THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
An Emergency Fund is liquid money or cash that you can get to very easily just in case something sh**ty happens like getting laid off from your job, which has happened to me three times already. Job loss can be very debilitating and the last thing you need to worry about is how you are going to pay your bills at the end of the month or risk ending up living out on the street (my biggest fear) or squatting in your apartment until you get evicted.
This is why everyone needs an Emergency Fund. It is recommended by the great Suze Orman that you should have at least an 8 month Emergency Fund saved up for a rainy day because that is how long, on average, it takes to find a comparable job.
To calculate how much you need in your Emergency Fund, just take every single necessary expense you have per month (This includes rent and food and DOES NOT include lattes, alcohol, going out to fancy restaurants and cable TV). When you’re jobless, you need to live like a pauper until you find your next great gig.
Once you calculate how much food and rent costs for one month, you multiply that amount by 8 and ta daaa! That’s how much you need to have saved up in your Emergency Fund.
Now, if you want to sip those lattes and have a little wiggle room while you are unemployed, then I strongly suggest stashing more dough in your EF.
Your Emergency Fund needs to be sitting somewhere that is 100% safe and does not belong in any type of investment accounts. And that includes Bitcoins for you big risk takers out there. But I’ll cover all that fun stuff in a later post.
I say this because while we are in an amazing bull market right now (July 2017) and people are making double digit returns on their investment, chances are when you, and especially I, need to dip into your or my EF when something sh**ty happens, the markets could be tumbling down and all hell breaks loose (remember 2008?!). So this is why you need to have your EF in something very unsexy because nobody knows when you are going to really need that money.
At the time of writing this post, the interest rate yield for my checking account was about a whopping 0.20%. Talk about unsexy. But it’s one of the safest places you can stash your Emergency Fund. In recent months, the feds have increased the interest rate (several more rate hikes are coming) and this is good news for us savers.
With all that being said, you should NOT keep your EF in your checking or savings account. The best place to put your Emergency Fund is in an online bank! They are yielding 1% or more and they are safe, secure and are insured by the FDIC up to 250K per account. It’s super easy to open these online bank accounts. There are no fees, no minimum amounts and all you need to do is link them to your checking or savings account. Word of caution though. It usually takes at least 3 business days to transfer money over to your checking/savings account from these online bank accounts.
The online bank that is yielding 1.35% is CIT Bank.
So there you have it. Park your hard earned money in an online bank so you will always be prepared for a rainy day. Your money will be working much harder and safer for you rather than stashing it under your mattress. If you know of any other reputable online banks that are paying an even better rate, please let all of us know.