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Did you know 63% of Americans don’t have enough money to cover a $500 emergency? Depending upon how you manage your money, this may or may not be surprising. What shouldn’t be surprising is that financial emergencies are going to happen whether you like it or not.
Your car is going to break down. The furnace will stop running. Or maybe your dog will eat a bag of chocolate and need a 2 AM trip to the emergency vet (I’ve been there).
Any number of financial emergencies could occur at any point throughout your year; it’s Murphy’s Law. And even though you can’t do much to prevent them from occurring in the first place, you can make make sure you’re prepared to manage them if you have an emergency fund.
What is an Emergency Fund?
An emergency fund is simply money you have saved in order to pay for unexpected expenses that don’t fit in your monthly budget.
Though nothing can take away the stress of dealing with expensive emergencies, an emergency fund most certainly can take away the stress of paying for them!
What kind of stressful emergencies are we talking about? Think unexpected job loss, out of the blue health problems that require medical attention, or unexpected home repairs.
Do You Need an Emergency Fund?
The truth is if you have an emergency fund you can be confident that you’re at least financially prepared when unexpected expenses strike. Without an emergency fund, those unexpected expenses will cause stress, money fights, and will possibly send you deep into debt over time.
If you don’t have an emergency fund, you could also be tempted to pull money out of your 401k, IRA, or other investments to cover unexpected expenses. Bad idea.
While you’re technically using your own money when you do this, it’s harmful to your current and future financial growth: aside from penalties and fees that results when you raid retirement accounts before you reach eligibility age, you’re slowing down the steady work of compound interest.
Worse yet, you could be forced to resort to piling up high interest debt on a credit card every time you have an emergency. Credit card interest rates are notoriously high, ranging from 7-21% in many cases.
That’ll potentially cost you hundreds of dollars in interest from even relatively small emergencies.
Overall, we recommend that everyone have an emergency fund because it is the least expensive way to pay of unexpected expenses that your budget can’t handle.
How Do You Create an Emergency Fund?
With an official-sounding name like “emergency fund,” you might think that you need to open a special account, like you would with a health savings account (HSA) or HRA.
But the good news is you can create an emergency fund just about any way that works for you, as long as you’re setting aside money specifically to pay for unexpected financial emergencies.
Popular emergency fund account types include checking accounts, savings accounts, money market accounts, online savings accounts, high interest online savings accounts, and even no penalty CDs.
No matter which one you choose, you’re not going to make a lot of money off your savings –and that’s OK. Remember, your emergency fund isn’t there to make you money. It’s there to help you avoid going into debt and paying unnecessary interest and fees.
Pro Tip: When you are creating an emergency fund, the most important thing is to make sure that you have easy access to the money you have saved. If your money is hard to access or takes several days to transfer over, you’ll end up taking out a loan or using a credit card every time an unexpected expense comes up.
Starting an emergency fund is simple, and you can do it in just a few minutes. Here are a few suggestions:
- Open a separate savings account at your current bank.
- Set-up an online savings account that will be easily accessible.
- Tuck away your money using an automated savings assistant.
Starting Your Emergency Fund From Scratch
First, it should be noted that starting an emergency fund requires discipline. It’s impossible to save money if you’re spending every dollar you earn on a monthly basis, but you can easily avoid that by getting on a budget.
Second, you need to choose where you will create your emergency fund (Remember, it’s very important to make sure that you have easy access to your emergency fund!). Most traditional banks will allow you to open a separate, additional savings account if you’re a current customer, though some banks may charge a fee or require a high minimum balance.
Our research indicates that the average traditional bank’s savings account interest rate as of August 2018 is 0.08%. Many banks offer even lower rates, with some as low as 0.01%.
Again, the purpose of your emergency fund is to protect yourself against unexpected financial emergencies, not make a high return on your money, but in today’s world of online banks, there are ways to do both.
Our top current recommendation for where to start your emergency fund, CIT Bank, not to be confused with Citi Bank, has managed to stand out over the past few years when compared to both online banking and traditional bank savings options.
CIT Bank: Emergency Fund Options at a Glance
Currently, CIT Bank offers three account types worth considering if you’re looking for an account to host your emergency fund: the CIT Premier High Yield Savings Account, CIT Money Market, and CIT Bank No Penalty CD.
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CIT High Yield Savings
Here’s why we believe CIT Bank High Yield Savings is an option worthy of consideration for storing your emergency fund.
Pros of CIT High Yield Savings
- No account opening fees or monthly maintenance fees.
- Minimum opening balance is $100.
- Account balances are FDIC-insured up to $250,000.
- 1.55% APY beats the national average by 22x
Areas of Improvement for CIT High Yield Savings
- Customer service is only available by phone from 8:00 AM to 9:00 PM on weekdays with limited weekend hours.
- The CIT mobile app has low ratings on all devices.
- No traditional branch locations are available.
Who Would Benefit Most From This Account?
- Savers who are just starting a new emergency fund
- Savers who currently have a savings account with a low APY
CIT Money Market Account
In general, a money market account is a worthwhile option to consider when looking for a place to park your emergency fund. It offers highly competitive interest rates and adequate liquidity for an emergency fund, but it does have its drawbacks, too.
Pros of CIT Money Market Account
- No account opening fees, monthly maintenance fees, or minimum daily balance.
- Minimum opening balance is $100.
- Account balances are FDIC-insured. *This is a bonus, as not all money market accounts are FDIC-insured.
- Interest is compounded daily.
- 1.85% APY is competitive.
