Where To Keep Emergency Fund for Optimum Effect

So every personal finance guru out there has been telling you that you need an emergency fund. No doubt, an emergency fund which is your backup stash of cash in case something goes wrong is a great resources to have in place. However, the question a lot of those gurus don’t get into is where to keep emergency fund that is most effective for saving.

The thing about emergency funds is that you really only want to have access to it when there is an actual emergency and not for occasional discretionary spending. Thus there are two main qualities you want in a place to put an emergency fund:

  1. It should be “liquid” meaning that it needs to be easy to access when you need it without incurring any penalties or risk of loss. For instance, a regular old savings account is the typical spot to put this money, whereas a certificate of deposit or some type of investment fund would be a pretty bad place.
  2. While it should be easy to access the money, it should NOT be convenient to use that money. What I mean by this is that if you kept that money in your main checking account, mixed with your regular spending money, it would be very tempting to use it for non emergency purposes. Even when it’s in a savings account it can sometimes be easy to use if there is online access to those funds.

So what’s the best place to put emergency funds?

My system is simple. I keep my funds in a credit union savings account that DOES NOT have online access. So if I ever do need those funds, I have to actually go down to the physical bank branch and make a withdrawal. Not only that, but I have my employer direct deposit a certain amount of cash into that savings account each pay period, so I never even see the money.

I like this system because while I have access to the money in case of an emergency, it’s not as convenient as an online savings account because there’s a bit more hassle in getting to it, and thus it gives me more time to think about whether or not the usage of those funds is actually an emergency or not.

What about Interest rates?

A lot of people would say that you get a higher interest rate on those funds if you put it into an online savings account such as CapitalOne360 (formerly ING Direct) or USAA, but the point of an emergency fund isn’t to earn Interest, it’s to have a safe undisturbed spot for money when something goes wrong. Besides, with the low interest rates that savings account receive these days, the difference in Interest earnings is going to be negligible. Not to mention that many local banks and credit unions can be just as competitive with Interest rates if you check around a bit.

The Discipline Factor

Of course, much of this has to do with discipline. If you are the type of person who has bad spending habits and think you might be tempted to dip into your emergency money, then it’d be a good idea to try the system I’ve outlined above. However, if you have the discipline to stick to a budget and are aware of your spending habits, then you could just as easily keep your funds in your checking account while keeping track of it using budget software such as YNAB. Either way, it’s important that you have a system in place that not only works, but one that you will stick to.

Where do you keep your emergency fund and what system works best for you?

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