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  • Writer's pictureKen Kowach

What is an emergency fund? How much and where to keep it (+Bonus: where I keep mine)

Updated: Mar 24, 2020

This week I’m writing about emergency funds. Some might think this is a snoozer of a subject, but it is still important.

Don’t worry, I’ve spiced it up with some of my homemade humor.

As I write this article, I am on active duty. The point of mentioning that is that I have spent all this time, my entire adult life, with 100% job security. Essentially, that has provided me with a huge security blanket, and it hasn’t been a good one. Here’s why.

I was never forced to learn the value of having a solid emergency fund that was composed of providing the typical 3-6 months of bills. Why?

Because there was no chance of me getting laid off. Even if I was forced to be separated from the military, it still meant potentially years before separation, depending on how much of the enlistment remained to be completed.

No Bueno.

For the rest of you folks out there who remember the Great Recession, I didn’t even feel the impacts for the most part. While a great portion of America was funemployed, I was still receiving that guaranteed paycheck.

More than this though, in the Army, we have things like Army Emergency Relief loans, wherein emergency situations, we can get a loan to cover the cost, so pretty much there is very little reason to keep an emergency fund while serving in the military…

Honestly, though, it isn’t a good setup. Here’s why. Nobody stays in forever. Eventually, I’ll be regurgitated back into civilian life, and I’ll be on my own to weather any future economic downturns or lay-offs.

So, as retirement looms closer and closer, I have found it a very important, and unpopular subject. So let’s talk about it.


Bottom Line Up Front

An emergency fund is a safe place to keep your cash or cash equivalent that provides good liquidity, protects against inflation, and isn’t susceptible to wild market swings.

There are several viable options of where to keep your money, most notably the high-yield savings, and finally, there are a few considerations when deciding how much to keep for emergencies. These include your most expensive potential emergency, or 3-6 months of bills if that happens to be higher.

Alright, let’s send it.


What is an emergency fund?

emergency funds coins spilling out of jar

An emergency fund is simple. It is any cash or cash equivalent that you keep for (actual) emergencies. Actual emergencies are completely unexpected expenses that you did not foresee or any financial altering events that happen in life. Well, what exactly is an emergency?

Okay, what is an emergency?

Did your car blow a gasket, reminding you of that one time you decided you could handle max spiciness at the Thai restaurant? Yes, that’s an emergency.

Did you get fed up at work and give your boss (now former boss) the double backflip, and now you have no job?

How about if your appendix decided it was time to call it quits, and now you’re curled up on the bathroom floor like a frat girl after a normal Tuesday night with a bottle of Jameson?

These are all fine examples of emergencies.


Where to put your emergency fund?

hanging piggy bank

Here’s a list of viable options of where to put your emergency fund.

  • High-yield savings accounts

  • Money market account

  • Treasury bills

  • CDs (without penalty fee for early withdrawal)

First of all, your credit card is not an emergency fund. I mean, I suppose it could be but

it isn’t a very financially sound option since you’ll start incurring a ton of interest as I explained in my article, seven ways to save $10,000 in a year.

Also, you shouldn’t be relying on any money that is invested in anything that swings in valuation wildly. If you have money stocks or bonds, that probably isn’t a solid place for your emergency cash, because what if that day your appendix decides to give out is right after the stock has a complete meltdown?

Additionally, you want liquidity. Things like Certificates of Deposits with penalties are not a good option because you’ll get penalized if you need your money before it matures. And you need to protect it from the risk of inflation too.

Don’t let that sweet cash erode away in purchasing power by stashing it under your mattress or by putting it in a normal savings account that gets you a meager 0.1% interest rate.

There are plenty of high-yield savings accounts. I feel like in the last couple of years, high-yield savings accounts have become all the rage.

Robinhood has one, Credit Karma has one, Wealthfront has one, Discover, American Express, Barclay, and probably everybody’s third uncle has one. It is ridiculous nowadays how many institutions have high-yield savings.

The point is, this is a solid option and there are plenty out there.


Bonus: My personal favorite option for emergency savings

five star rating

Here’s my personal favorite option for where to keep my emergency savings.

