A reader, Slinky, recently commented on my article “10 Great Ways for College Graduates to Start Off on the Right Track With Their Finances” that many recent graduates know information about budgeting, and know not to go “wild” with their new found income, such as by buying a brand new car, etc, but were less knowledgeable about SAVING and INVESTING their new found income. One thing she specifically asked about was in regards to emergency funds, where one should keep an emergency fund and the pros and cons of different options. I recently wrote an article on why you need an emergency fund, and how it can be a powerful tool for keeping from getting into debt or going deeper into debt, but did not go into details on where the best place to keep one is. You want some liquidity and little risk, so index funds and the stock market are not a great place for your “base” emergency fund. You don’t want to HAVE to sell index funds at a time when the market may be down. Three of the most common places to keep an emergency fund are 1.) online savings accounts, 2.) money market accounts, or 3.) a local branch or “bricks and mortar” bank savings account.
Online Savings Accounts- Online savings accounts such as INGDirect , HSBC Direct , and Emigrant Direct generally pay a much higher interest rate than local bank branch savings accounts. Online savings accounts generally do not provide you with an ATM card, so to get your money you must transfer it to a linked checking account. Currently, I have a small amount of money in my local bank account savings account as a cushion, and I believe it pays 0.2 % interest, as opposed to ING Direct which pays 3.0% interest. That is a difference of 15 X ! For getting to your money, time-wise, with ING it takes about 4 to 5 days to transfer money in from a linked checking account, and about 2-3 days to transfer money back out of ING into your checking account. So if you think you may need the money faster than a few days, this might not be the best option for you.
Money Market Accounts- Money market accounts are similar to online savings accounts, but they usually have check writing privileges and may have an ATM card as well. They also usually pay a higher interest than a local branch savings account, many with rates similar to online savings accounts. I currently use a Capital One Direct Banking High Yield Money Market Account as an irregular expenses account and have an ATM card and checks, both of which were free. It has a current APY of 3.0%, the same as ING Direct. Capital One seems to take an extra day or two to transfer money into your account, or about 5 days. There are usually monthly transaction limits on check writing and withdrawals, for the Capital One account it is 6 withdrawals, of which only 3 can be by check, but that is plenty for my purposes and should be for an emergency fund as well.
Local Bank Branch- A local bank branch savings account is the old standard for many people’s savings, including emergency funds. You can drop off deposits in person or transfer money from your checking account, and it will be available to you by the next business day. Most savings accounts, similar to online and MM accounts, do have limits on withdrawals per month as well though. Local bank savings accounts will provide the easiest access to your money, but generally offer very little interest. Nowadays, if you are earning the typical rate savings accounts pay, you are losing money due to the effects of inflation.
So how do you determine which account is the right place for your emergency fund? -Ask yourself the following questions:
Are you likely to need cash really fast ? (Like 1 day or less)
How soon will you need access to it? Is 2 to 3 days OK?
Do you want it to be a little harder to access?
How concerned are you with rate of return?
By thinking about and answering the above questions, you can determine which account provides the benefits most important to you. If I were just beginning an emergency fund, I would probably think about using a money market account, as I like the ability to access your money with an ATM card or write a check in a true emergency if need be. I do like ING very much, I have had an account for almost 6 years, and used to really like the fact that you can’t access it immediately, although since I am more disciplined now this isn’t quite as important to me. Since a MMA provides basically instant access to your money as well, I personally find the bank branch savings account the least attractive, although I do keep a small amount of money as a back up to my checking account.
Where do you think is the best place to keep an emergency fund?
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We’ve split ours between the local brick and mortar and an online MMA. It’s about a 1/3 : 2/3 split. We just like having the accessibility of the local bank, but hate the interest (doesn’t come close to keeping pace with taxes and inflation).
great post!
Hey, thanks for writing this! I have an ING account as well which I’ve been using, but I don’t really know about money market accounts. I like that they earn a bit of interest, but you can write checks out of them. That would make life nice and easy in the case of an emergency. I’ll probably keep a small part in my brick and mortar savings (which transfers to checking if I overdraft (I love my credit union)) so I can have immediate access to that if I need it, and then put the rest in a money market.
