Life is full of financial curveballs. Whether it’s sudden car or home repairs or unplanned medical bills, unexpected expenses always have a way of popping up. An emergency fund is a crucial component of a healthy financial plan because it can keep you afloat while you deal with impromptu financial setbacks.
A common question that members have is where they should store their emergency funds. You need to be able to access the money quickly, yet you also want to earn a decent return on these funds while they’re idle. In this blog, we’ll highlight strategies and accounts you can utilize to ensure your emergency fund is growing and easily accessible.
What is an Emergency Fund?
An emergency fund is money you set aside to cover unplanned expenses. While this concept has been around for ages, it’s quickly become a must-have component for financial well-being. Following the Great Recession of 2008 and the COVID-19 pandemic, people realized an emergency fund is much more than simply a rainy-day fund.
Most financial educators suggest you should house between three to six months of living expenses in your emergency fund. That figure might seem substantial; however, those funds will prove invaluable if you face a sudden job loss. So, with a sum that great, where should you keep it?
Which Accounts Are Best for an Emergency Fund?
Assume your monthly expenses amount to $5,000. The three-to-six-month suggested threshold would equate to an emergency fund between $15,000 and $30,000. That’s a substantial amount of money that could earn a decent return in risk-based investments, such as stocks. However, those investments often impede your ability to access the money quickly.
Many investment accounts require several business days before the funds hit your account. But more so, withdrawing those funds could result in significant financial losses if the market is down.
Instead, the ideal place to house your emergency fund is within federally insured financial accounts.
Traditional Savings Accounts
Every member of the credit union has a traditional savings account. While savings accounts usually provide modest returns, they’re excellent for housing short-term investments or those just beginning their savings journey.
With the ability to transfer money into your checking account instantly, traditional savings accounts are one of the most accessible options available. You can also withdraw funds with your ATM or debit card.
To avoid accidentally or frivolously spending your emergency money, open a separate savings account at the credit union. Keeping your savings separate from your everyday banking accounts will make you less likely to access this money.
Money Market Accounts
As your emergency fund grows into the thousands of dollars, it’s time to look at higher-yielding options. A money market account is a unique investment tool that allows you to earn substantially higher dividends than traditional savings accounts. These variable rate accounts often limit how many withdrawals you can make to six per month.
Typically, money market account yields are based on tiers, meaning the higher your balance, the more you earn.
Share Certificate Accounts
Share certificate accounts (commonly called certificates of deposit) are investments that earn fixed rates over a designated period called a term. During the term, you cannot withdraw funds without incurring a penalty (typically a portion or all the interest earned to date). In exchange for locking in your funds, you earn significantly higher dividend rates.
Indeed, locking in your funds for a designated period doesn’t seem like the best strategy for an emergency fund. However, when used in combination with other accounts, they can provide significant gains to boost your overall emergency fund.
We’re Here to Help!
Life happens. Unexpected expenses will always pop up, usually when you least expect them. To prevent your finances from being derailed, an emergency fund is crucial. The trick to building and maintaining a healthy fund is to automate the process through payroll deductions or automatic transfers.
If you’re interested in learning more about savings options or automation tools like payroll deduction, we’re ready to help. Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to speak with a team member today.
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