The Emergency Fund
In general, most personal finance gurus recommend a 3 to 6 month emergency fund. This can take many different forms, so I decided to break down how we approached it.
How much?
We decided that our emergency fund should cover up to 6 months of recurring monthly payments. For us, this includes our mortgage, student loan payments, groceries, utilities and insurance premiums. As conservative spenders, we felt more comfortable with a six-month cushion compared to three.
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Where?
This can be debated, but we decided to park our funds in a savings account. Since our traditional savings account with Chase has a paltry interest rate of 0.01%, we opted to find a high-yield savings account instead. There are many different options online (click here for a comprehensive list). We chose Citibank. Below, you’ll find a graph of the account’s annual interest rate since its inception.
As you can see, the interest rate has decreased by about 50% over the last ten months. Even so, it is still head and shoulders better than the rate offered by our traditional savings account at Chase.
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When?
As the name implies, we only plan to tap into this account in an emergency situation. Job loss would be a reasonable excuse. Medical bills and home/auto repairs that can’t be covered by our credit card also come to mind. Home renovations, vacations, vehicle purchases—these are not acceptable instances. As the pandemic has shown, many careers that were previously considered stable may in fact not be in the face of a worldwide crisis.
The take home point: everyone needs an emergency fund.