Beating Broke

Personal Finance from the Broke Perspective

How Much Should Your Emergency Fund Be?

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If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund.  But just how much do you have in your emergency fund?  And how much should you have in that fund?

Ramseyan thought:  Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses.  This is the current plan that my wife and I are using.  We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings.  It’s just under $1050 at the moment and growing at about $2-$3 a month.  Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking.  Many people, my wife and I included, couldn’t even make it a month on $1000.  Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum.  They may be right.

The key here, is that we’re discussing personal finances.  It’s personal.  When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all.  We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole.  We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate.  Certain things will raise the risk of an emergency.  If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car.  If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be.  I suggest starting with at least $1000.  It’s a good number, and for many, it’s more than what you already have.  If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so.  Continue to build it until it is at least 3 months expenses.  In the end, shoot for a constant emergency fund of at least 6 months expenses.  Try to keep it to no more than 12 months though.

Why no more than 12 months?  Because you’re likely keeping it in a high-yield savings.  The 3-4% that they are currently paying is good, but you can do better elsewhere.  If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return.  Presumably anyways.  History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund.  If you don’t then this whole article is pointless.  It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional.  Before making any big money moves, you should consult a professional.

Emigrant Bank Announces 3.75% Dollar Savings Direct

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Emigrant Bank announced their newest high yield savings account today.  Called the Dollar Savings Direct account, it will pay out what they claim to be an industry high 3.75% on all balances over $1000. I believe that there is at least one account that pays higher than 3.75% and the WaMu account is paying out 3.75%.  Still, a pretty good rate that is hard to beat.

If the name Emigrant Bank starts ringing bells for you, it’s because they run the Emigrant Direct savings accounts.  The Emigrant Direct savings accounts are a no minimum account that currently are paying 3.00% on all balances.  Neither account charges any fees and link directly to your current checking account.

It’s beginning to look like the Online Savings market is starting to heat up again.  With the current financial turmoil, people are starting to look for the highest yield they can find.  And quickly overcoming any qualms they have on using a online account to do so.  It’s a good thing for savers.

Choosing an Online Savings Account is Easier Than You Think

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If you really want to over simplify things, you can choose online savings accounts by no other requirements than the interest rate that the account is paying out.  If that’s all you care about, then the current high yield king is WaMu with 3.75% (current as of 8/5/08).  The rest fall behind, but most all of them stick in the 3-4% range with only a few outliers in each direction.

So, unless you really, really want to chase rates, you’ll want to pick a savings account with some other things in mind.  Each person is going to have different things that they like and require, so I’ll share how I selected my accounts first.

When I was looking for a high-yield savings, I was looking for something to hold our emergency savings.  A lump of money that wouldn’t get touched for quite some time (hopefully). Because the money was just going to sit around interest rate was one of the most important factors.  At the time, I had narrowed it down to three accounts.  ING Direct, HSBC, and e-Trade.  e-Trade was paying 4%, HSBC was at 3.75% and ING Direct was at 3.3%.  They were all pretty close.  I decided that the interest difference was fairly minimal.  I chose ING Direct.  The deciding factor was the $25 bonus I got for opening an account with more than $250.  Even at 4%, that was well over a years worth of interest up front.

I’ve since moved our account over to e-Trade for the higher interest rate.  I still hold our account at ING Direct (several actually including a Orange Checking) for other household savings accounts such as a home improvement fund.  It really is just a matter of accounting now, so I could easily move the money from one to another.

When you go to choose your account, be sure to take into effect some of these factors.

  • You’ll want to make sure that the account will let you transfer to another savings account.  ING Direct doesn’t.  I get around that by pulling the money from my e-Trade account.
  • Is there any risk involved to the bank?  With a few banks being shut down, this is more of a factor than it should be.  Remember to make sure that wherever you put your money, it’s FDIC or NCUA insured.  As long as that is in place, you won’t lose your money up to $100,000.  And don’t be afraid to double check insurance claims with third parties.
  • Do you need a Debit Card?  Many of the accounts don’t give you a debit card.  ING direct does, and that was another important factor in my choice.
  • Are there any bonuses involved?  As far as I know, ING Direct is the only one that currently has a bonus program.  All you need is a referral code and you’ll get $25 with a new account of over $250.  (If you need a referral, let me know and I can get you one.)
  • Do they require other accounts?  Will they make you open other accounts to hold the savings account?  WaMu, for instance, requires a online checking account in order to have an online savings account.  Not a huge deal, but can be a bit of a nuisance.

I’m sure that there are other factors to take into effect when you select your account, but those are the big ones.  With interest rates as competitive as they are in this niche of accounts, you’ll be hard pressed to make your selection on interest rate alone.  And keep in mind that just having a high yield account puts you well on your way to debt freedom and financial independence!