Today, we’re looking at the best bank account you can use to keep your full emergency fund, to save three to six months of your key expenses – from Baby Step No. 3 of Dave Ramsey’s 7 Baby Steps.
Right now, we’re in the second section of Page 12 – 13 in Chapter 1 of Dave Ramsey’s Complete Guide to Money.
And here’s my lesson for the day:
The best bank account for your emergency fund gives you instant access to your money when you need it.
Chapter 1, titled Super Saving: Common Sense for Your Dollars and Cents, continues on Page 12 with why you should make your full emergency fund “liquid.”
As you save up and move towards building your full emergency fund, which might take a while…
… because, let’s face it, a lot of people don’t usually have three to six times their monthly key expenses sitting around…
… there’s one question we need to address:
That is: what’s the best bank account to use to save for your full emergency fund?
The answer from the book will come in a bit.
But first, let’s talk about the word: “liquidity.”
Dave describes liquidity, in the book, to mean “availability.”
That is, if I have $3,000 in liquid cash, then that means, I have $3,000 available and ready to use anytime I want it.
This is very important, because the concept of liquid cash ties in with the primary goal of an emergency fund.
And what’s the primary goal of an emergency fund? To be able to have that cash whenever I need it.
… and not to have to wait till banking hours or 72 business hours or more to cash my money, like you’ll see with most savings or checking accounts.
So, we’ve just established that the first thing we’re looking for in a good bank account for our full emergency fund is…
… No. 1: Being able to have instant access to the account.
This is the most important thing we need to look for, but that’s not all…
… we also want to remove the temptations of spending the money on other expenses that are not emergencies.
For example, we want to make sure we’re not spending our full emergency fund on paying rent, buying food, or subscribing to our phone or internet plan.
These are key expenses, and so should be paid for with our like other monthly expenses.
If we want to avoid that temptation on spending our emergency fund on whatever catches our fancy, then we need to make sure that the money is not too close to us.
In other words, we want to make sure our emergency fund is not stashed under our pillows or mixed in with our general savings or checking accounts that we operate every month.
And right there is our second biggest criteria to look for in an excellent bank account for our full emergency fund.
That is, we’ve just established that the second thing we’re looking for in a great bank account for our full emergency fund is…
… No. 2: Being able to keep the money separate from our other money, so we don’t spend it on non-emergencies.
And so putting the first and second criteria together, here’s what you have:
You want your emergency fund to be available / liquid; but separate from your everyday bank accounts…
… that is, you want your emergency fund in a place where you won’t mistakenly dip into it; but that you won’t also have to wait for hours or or days to withdraw your money when you’re faced with an emergency
Are those the only two key things to look for in the best account for your emergency fund?
The answer is: no.
Because, here’s the deal:
When you have a full emergency fund that’s $7,000… $10,000… $15,000 or even more…
… there’s another sneaky temptation you need to be concerned about.
And that’s the temptation to want to ‘put your money to work.’
Which means, you might be thinking: why should I put a whole $7,000 in a bank account that makes me little or no extra cash, when I could simply be making the ‘cash work for me’…
… by putting the $7,000 in a profitable mutual fund or high-growth stocks?
According to Dave, there are TWO big reasons why you can’t do that:
1. Your emergency fund is not an investment
Your emergency fund is insurance – and paying for your insurance will cost you money.
For example, how does your health or home insurance work?
When you pay for your health or home insurance, you’re buying a promise that you’ll be able to get the resources you need to bounce back from any health scare or a sewer repair that life may throw at you someday.
So even though you pay decent insurance premiums every month, the real value of your total payments is way more than what you put in every month.
For example, you might put in $456 a month for an individual health insurance plan, and expect to be covered for tens of thousands of $$$ in healthcare expenses.
The same thing applies with your emergency fund…
… when you build up an emergency fund, you’re saving up for a promise that you’ll be able to bounce back from curveball that life may throw at you…
And so, the real value of your emergency fund goes beyond that money you put in every month. Your emergency fund protects you, and goes beyond making a few extra hundreds of $$$ with it.
You experience the real value of your full emergency fund: when you can afford to keep your life and household running, when life thinks it’s got you boxed into a corner.
… which is precisely why you need that emergency fund as a very important part of your survival kit to fight back against life.
And so, now you see why a traditional mutual fund or stock investment account isn’t precisely set up to help you tackle life’s emergencies.
2. Withdrawing money from investment accounts might be too late for your emergencies
Here’s the truth: Most mutual fund or investment accounts won’t let you withdraw that money for an emergency fund when you truly have unexpected expenses.
The investment companies often have standard rules around withdrawals which you’d need to abide by, and things can take longer times than usual for you to have that money in your hand.
Whereas the biggest commodity you don’t have in spades during an emergency is time.
Bottom line: think of your emergency fund as insurance – not as an investment.
So far, we’ve established that the third thing we’re looking for in a good bank account for our full emergency fund is…
… No. 3: We don’t need the emergency fund to make us extra money.
The Top 3 Things To Look For in the Best Account For Your Emergency Fund
And so bringing together all we’ve learnt so far, here are the top 3 things to look for in your bank account for your full emergency fund.
No. 1: Being able to have instant access to the account
No. 2: Being able to keep the money separate from your other money, so you don’t spend it on non-emergencies
No. 3: Not looking for the emergency fund to make us extra money
And so, which bank account satisfies all three criteria, according to Dave?
Answer: a simple money market account with a good mutual fund company.
And according to Nerd Wallet, a personal finance comparison site, here are the 5 best money market accounts available in the market right now:
- Axos Bank High Yield Money Market
- TIAA Bank Yield Pledge Money Market
- CIT Bank Money Market Account
- Sallie Mae Money Market Account
- Discover Bank Money Market Account
All these money market accounts give you quick and easy access to your savings whenever you need it… which is exactly what you want for your full emergency fund so you can handle unexpected expenses.
Because: The best bank account for your emergency fund gives you instant access to your money when you need it.
That’s all for today, my friend. We’ll continue in the second section of Page 13 of the book tomorrow.
See you then.