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Where Should You Put Your Emergency Fund?

by Shawanda Greene

Financial TornadoA couple of weeks ago, a cluster of angry thunderstorms tore through the DC area. They seriously disrupted our lives.

Trees crashed onto parked cars, area restaurants shut down, and residents rushed local gas stations for fuel and ice.

I was without power for two long, hot, one hundred degree days.

My neighbors were without electricity for three times as long.

And get this, in some neighborhoods, the Internet didn’t work. Eek!

We were in a true state of emergency.

Catastrophic events can happen in a matter of seconds.

If you’ve saved the almost universally recommended three to six months of living expenses, you’re probably in good shape to deal with surprise expenses. Then again, depending on where you stored the money, it may or may not be easily accessible.

A lot of people attempt to milk as much interest as possible out of their cash reserves. They can’t bear to watch a large chunk of money produce miserably low returns in a simple savings account. As a result, they’re too eager to put their financial safety net at risk in volatile investments, e.g., stocks, bonds, precious metals.

Emergency savings belong in a bank where they’re safe and available for, ya know . . . emergencies.

Yes, over time, inflation will nibble away at your money’s buying power, but that’s fine. When the unexpected happens, your cash isn’t trapped in a mutual fund that’s tanked in value because the European Union can’t decide whether to bail out Greece or kick it into the Mediterranean Sea.

You can even make a strong case for hiding a few thousand bucks in your home.

During a natural disaster, like the one mentioned, ATM machines might stop working.

For more predictable emergencies such as falling ill, losing a job, or getting in an auto accident, you can keep things a little less  20th century. A  checking, savings, or money market account in an FDIC insured bank should do the trick.

Of course, some institutions will give you more bang for your buck than others. All else being equal, you should opt for the account that pays the highest interest rate.

In an upcoming post, we’ll discuss how to find the best bank account offers. But considering where rates are on interest bearing accounts these days, try not to get your hopes up too much.

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{ 20 comments… read them below or add one }

Daisy @ Add Vodka July 19, 2012 at 9:45 AM

I keep my EF in an accessible TFSA (tax free savings account for non Canadians) which does give me a bit of a return but not much. I can withdrawal any time.
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Shawanda Greene July 20, 2012 at 12:07 AM

A tax-free savings account? Hmm. I wonder if we have those in the U.S. I’ve never heard of one, but I’m going to look into it. I hate paying taxes on the measly amount of interest I earn on my savings.
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Holly@Clubthrifty.com July 19, 2012 at 9:46 AM

I have way too much $ sitting in my savings account right now earning zero. I have been looking for better options….but there aren’t a lot out there!
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Shawanda Greene July 20, 2012 at 12:11 AM

Sometimes it’s just better to sit tight. For a brief moment in 2011 (or 2010?), I made the mistake of chasing 3% returns in a Ginnie Mae bond fund. I couldn’t have put more than $4,000 in there. I promptly lost $100. For 3%, it wasn’t worth the headache.
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L Bee and the Money Tree July 19, 2012 at 10:11 AM

I like to pretend I am a secret agent and keep a small cash reserve at my house. That way when the Russians come for me I can skip town.
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Shawanda Greene July 20, 2012 at 12:18 AM

I don’t keep much cash on hand, but I certainly can see why it’d make sense to keep a thousand or two dollars within arms reach. You never know what might happen. I mean, what if we were victims of a virtual terrorist attack from the Russians, or worse, the Chinese?!

Of course, we josh . . . but still, ya never know.
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shruggingatlas July 19, 2012 at 12:37 PM

I don’t know where to keep money. But with credit tight and rates low, it really presents a problem for savers.

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Shawanda Greene July 20, 2012 at 12:20 AM

Yeah, it does. I long for a return to the days when a simple online bank account paid 4.75%. ING spoiled me. I’m not sure I’ll ever be the same.
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Modest Money July 19, 2012 at 1:40 PM

The lack of return on my money is the big reason why I am wary of building up a decent sized emergency fund. If something bad were to happen I could just transfer money from my line of credit. If ATMs weren’t working at all, I think banks would be forced to figure out some kind of system for people to get money. I’m not too worried about that kind of situation though.
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Shawanda Greene July 20, 2012 at 12:24 AM

I’m extremely reluctant about relying on credit for emergencies. The lender could reduce or cancel that line of credit at any time. I’d hate to be in the position where I had to liquidate long-term assets in order to raise cash.
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Lance@MoneyLife&More July 19, 2012 at 1:42 PM

I keep mine at ING direct and should be able to access it fast enough if I need it. Also, make sure you don’t keep too much cash at home. Your insurance will only cover up to a certain amount should there be a robbery or fire and you will be out the difference.
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Shawanda Greene July 20, 2012 at 12:29 AM

I keep my emergency fund at ING Direct as well. Several banks offer slightly higher interest rates, but I’ve been with ING so long, I feel like I trust them not to screw me over.

Thanks for pointing out the importance of not having too much cash at home. I think more than a couple thousand is too much.
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Kathleen @ Frugal Portland July 19, 2012 at 2:44 PM

I don’t have cash at home (other than maybe $5). I do know some Mormons, though, so my disaster plan is to go to their houses and eat their food — they store up years and years worth of food!
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Shawanda Greene July 20, 2012 at 12:38 AM

OMG! That is so racist!

I’m just kidding. *chortles* It’s just that I hear so many people misusing the word lately, I wanted to get in on the fun when the opportunity presented itself. :)

But seriously, there are companies dedicated to providing goods for customers to stockpile. What are people preparing themselves for?

Check out The Ready Store (http://www.thereadystore.com/). They’re fascinating.
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Amy Turner July 19, 2012 at 7:50 PM

I have two big piggy banks at home that are almost full. By force of habit, I keep my cents there from long ago, every time I have some. I figure these would tide up some emergency cash spending if the need arises. My husband and I maintain two separate individual accounts for savings and one joint account. These are all for emergency purposes and retirement savings.
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Shawanda Greene July 20, 2012 at 12:47 AM

So you’re the reason pennies and nickels cost twice as much as they’re worth? Do the country a favor and put those coins back into money supply. :)

I remember when I was growing up, my mom would put her spare change in a large, empty water jug. I haven’t seen that thing in about 15 years, but it has to be around her house somewhere. Exactly where? Only God knows.
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Amy Turner July 24, 2012 at 9:07 AM

yes, I’m planning on hauling these to the bank. Maybe one of these days, I just need the energy to count them first:-)
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MyMoneyDesign July 19, 2012 at 8:28 PM

I agree that its important to have at least a few bucks in your house. I remember during hurricane Katrina a few years back, people had no money and no way to get a hold of it. Honestly though in a “true” state of emergency, I would think that food and water matter a lot more than actual money.
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Shawanda Greene July 20, 2012 at 12:49 AM

So you’re telling me you think thousands of people without Internet isn’t a true emergency? The only thing that could’ve been worse is if the grocery stores ran out of wine.
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