What to do with your emergency funds? If you are prudent, you have amassed an emergency fund that is equal to anywhere from three to nine months of fixed expenses and up to a year to two if you are retired. But in today’s low-interest environment it may not be the best thing to keep these funds in a traditional bank. And you do not want to be reckless and invest these funds in the market just to achieve a higher rate of return. Remember, an emergency fund is not meant to earn you large sources of extra money but rather is designed to cover emergencies that arise from a loss of your job, unexpected repairs to a car or your house or serious illnesses.
First, you want to keep your emergency fund separate from your regular accounts such as your checking or savings accounts. The reason for this is you will be less tempted to access the funds if they are in an account designated for your emergency funds. But let us face the fact that in many traditional banks you will only earn a fraction of a percent on your funds. In many instances, the annual interest rate being offered by traditional banks may be less than one percent, and in many instances, it is near 0.10%. That is nothing but remember, these funds are not considered investment funds and are not designed to earn a large return. They are for your safety net in the event of an emergency.
Now if you have saved six months worth of fixed expenses you should have a sizable amount in your emergency fund, and there is no reason why you should not seek out the best returns from your banking options, and that means looking to Internet-based banks. These banks do not have physical locations and therefore keep their operating costs to a minimum. This allows Internet banks to offer as much as 1.5% for a savings account. These banks also offer many of the same features of traditional banks by providing checks and debit cards for easy access to your funds. And just like a traditional bank, the legitimate Internet banks are FDIC insured.
Internet banks were a novelty when they first appeared in the early 2000’s but have since become a major force in how people are saving their funds. And to compete with traditional banks that have local branches Internet banks in many instances offer free ATM usage and have started offering checks for those with checking accounts.
But seeking better returns on your emergency fund while keeping them in a safe and in a secure location is paramount access is also key because when an emergency hits, you will need access to those funds in a hurry. Which is one reason why it is wise also to keep a traditional bank account that can be linked to your Internet bank. Traditional banks offer things that an Internet bank cannot like notary services, paper transactions, and such amenities like safe deposit boxes.
While emergency funds are not by design intended to earn you large profits that does not mean that you should not seek out the best possible rates for savings accounts to keep your funds. Look past traditional banks and see what an Internet bank has to offer.
Thank you for reading this week’s post and if you have questions or comments about emergency funds or where to keep them, contact me directly or leave a comment here.
