If we pay any attention to financial advisors at all, we already know that we should have several months’ worth of income as an emergency fund. But where is the best place to put it. Most experts suggest a high interest savings account.
When you consider your other options, it just makes sense. Really, you could put it:
- In a coffee can buried in the back yard. The problem here is that you could forget where you put it. Of course, you could draw a map, but that would mean anyone could find it. On top of that, it won’t earn any interest at all.
- In mutual funds. The problem here is that you introduce the element of risk. Not a good idea for an emergency fund. Additionally, it will take you longer to get your money if you need it for something like, oh say, maybe an emergency.
- In a passbook savings account. This is an option, and the money will be safe, but as far as interest goes, you might just as well have left it in the coffee can.
Clearly, a high interest savings account is the best option. Now, don’t get us wrong: high interest savings accounts are currently earning anything but high interest. The rates on most of them are still under 2%. Still, it’s considerably better than what you will earn on a standard savings account, and you will have ready access to your money.
Another benefit (or drawback, depending on how you look at it) to having your money in a high interest savings account is that you are limited regarding how many times per month you can withdraw money. In a perfect world, this would keep you from being tempted to drain your savings account over a shoe emergency instead of a real emergency. Unfortunately, we don’t live in a perfect world, and there’s nothing to stop you from buying 20 pair of overpriced pumps. But at least you’ll be limited regarding how many times per month you can do it.
So, once you have enough money put aside to qualify for a high interest savings account at your financial institution, transfer your money there and leave it alone until you have an emergency. If an emergency comes, you’ll be glad you left it alone. If an emergency never comes, you’ll be glad that you earned higher interest on your money.
