I can see the horizon. If all goes according to plan, I should be out of my credit card debt by the end of the year and done with my car payments by next month. So I wanted to plan next steps. The biggest task I have to accomplish is to create a 6 month emergency fund. The idea is to have an emergency fund that will allow me to maintain my current lifestyle in the event that there’s no money coming in due to unemployment or something else that inhibits me from making money. I’m trying to save for 6 months of monthly expenses. I know people save 6 months of their monthly income but I’m not doing that. I know trying to save that much is going to discourage me so I’m starting small. My current monthly expense is about $2500 give or take but by the time I’m done making my car payments and out of credit card debt it should be around $2000. So my 6 month emergency fund should be around $12000. That’s a big number to save alone and so I’ve been looking for ways to save that will also help me reach my target faster. Here’s what I’ve found out from my research.
Emergency funds should be in a savings account, not an investment account- To me, the whole idea of an emergency fund is for the money to be readily available in the event that I need to dip into it. Not available 3-5 days after I need it and not less than what I put in. Well, putting it in an investment account pretty much does that. If your emergency funds are in index funds, etfs or any other investment vehicle, there’s no guarantee that all of what you put in will still be there (since your balance fluctuates depending on how the market is doing). Also you will not have easy access to this money the way you would if it was in a savings account. No, your money will not grow as fast as it could if it was in one of those investments, but it will be safe and it will be available, which is what you really need when the time comes to withdraw that money.
Savings accounts from an online bank give you better interest rates- Sometimes the online savings accounts even have better returns than money market accounts. I have two accounts with an online bank. One is an MMA that has a 0.85% return and the other is a savings account that has a 1% return. So the money that I keep in the savings account makes 0.15% more monthly than the one I have in the MMA account. I know a lot of people are hesitant to open an online savings account because they don’t trust it. I used to feel that way too. I didn’t know why or how they were able to provide a better interest rate than regular banks and thought that its too good to be true. I looked into why online banks provide their customers with a higher interest rate. I found out that the reason their rates are higher is because they don’t have as much expenses as regular banks. Since they don’t have physical branches around town, they don’t have to worry about the same costs as banks who do (overhead costs like security, paying branch staff, rent or utilities etc.) Because they have less expenses, they have room to provide a higher interest rate to their customers and pass on the savings. Also this is a great way to attract customers. I don’t know how long their competitive rates will last. Maybe they’ll lower it once they feel like they have enough customers, but for now, online savings accounts are the way to go.
Save for 6 months of expenses, its easier than saving 6 months of income- If you have the financial discipline and the funds coming in to do the latter, then by all means go ahead and save that amount. But if you’re like me, struggling to get out of debt, easily discouraged by daunting goals and have the constant need to see the light at the end of the tunnel, save for your expenses instead. This is assuming your expenses are lower than your income. If its not then that’s another bigger problem you should address by cutting out expenses you don’t need and finding ways to earn more money. But if you are making more money than you’re spending and need to create a safety net for yourself, this is the way to start out. Once you shave down your monthly expenses to the ones you need, save that amount for 6 months.