Unfortunately since that comment the water pump went on my 16 year old, 215,000 mile car. It has other issues (transmission for one) so this was the final straw. So I will have to go a little “wild” and get a new car. I am leaning towards buying a new new car as well. First off, the car I’m looking at (Scion tC - good reviews and a little sporty for me) I can get new and still in my price range (less than half my newly graduated annual salary). Second, there are very few of them to be found used in my area, which is a problem for buying used. Third, I really need a reliable car as I take several trips a year up north to visit family - 6 hours one way. Fourth, I’m actually a very petite girl who does NOT want to have to pull over because my car is dying in some of the distinctly unpleasant areas of my city - something I’ve worried about with the now dead car. So I’ll be paying a little more for peace of mind and more reliability, but I’ve decided that it’s a priority for me.
I’m pretty bummed that most (not all though, I still need an efund) of my emergency fund will be going towards a down payment on a car though. I had it all figured out to save up the money and buy a car out right, but the darn car didn’t last long enough.
@NtJS-Good idea- I’ve been thinking I need to get a little more in my local B & M -so i may follow your suggestion on the split.
@ Slinky- I like having the ability to write checks if need be from a MMA as well.
I totally understand needing to have a reliable car, especially if you have to travel long distances- I would recommend that you keep looking for a used one, but if you do buy new try to put down enough to keep your payments reasonable and try to finance for as short a period of time as you can. One of my financial regrets was financing my last 2 vehicles for 5 years each- the interest was actually pretty good, but that is too long! I will never finance a car longer than 3 years in the future.
Thanks for the feedback!
I plan to survive without a car for the next few months to save more of a down payment. I’m aiming for no less than 20% down, more if I can manage it. I’ve been planning on contacting banks for their repo lists as well. Repos have stricter laws about reselling than used cars, and you can often get better deals. But that’s plan B, because I can’t count on finding anything good. I’ll also keep an eye out for used, but currently there aren’t any good deals out there for the Scion (which I’m pretty set on). I will definitely check over the next few months while I save though. If I find a good deal, I’ll just have a better down payment.
I’ll keep that in mind about interest rates. I plan to finance for whatever gets me the best interest, and then pay it off within 3 years at most. I had planned to save some fairly large amounts of money to buy a new car asap, so those will go towards paying the loan off early. I know that my credit union offers good interest rates and no penalty for early repayment, so it’s definitely an option. And since I’m used to living on a whole lot less than I’m not making, it shouldn’t be a problem.
Most of mine is in an online savings account, but I am always careful to keep a bit of padding in my brick and mortar bank account as well. Not a whole lot, usually an extra $1000 or so, plus enough for the next month’s rent.
I am a credit card user (and pay off the card monthly), so I frequently figure that in an emergency, I would use that card and then pay off the card from the emergency fund if necessary. The money in the brick and mortar is for an emergency immediate transfer of cash.
@ Slinky- Sounds like you have a pretty good plan there! I don’t think there is anything wrong with wanting a certain car either- otherwise we would all drive the same thing. The Scion is very nice looking.
@Megan- Thanks for visiting! I need to increase my “padding” in my local bank- Sounds like you have a pretty good system set up there.
Thanks for the great advice. I currently am looking for a bank to put my emergency fund was psyched to see this article in the Carnival of PF. I have recently read a lot, a lot about ING, generally that it’s a great bank and has a great online interface. I also have heard a lot about Etrade’s online saving account that earn 3.5% interest. I don’t really know much about these accounts- do you know of any drawbacks associated with online savings account or Etrade generally?
I started a thread in the Wesabe discussion group, where I work, about where to put my emergency fund and got a range of answers. Thoughts?
https://www.wesabe.com/groups/4-saving-up/discussions/1845-made-an-emergency-fund-where-should-i-keep-it
@ Allese:
Sorry for the delayed response, i was on vacation for a long weekend and am still catching up. I haven’t used E-trade’s online bank, but I have not heard anything really bad from those who have. One thing to consider is the transfer times between a linked account, and how fast you may need to get to your money. Some people like it to be a little harder to get to, so the time to transfer back to a checking account is not a problem,, while others like an online savings or MMA with an ATM or even checks like Capital one. Thanks for the link to the discussion, there are some good points there.
Thanks for visiting!
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