Genesis 41:28 – 30 says, this is the thing which I have spoken unto Pharaoh.
What God is about to do, he sheweth unto Pharaoh. Behold, there come seven years of great plenty throughout all the land of Egypt, and then there shall arise after them seven years of famine, and all the plenty shall be forgotten in the land of Egypt. And the famine shall consume the land. Dave Ramsey said an emergency fund turns a crisis into an inconvenience.
Recently received a question from a client of mine regarding their emergency fund. Let’s say, let’s call this guy’s name is Mark. Him and his wife will call her a Helen. They live in Northwest part of the country doing great, crushing it almost half millionaires in their early thirties or so just doing a great job.
He asked the question recently of where the best place is to keep an emergency fund. And that’s what I want to discuss with you today. Where is the best place to keep an emergency fund?
But first let’s talk about what constitutes a fully fund emergency fund.
So. Again, kind of going back to our financial framework, we have our path to financial success. Step one is a thousand dollars in the bank. Step two is to eliminate all non-mortgage debt. Step three then is to save up a fully funded emergency fund. A fully funded emergency fund constitutes. Anywhere between three and six months of expenses saved for an emerge fund, say for a rainy day, essentially, but it’s expenses, not income.
So how do you go about doing that? Well, you would, hopefully you’re doing a budget, and you can see what your monthly expenses are you total them up. You have a certain number, maybe it’s 4, 000, maybe it’s 5, 000, maybe it’s 10, 000, whatever your expenses are for the month, you add them up and then you simply times it by three or times it by six.
So, for example, if your monthly expenses are 5, 000, then three months would be 15, 000. Six months would be 30, 000. So, you would have a range somewhere between. 15, 000 and 30, 000 in an emergency fund put off somewhere that some where’s we’re going to discuss today saved for emergency funds. So how do you know what the right amount is?
Well, it’s subjective. It’s not a formulaic kind of equation. It, it really depends. For example, if you’re a single income, either you’re a single person or you’re a You have, you have, you have a couple where only one person works. You probably want to cheat towards the six-month mark. If you’re self-employed, right, you might want to cheat towards the six-month mark because income might vary.
It could change. It could go away. It could drop things like that. If you have a two-household income, you know, the chance of both of you getting laid off, for example, you could cheat more towards the three-month side. If you have very stable jobs, you’ve worked at your companies for decades, right?
Very, very stable. Even maybe it’s one of them. You could again, cheat towards the three-month side. So, it’s somewhere in between there. You know, three months, four months, five months, six months, that’s what constitutes an emergency fund, a fully funded emergency fund. So, the question is, where is the best place to keep it?
Well, let’s talk about that. So, first, the thing that you must remember, especially now in the world of kind of changing interest rates for, for a long time, from like 20, 2009 till almost Nothing was paying interest. So, it really didn’t matter, but now you can make almost 5 percent on a money market account, risk free, right?
So that, that’s a great thing, but here’s the thing to remember about your emergency fund, and I need some of you to say it with me. It is not an investment. Say it with me. An emergency fund is not. You must think about your emergency fund as insurance. Why is that? Well, insurance is something that we pay for to protect valuable things, right?
You pay for health insurance so that if you get medically, you know, injured or you get sick or you need some care, you have insurance to cover it and you don’t have to pull out of your wealth. Same idea with the emergency fund. This is money that is set aside for somewhere to protect the wealth building side of things.
It protects you don’t take money on your house. You don’t take money on your retirement accounts. You don’t take money on your investments. You don’t have to sell things to cover expenses because you have money setting aside for an emergency fund, but it, it costs you money, right? If, and since if you’re not, if you’re saving money and you’re not keeping pace with inflation, you’re generally losing money, which is why we don’t want to have more than six months.
We don’t want to have a year or two years of money just set aside in savings because if you’re not making at least inflation rate, which currently is around three, three and a half percent, if you’re not making that, if you’re only making one percent of your money, but the cost of things are going up three to three and a half percent, you’re actually losing purchasing power.
You’re losing ground. You are losing money. Money, it’s just a different kind of way of losing money. So, for all our investment side of things, we want them to be making more than three, three and a half percent, but not the emergency fund. It, that’s not the goal. The goal is to keep it safe. We want it to be placed somewhere where it is safe.
So, we have access to it because your emergency fund is said, why threw me one more time, especially you guys out there. Cause I know how you think it is not an investment. Think about your emergency fund as insurance. So, so if we think about some attributes of it, it will lead us to where is the best place to keep it, right?
So again, the goal of an emergency fund is to keep it safe, not growth. That’s what investing is for. When we get to investing, we’re going to talk about investing in future episodes. That is the engine. That’s our job is to get it to grow at least on the wealth accumulation side when we get to retirement Our investments change a little bit.
We have some that we need to grow We need some to provide us income and we need some to protect us against market downturns but again different episode different topic, right? So, the goal of their solid emergency fund is to Is to keep it safe and we need it to be liquid. Liquidity is a term. It’s a financial term of basically how fast can we turn something into cash?
So, for example, a house, how long would it take you to take the equity, the value of your house and turn it into cash? Probably at least two months. Like if you decide to sell your house today, you wouldn’t see the cash in your checking account for probably at least two months, right? That is not very liquid.
Same thing with your car. If you decide to sell a car and a hard asset, how long would it take you to turn that into cash? It would take maybe, maybe a week, right? You could list it for sale, and you might get the cash in a week or so. Even an investment. If you have a brokerage account, a mutual fund, a stock, a bond, things like that, even you execute that trade, it’s going to take two days to settle two days to clear.