If you haven’t heard of it, you need to check it out. I’m not promoting them or anything. I just really like Public. At the time of this writing, it provides a 2.5% interest.

Technically you have to use the Public App on your smartphone, but yeah, it is a solid option in my opinion because it is SIPC insured, and it won’t swing with the market.

I recently started using this because it is about 1% to 1.5% higher than most of the high-yield savings that are out there (gimmick-free). (Especially due to the March 2020 Fed rate cut)

Technically, Public is an investing platform, much like a social media version of Robinhood, but you can park up to $10,000 in there without investing it and it’ll accrue 2.5%. One thing to look out for though is the total cash value will not exceed $10,000, so leave some wiggle room in there if you are putting close to $10,000 or else it’ll cap it, even though you should have gotten a certain amount of interest.


How much to put in an emergency fund?

Here’s the golden question.

Everybody wants to know how much to keep in an emergency fund. Obviously, it depends.

Just as nobody would ever advise you to be underinsured, no financial planner would recommend you to have too little in your emergency savings. Luckily for you, this blog is not for financial advice and is for entertainment purposes only as stated as a disclaimer on my homepage (so as to prevent litigation), so I get to keep it real.

For me, I would only keep as much as I need in emergency savings, to cover as much as I can reasonably predict that I would ever need. Anything more than that kept in cash is underperforming what it could be doing in the long run in a better returning investment.

It is obviously going to change situationally, but as of now, I don’t have to worry about having to pay my bills for 3-6 months in case I get laid off. That’s the beauty of being in the military. I have that luxury.

What I do keep on hand is to cover as much as I need to for the most expensive emergency that I can think of. Since I have full health coverage, it isn’t health costs.

It would probably boil down to buying myself, my wife, and all three of my kids round trip tickets across the country in case there was a death in the family.

What that means then is about $5000 for short notice round trip tickets. The next highest thing would be an insurance deductible. I like to keep my deductibles high because, let’s face it, insurance is a racket.

If you aren’t like me and don’t have job security, it makes sense to keep 3-6 months of bill expenses on hand. And no, that doesn’t mean you keep your Netflix and Hulu subscriptions.

You would add up all of your bills that you can’t cancel and that aren’t luxuries. Your rent or mortgage, car payments, car insurance, and any debt obligations, commonly like credit card minimum payments, or less commonly, paying a monthly charity amount of a child in Africa.


How do I get started?

Guys, I’m not about reinventing the wheel. There are plenty of tried and true methods, but I’ll agree with Dave Ramsey on this one on his baby steps (but not the one about paying your mortgage off early).

Step 1. Save up $1,000 to have at least something for emergencies.

Step 2. Pay off all of your consumer debt. (He recommends the snowball technique). Do it however you want, if you’re disciplined enough, pay off the highest interest first, known as the debt avalanche payoff technique.

Step 3. Now you can get that emergency fund up to where it needs to be, depending on what method you used for your situation. If 3-6 months of bills are your highest amount, go with that. If you’re an Ebenezer Scrooge and saved 37 cents by going with the $10,000 deductible on your car, go with that if it happens to be higher than 6 months of bills.


Final Word

There are plenty of us Positive Polly’s out there where we think the best of all situations. As we age though, I think that is when it starts to dawn on all of us that things aren’t always going to be as rosy as we expect them to be.

I used to jump out of airplanes without a care in the world back when I was 20 years old. I still do it but I’m in my mid-30s (time of this writing), and frankly, it scares me just to think in how many ways I can possibly die or get injured.

The same goes for emergency funds. If you’re reading this and you’re young, just try to be a bit more forward-thinking, unlike most of us, myself included. Prepare for emergencies. We don’t need to have a negative outlook on life, but just a realistic outlook and understand that bad things happen to everybody for seemingly no good reason, all the time.


The Woke Hack

"Save your money and one day, your money will save you."

Time to Pay it Forward

Feel free to comment down below with where you keep your emergency fund. Talk about what has worked well for you as far as how much to keep for emergencies. Also, point out something that I missed or didn’t think about in my discussion.

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