If you’re in the market for financial advice, you probably already know that the so-called experts disagree on a good many things. There is plenty of conflicting advice available concerning where you should put your money and how much of it you should put there. One thing most financial advisers and experts do agree on, however, is that you should have a significant emergency fund, and that the best place for that money is in a high interest savings account.
The idea of an emergency fund, quite simply, is that you will have money on hand if you should run into a serious financial emergency. There are any number of financial emergencies which might happen to the typical family, and it’s beyond the scope of this article to consider them individually. Consider things like unexpected medical bills, auto repair bills, and household emergencies when you think of the kinds of things you would use an emergency fund for.
In order for an emergency fund to be useful to you, it must:
- Contain a sufficient amount of money to deal with typical emergencies. The dollar amount will vary from family to family, but for most families, $2,000 to $5,000 represents a good figure.
- Be readily available in case of an emergency. Having $1,000,000 does you no good during an emergency if you don’t have relatively fast access to it.
- Be left alone except in genuine emergencies. The exact definition of an emergency can differ from family to family, but the money in an emergency fund should never be used for anything that can wait.
A high interest savings account covers all of these bases for you. In addition, it offers you a significantly higher rate of return than a typical passbook savings account. Because the money is an emergency fund is not expected to be used under normal circumstances, it pays to let it sit somewhere where it will earn you an optimum rate off return.
It goes without saying that the average American family does not have $2,000 or more sitting around waiting to be deposited into a high interest savings account for an emergency fund. Still, the typical American family can build to that amount in a year or two with a little bit of self discipline. The trick is to put the money into an account and leave it alone.
High interest savings accounts help in this respect because they often limit how many withdrawals you are allowed to make in a given month. Unless you are prone to having daily emergencies, you won’t need to take money out of your emergency fund more than once a month anyway. Frankly, if you are taking money out more than twice a year, you are defeating the purpose of having an emergency fund and should re examine what exactly constitutes an emergency to you.
{ 1 trackback }