An emergency fund is one of the first personal finance goals you should tackle. It is important to have at least 3-6 months of expenses saved up in case of an emergency, such as losing your job, car repairs, home repairs, or any unexpected expense. Let's take a look at how much should be in your emergency fund and where to safely store it so you have access to it in an emergency.
Emergency Funds
How do you determine the amount you need in your emergency fund? If you are just starting out, save up $1,000 as a starter fund. After your started fund is set up, aim to cover your bare minimum expenses for one month. To determine this amount, add up your monthly expenses: rent, car payments, minimum credit card payments, student loan payments, food, and utilities. Next, aim to save at least 3-6 months of this minimum expense amount. Finally, aim for 3-6 months of paychecks.
If you are the sole provider of your family, if your job is in a volatile industry, or if you have inconsistent income, you may want to have 6 -12 months of expenses saved.
It may take you some time to move from one goal to the next, and that is okay. Each goal is a step towards greater financial security. Celebrate each milestone and be patient with yourself as you work on your next goal.
High-Yield Savings Accounts
Where should you stash your emergency until you need it? A savings account is an account that pays you interest on your balance and only allows 6 withdrawals a month, although the withdrawal limit is waived by the Federal Reserve at this time. A high-yield savings account is a savings account that pays you a high interest rate on your money, often because it is an online-only account. Make sure the bank is FDIC insured, which protects balances of up to $250,000 at each bank.
You may want to keep a normal savings account with quick access to a small amount of money in a local bank. However, the majority of your emergency fund should be kept in a high-yield savings account. Be familiar with how long it takes to transfer money out of the account so you can access money if you need it. Most "emergencies" can handle a 1-3 day transfer or can be temporarily placed on a credit card and reimbursed by your emergency fund. But some emergencies are true emergencies, and you don't want to be caught off guard if you need money immediately.
Some people argue that you should invest your emergency fund because you will get a better return than a savings account. Do not invest your emergency fund. Its job is not to make you money. Its job is to be there and be liquid (available as cash) in an emergency. You might not be making as much money on it, but you know it will be there for you, not disappearing in a market crash right when you need it.
The Best High-Yield Savings Account
I have a savings account at Ally. I have been impressed with their easy-to-use app, and I love the Buckets feature that allows you to separate your savings into different buckets for different goals. However, there are many banks with better interest rates and great features that may be a better fit for you. The best high-yield savings account is the one you open and use.
Choose a high-yield savings account that has the features you desire. Be sure to search for sign-up bonuses before opening an account. Transfer a small amount in and out of the bank to see how long and how smooth the process is. See if you like the app and the features the account offers. If it seems like a bad fit, you can always switch banks.
Opening an account often requires a soft pull on your credit, so it should not affect your credit score. However, it is always good to confirm that the inquiry will be a soft pull before allowing them to check your credit.
Let's take a look at some excellent FDIC-insured high-yield savings account options.
Rates updated on 5/23/24. Click on each bank to read the offer details. Interest rates may change.
Bank | APY | MinimumOpening Deposit | Monthly Fees | Features |
5.00% | None | None | Wealthfront is not a bank. Balances are FDIC insured up to $8 million by storing at multiple partner banks. | |
5.00% | $100 | None | Unlimited external transfers | |
4.75% | None | None | | |
4.65% | $100 | None | | |
4.60% | None | None | Combined checking and savings account, vaults, roundups, up to $2 million FDIC insured through multiple banks | |
4.40% | None | None | Same Day Transfers | |
4.35% | None | None | | |
4.25% | None | None | | |
4.25% | None | None | Automatic Transfers | |
4.20% | None | None | Buckets, Surprise Savings, Automatic Transfers |