accounts and create an automatic savings plans for each account. He uses these features to meet short and long term savings goals.
His favorite way to save money on car insurance is by using Root, an app-based car insurance service. He saved $240 this year after switching from Geico to Root
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$1,000 and a credit card will cover most minor emergencies. I think for something major like job loss you probably want 6 months worth of expenses minus whatever you would receive in your state for unemployment. I just keep that money in a regular brokerage account that is invested. I can sell whatever stocks I need to and the money will hit my personal bank account in about 5 business days. This way I earn about 7% a year on that money. You certainly don’t want $50,000 all in a savings account earning nothing every year. At the very least you want to keep up with inflation of say 3%.
Good points. I think that way is a more efficient route.
For me, I’d rather not potentially take on more debt via credit card or take money out of investments unless absolutely necessary. But that’s just me, I recognize that it could be a good option for others.
Really good overview. What I did recently learn (need to update my post) is that most people should be able to open up four total insight cards, putting away $5,000 in each one. That’s $20,000 per person earning 5% interest. Open up five Netspend accounts too and that’s another $5,000, so most people should be able to put away $25k per person at 5% interest. That’s a pretty massive emergency fund that’s earning a good rate of return, so no one can even really complain about that.
The $1500 per 24 hours might not be true anymore. I’m planning to do a $2,500 pull sometime soon, so we’ll see if it lets me do it all in one go. I suspect that it will.
Good Stuff, FP! I think ill be able to work up to more cards in the future.
I’ll be on the lookout to see if your able to do more than $1500. Thx!
I can confirm $2,500/day is the limit. Also, agree with FP – looks like you’re able to get four Insight accounts per person. Super dope.
Wow, that is awesome! I’m slowly working on my 2nd card.
Gary,
Great article!! I stated following your site about 7 months. I opened up CapitalOne 360 Savings in November 2016. That’s the account I use to for emergency fund and other saving goals.
I took my mortgage and car payment and determined I needed about 5 to 6 months for the emergency fund.
Good to hear Kunjal! I do the same with my Capital One account, I love it! I’m glad you were able to assess your situation and now know what you need in your EF.
Keep up the good work and thanks for your support!