How much do you keep in your emergency fund? WHERE do you keep it? How often do you re-evaluate it? We haven’t talked about emergency funds in a few years, so I thought we should revisit. (Pictured: Tory Burch Priscilla Wallet, was $250, now $175 (also available in fuchsia, as well as in a zippered pouch on sale for $66).)
The basics remain the same: the suggestion I always see is to keep three to nine months of living expenses (mortgage, rent, loans, food, basic living needs), easily accessible in case you’re laid off, fired, quit, or are otherwise unable to work — or if you have some other huge unexpected expense, like if your car breaks down or you get in an accident and have bills to pay.
The choices, sadly, haven’t changed that much since we spoke about this last: in order to keep money accessible, you generally want a savings account, which means that it’s going to earn LOUSY interest. There were times before the recession when a regular savings account could earn 4% and a money market fund somewhere like Schwab could earn as much as 7%, but those rates are pie-in-the-sky dreams today. Mint has an easy way to look at what interest rates are being offered right now (just go to “Ways to Save” –> Savings) and the highest offered is .9%. POINT NINE PERCENT, PEOPLE. Although I have heard reports of local credit unions and the like offering higher interest rates, there are often hoops to jump through — high minimums to keep in the account, a certain number of monthly transactions, etc, etc.
Just in case you’re curious: we have kept our emergency fund in a Capital One account (which originally was earning 1.8% back in 2009, and is now I think around .75%). Mid last year I decided we had way too much cash in our emergency fund, and invested a third of it in the market; I put another third of it into another big online savings bank, Ally, which I find I LOVE. (And no, this is not a sponsored post.) Ally has a decent interest rate (I think it’s .85% right now) but it’s ridiculously easy to open a million different little accounts and set up automatic transfers — we now have teeny accounts with monthly (sometimes weekly) contributions to big but irregular expenses, such as a vacation fund, my son’s music and gym classes, insurance payments, dental care, and more. We currently have about 5-6 months between Ally, Capital One, and our regular bank (Chase), and honestly I feel like it’s still too much money — I keep thinking that in the event of an emergency we would drastically change our living circumstances to require less money, sell stocks or funds invested in the market, sell some of our possessions, or borrow money for a month or two from family. (I keep thinking about a conversation I had with a friend where we talked hard numbers — our emergency fund was five times what hers was! But she lives in a much lower cost of living area; our mortgage payment by itself is probably easily 3 or 4 times what they pay for their mortgage payment.)
Other savings vehicles I’ve taken a look at (and have been unimpressed, but maybe you’ll think differently):
- credit unions offered through alumni connections (for me it’s Northwestern and Georgetown; for my husband it’s Tulane and NYU)
- money market funds — I keep a small amount of cash in Schwab just to see if the interest rate ever perks up, since I don’t think that is part of Mint’s analysis — unfortunately it hasn’t, at least through Schwab.
- laddered T-bills — someone told me about this years ago: the idea is to buy a series of 6-12 month T-bills, so every month one comes due. In theory, the interest rate is higher than a savings account, and you have a fresh crop of money coming your way every month in case you need it — and if you don’t, you just reinvest it and wait until the next one comes due. It’s a nice idea in theory, but let me also say this: I HATE TREASURY DIRECT, which is the only way to actually buy T-bills (or at least it was the last time I looked into it). It is the least intuitive, most confusing online investment option I’ve found — I accidentally bought a few 30-year T-bills the last time I tried to invest (whoopsies). From my understanding, the rates are still pretty low so I haven’t taken another look in a few years.
- laddered CDs or bonds — I’ve also looked at these; the interest rates aren’t really better than a savings account until you get to the 3-year mark. For my $.02, with that kind of time frame I’d rather have the money either in cash or in the market.
- laddered municipal bonds — I’m putting this one in a separate category because it’s the only one I have yet to really investigate. Supposedly municipal bonds offer a slightly higher rate; I think the reason we don’t own any is because the last time I tried to buy bonds (while doing some asset reallocation) I was using an old 401K I’d rolled over into an IRA and you can’t hold municipal bonds in a tax-advantaged account (or something like that).
- cash — cold, hard, cash, hidden somewhere around the house. I TRY to keep a small amount of cash on hand (like, less than $200 in a variety of bills) but I always end up dipping into it to pay the babysitter or cleaning lady. In the event of the zombie apocalypse, just look for the chick trying to barter Mikimoto pearls for bottled water.
Readers, what do you do with your emergency fund? How many months of living expenses do you keep in your fund — and where do you keep it?