What Is An Emergency Fund And How To Calculate Your Emergency Fund Savings?
What Is An Emergency Fund And How To Calculate Your Emergency Fund Savings?
- By: Frank Makrides
- Updated on October 16, 2020
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One of the most important things everyone needs to have in place as part of their financial wellness is an emergency fund. My emergency fund has saved and come in handy so many times when I needed it. From unforeseen home and car repairs to other financial emergencies that have popped up from time to time, having money set aside provides peace of mind for these unplanned expenses. In life, there are always surprises and unforeseen expenses that pop up from time to time, and that is why it is critical that you have an emergency fund in place.
What is an emergency fund?
An emergency fund is an account where you have money set aside for a rainy day.
Typically, you want to calculate your monthly expenses and have at least 6 months of emergency funds set aside. If you have not calculated or have a good handle on your monthly expenses, please check out my page on budgeting. I have free tools and resources for you to quickly get an understanding of what your monthly expenses are. In the meantime, you should start at the very least by putting away a thousand dollars to start things out, just so have something in place for an emergency.
Please click on the FDIC guide on “Learning Bank – Checking & Savings Accounts“
What type of account should I have for my emergency funds?
I would recommend a traditional savings account at the very least. A savings account will allow you to take funds out on an infrequent basis typically without penalty and with higher interest rates than a checking account. Other options could include a certificate of deposit account and some even use Roth IRA accounts as a means to park money away in the event of an emergency. I’m recommending the savings account but you are welcome to research other options to see what is the best fit for you. The goal here is to have money set aside for an emergency. As long as you can do that you’re going be better prepared for any financial surprises that could potentially pop up in the future.
Please click on the FDIC guide on “Learning Bank – Checking & Savings Accounts“
What is a savings account?
A savings account simply put is a bank account that has a limit on the number of withdrawals you can make on it over a given period of time without incurring a penalty. Think of this account as a place that you can store your money and hopefully earn some interest over time on your savings. There are vehicles within banks that do link checking and savings accounts together when needed for different services, internal transfers, interest offers and more, but in general savings accounts are not transactional accounts for frequent payments.
Bank accounts, checking, savings, CDs and money market account interest are subject to taxation. Please click the link to the IRS website for additional information.
How to open a savings account?
You would need a government form id, proof of address and a tax id, your social security number. Today this can sometimes be done all from a mobile app without any human interaction, it’s pretty amazing. I have found that approval sometimes is pretty instantaneous and then if it’s an online bank I would then go about transferring funds over the bank from another institution or wait to receive a debit card to start to deposit funds. Either way the account opening process, especially with online banks has gotten pretty seamless.
If you’re a minor or a student you would typically need proof of enrollment at your qualified school or you might need a parent or guardian to cosign. This might make the account creation process sometimes a bit more complicated but you should still be able to open accounts relatively quickly.
Checking, savings, CDs and money market accounts in the United States are protected by the Federal Deposit Insurance Corporation (FDIC). Click here to learn more information.
Online savings accounts
I don’t have the need for large regular cash deposits, I personally prefer online savings accounts over traditional local bank offerings. Their overhead is much lower and they pass the savings to you in the form of goods and services. I have never had an issue that I couldn’t resolve through the phone, online chat or email. Their technology is also far superior in many ways, including typical industry-leading mobile applications with a lot of smart and intelligent features built-in. Some of these that I love to use are integrated budgeting tools, setting goals and spending alerts. The best part of all is that online banks usually offer higher interest rates and bonuses to new customers as they’re aggressively growing and expanding their customer base. That is great for all of us looking to get the most out of our money today.
Please click on the link to the free “Tips For Safe Banking Over the Internet” guide from the FDIC, Federal Reserve and Office of the Controller.
Things to look out for
Check with your bank on how many transfers you can make in a given period from a savings account, internally and or externally without incurring a penalty. Also, get an understanding of what those penalties are. This is critical especially if you plan on moving funds, you should plan around this and leverage a checking account for those on-demand transactions so that you do not incur any penalties on your account.
If you want to take the guesswork out of it, the two financial institutions below, Axos Bank and Chime are by far the best two options. If you want some of the highest interests offered in banking today, then check out Axos Bank. If you’re looking for all the bells and whistles from an online banking standpoint, then check out Chime. You can’t go wrong with either choice.
#1 rated high interest checking & savings
#1 Rated For High Interest Checking & Savings
After researching banks nationwide for high yield savings and checking accounts, Axos Banks tends to always be close to the top. Their technology and online banking products are amazing as well. If you want high-interest accounts, modern banking services and some of the best banking technology out there, then you have to check out Axos Bank.
#1 rated for online & automated checking & savings
#1 Rated For Online & Automated Checking & Savings
If you’re looking for banking with no fees and automated savings then you have to try Chime. They offer no hidden fees like monthly fees, overdraft fees or minimum account balance fees. They also offer a service to get you paid up to 2 days early through direct deposit. With Round-Up, you automatically transfer spare change to the dollar into your savings account. Try Chime today.
Summary
Having a financial institution you can rely on for your emergency account savings and your other banking needs is critical. Make sure you shop around both your savings and checking account needs. Ideally, you want your bank or financial institution to maximize your money earning potential on your deposits. See what options the bank has for high-interest rate introductory offers, linked accounts with high interest, digital and mobile banking services. Be sure to shop around and take into consideration your savings needs and overall financial goals.
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Frank Makrides
Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.
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