How Can You Keep Your Emergency Fund Accessible -- But Not Too Accessible?
If you've managed to save up a few thousand dollars in an emergency fund to help cover job loss, medical expenses, or other expensive and unforeseen expenses, you should be proud -- in fact, more than 1 in 4 Americans report having no emergency savings whatsoever. However, having this money sitting idle in a low-interest checking or savings account may make you nervous. You may find yourself tempted to overspend if your higher savings balance is available with only a few clicks, and if your debit card is lost or stolen you could find your savings account quickly emptied. Read on to learn more about the advantages of keeping your emergency fund out of immediate reach, as well as some of the ways you can accomplish this while still earning a decent return on your investment.
What are the advantages to keeping your emergency fund inaccessible?
Just as going to the grocery store while hungry can sometimes cause you to purchase items you don't truly need, trying to stick to a budget when you have thousands of dollars at your immediate disposal can also lead to more impulsive purchases. Before you know it, your savings account could be dwindling as you find yourself living beyond your means.
While you may want immediate access to cash in an emergency, short of providing bail money to a friend or relative, there are very few emergencies that actually require cash. You'll be able to put car repairs and other sudden expenses on a credit card while medical bills can give you enough notice to withdraw funds from an outside institution within a day or two. Having this extra time to think about an expense and plan how it will be paid can keep you from making a rash decision.
What options can help you keep your emergency fund safe while beating the rate of inflation?
There are a couple of ways you can keep your emergency fund growing while ensuring it takes you a day or two to access the funds. The first is an online savings or money market account. These accounts require higher balances than other savings accounts, and can, therefore, afford to pay a higher interest rate to customers. You'll be able to transfer these funds to your primary checking or savings account upon a couple of days' notice.
You may also opt to purchase certificates of deposit (CDs), laddering these CDs as your emergency funds increase. Because cashing out a CD before its term has ended can cause you to forfeit the earned interest, it can be beneficial to ensure you have multiple CDs with multiple renewal dates. One example would be someone with $6,000 in savings who purchased a new $500 1-year CD on the first of each month. While the CDs are being laddered, this person still has access to the bulk of savings -- and after the first year, a CD will be set to renew each month, giving this person the flexibility to withdraw the investment (and interest) if an unexpected expense crops up or continue the ladder by purchasing a new CD. Contact a local outlet, such as Rio Grande Credit Union, for further assistance.