And, and it’s going to take some time to get money into your savings account. But the money that’s in your, your savings account, you can just transfer it very, very fast into your check account. You go to the ATM, pull it out, right? That’s very, very liquid. So, we want that account to be liquid, meaning it can be turned into cash in minutes.
That’s the idea. Another attribute that we want about the emergency fund is we want it accessible. We want it accessible. What does that mean? It means we have access to it. So, it can be through a debit card. We can get access to it. We could write a check. We could go to the ATM. We can transfer it.
We want it to be accessible. So, we don’t want it too far out of reach. We want it kind of close enough to us where we can get access to it, but we don’t want to have to jump through a bunch of hoops, right? Like you don’t want it to be in an account that is. That there’s no branch around you that the branches are on the other side of the country for example Then you don’t have a debit card, or you don’t have a way to transfer it, right?
You don’t want that you want it to be within arm’s reach where you can get it in a moment’s notice if you need it So if you think about transfers, even transfers, you know, to other financial institutions might be difficult. So, for example, I would not have a client of mine keep their emergency fund. I in a Schwab brokerage account that I match, right?
That’s not the best place for it. Now, truth be told, we do that with some people as they’re kind of formulating. You know, the coaching model and getting out of debt and building that merge fund to kind of keep it there a little bit, arms reach just from spending it. We’re trying to work on the behavioral side of finance, but someone who has good management, money management skills, someone who’s in control, things like that, you don’t want it in a brokerage account because you need it close.
You don’t want it like in a. And a money market account that somewhere else that doesn’t have debit card or check writing privileges. You want to be close because even if you initiate a transfer, it might take a while to transfer. So, for example, Friday afternoon, you need money, but it’s in a brokerage account that you need to transfer, and they don’t do transfer Saturday, Sunday.
They only do it on business days. It could take a couple of days for it to get there. That could be a problem. So, you want.
So those attributes, not an investment, liquid and accessible are going to lead us to traditional savings, checking, maybe money market accounts, if it has transferability or debit card privileges within a transaction. Normal traditional bank that is going to be the best place to keep an emergency fund where you have Debit card privileges check writing privileges to you.
It’s in cash. It’s not investments It’s just kind of simple and again I know that traditional savings checking money market counts are not keeping pace with inflations, but it’s okay to Because the goal of this emergency fund is to be safe, to be liquid, to be accessible. And the last thing is to be available.
Now, if you have, this is kind of an optional step, but I learned it really the hard way. I banked through Navy federal. Navy federal is my primary. A banking account has been since I joined the Marine Corps back in 1996. So almost what, 30 years or so at this point. And one day we were out shopping, Eric, and I Mrs.
Beautiful and I and the kids, I think we were going to Best Buy if I remember correctly, we were at Best Buy and we were buying, I think a laptop for a kid or, so we were buying some kind of electronic and. For whatever reason, the Navy federal visa processing side of things, but it’s just on Navy federal side, it wasn’t on visas, their server went down.
And so, no. So, Navy federal debit cards could be used, and we don’t have a credit card. We haven’t had a credit card since 2008 so we didn’t, you know, we, that’s all we have is debit cards. And so, the, the visa Navy federal processing system went down and there was a handful of people there that had named federal cards and they couldn’t buy it and they’re like, we can accept debit cards, but not Navy federals.
I mean, that’s literally what the, the little geek squad or the best buy person was, was saying. Well, thankfully. We have our emergency fund at a separate bank account and so we keep that at USA so Again, it’s kind of far enough away. We had debit card check writing privileges we could transfer it things like that if we need to and This was an emergency fund but was us buying computer was not emergency but what we did was we Basically, we had gone out of our way to get there.
We’ve gone through all the hoops. So, we use our second banking institution, USA in that case, and we’re able to buy it. And then a couple of days later, just transfer the money from Navy federal over to USA. And so, a good pro tip is to have your emergency fund really at a second institution, a separate, again, traditional bank that you don’t traditionally use.
Why is that? Well, for situations like that, for number one, number two, if for some reason your debit card gets hacked which occurs, it’s happened to us several times that card will get shut down. It might take you a couple of days to get to a branch or get a new card sent to you. You have access to that.
Again, kind of just speaking from native or federal’s perspective, they have very, let’s say how to call it, maybe sophisticated. Not so much. I don’t know. Very rapid and we’ll call it maybe fraud protection. Like if they recognize a transaction that’s outside of the normal, it’s like accounts shut down, right?
Kind of thing. And I appreciate that to some degree that they’re trying to protect me really themselves and doing so. Different, different episode. Again, we’ll talk about that at some point about protection for our protection on debit cards. But you know, they, they’ll shut down a card. Well, if you’re traveling and you didn’t put in a little travel notice with them, they shut down your account, you have access to money.
So again, the value of having it at a separate institution. So, the last attribute is to have it available. I like the idea of having it available at a second banking institution. So that’s what we’re looking for when it comes to an emergency fund. So where is the best place to keep your emergency fund?
In my opinion, it’s at a traditional bank separate from your primary banking institution, money, and either a savings or a checking account that you have debit card or check writing privileges or immediate transfer accessibility. to it. The value in having a fully funded emergency fund is it provides peace and stability, and it will make you bolder and riskier with the other aspects of your financial life.
Your micro action for the week. Ensure that you’re fully funded emergency fund. Is liquid accessible and available. Today we talked about the best place to keep your emergency fund. We talked about how it’s not an investment. We talked about how to keep it liquid, how to have accessibility to it and how to have it available.
I hope this helps you on your financial journey. If you have any questions or comments, you can leave them below. Additionally, you can send an email to Mike@truewealth.show.
And until next time, I hope you have a great day.