Areas of Improvement for CIT Money Market Account
- Limited to 6 transactions per month; additional transactions incur a $10 fee per transaction
- This account is different than a traditional money market mutual fund. See the CIT FAQ for more information.
Who Would Benefit Most From This Account?
- Savers who are looking to build a large emergency fund and want their money to earn more interest than a savings account.
CIT No-Penalty CD
Most CDs (certificate of deposit) come with set term limits and significant penalties for withdrawing funds before the end of the term. The CIT Bank No-Penalty CD is a bit different.
Pros of CIT No-Penalty CD
- CD is available on an 11-month term.
- You may withdraw the total balance and interest earned, without penalty, beginning seven days after funds have been received for your CD.
- Account balances are FDIC-insured up to $250,000.
- No account opening fees or maintenance fees.
- 1.85% annual APY
Areas of Improvement for CIT No-Penalty CD
- Minimum deposit is $1,000
Our Recommendation for Most Savers
Most savers will benefit most from the high APY and superior flexibility of either the High Yield Savings or Money Market Account. If you value a higher interest rate and don’t mind transaction limits, the Money Market is a smart choice.
How Much Money Do You Need to Save in an Emergency Fund?
Across the board, financial experts vary when asked to pinpoint just how much money you should save in your emergency fund.
On the low end, some experts advocate saving a minimum of $500 to $1,000. Some financial planners suggest a minimum of one to three months of living expenses, and others push for as many as 6 months of expenses.
Related Reading: How to Build a Starter $1,000 Emergency Fund Quickly
Our recommendation is not one size fits all: the size of your emergency fund should depend greatly on your combined average steady income, job security, whether you own a home (vs. renting), and your overall monthly debt obligations.
In other words, you should look at the big picture when deciding just how much money you need in your emergency fund.
Here are some examples:
- Combined annual income less than $40,000; secure jobs | Rent of $600| Student loan payment of $240
Recommended minimum emergency fund: $1,200Rationale: Emergency fund is equivalent to 2 months of rent and is also large enough to cover many other costs.
- Combined annual income of $70,000 | Homeowners | No debt
Recommended minimum emergency fund: $10,000Rationale: Emergency fund is adequate to cover virtually any unexpected home-related emergency. It also could cover two months of living expenses in the event of a job loss.
If you’re a homeowner, you should also consider the age and remaining life of the major mechanical elements of their home, including but not limited to your furnace, air conditioner, water heater, and kitchen appliances.
Other items, such as your windows, roof, siding, and gutters typically don’t make our list of items to consider when calculating your emergency fund needs. Here’s why: Most of the time, you won’t suddenly and unpredictably need to replace these items.
Instead, you should create a separate savings account for long-term repair and replacement costs for these items. We call this a sinking fund.
Emergency Fund FAQs
Looking for more information about emergency funds? Check out the frequently asked questions and answers below.
How do I grow my emergency fund after I set-up my account?
There’s no one-size-fits-all approach to building an emergency fund, but we recommend the following process:
- Identify how much money you currently have saved and add it to your new emergency fund. This could be unspent cash, large change jars, excess money that is just floating around in your checking account, or cash you may have saved using an automatic savings assistant like Digit or cash back app like Ibotta.
- Go over your budget carefully and identify expenses you can reduce or cut completely. Don’t worry, you can still get your pumpkin spice latte, but limit your optional expenses whenever you can. The savings will add up much faster than you may expect.
- Look into ways you can grow your income, at least for a short time. You could pick up extra hours, pick-up a few odd jobs for friends and family, or look for a more long-term opportunity. (See our list of 50+ ways to make extra money.)
When should I use my emergency fund?
If you encounter a significant and unexpected financial expense, you’ll be relieved to have an emergency fund to tap into right away.
Before you make a hasty decision, it’s always worth checking on your current monthly budget to see if you can make a few adjustments to cover costs. Your emergency fund is always your last resort.
How big should my emergency fund be if my job is in jeopardy?
When your job is insecure (even a little), our recommendation is to do everything you can to put all other financial plans on hold, including investing, saving for other goals, and paying down debt so you can build your emergency fund as much as possible.
You may not know whether your job is truly in danger, but in most fields, word travels fast. Few companies downsize or process temporary layoffs without rumors spreading first.
If you catch wind of any threatening talk, it’s a good idea to try to expand your emergency fund to cover 6 months or more of living expenses. This way, if you are laid off, you’ll have a strong cushion to ease your stress while you look for a new job.
What expenses don’t really qualify as financial emergencies?
It’s pretty clear that the latest sale at your favorite retailer doesn’t offer a solid reason to raid your emergency fund, but what about some of the grey area expenses? Here is our stance on a few expenses that shouldn’t lead you to touch your rainy day fund.
Appliance replacement. Yes, they do break down, and it’s always at the worst possible time. But the truth is you know it’s coming at some point. Dishwashers eventually leak, your refrigerator won’t last forever, and even your stove has a limited lifetime. You should plan ahead for these kind of expenses with sinking funds, not your emergency fund.
Routine car maintenance. An oil change and tire rotation isn’t an emergency. And neither is replacing your tires when the tread is no longer safe. If you plan ahead, most auto maintenance is predictable.
That said, some car repairs are unpredictable. Depending on the value of your car, when these colossal car emergencies strike, you may be better off ditching the car and using your emergency fund to buy an inexpensive vehicle with cash.
What should I do after I dip into my emergency fund?
Start rebuilding your emergency savings as quickly as you can — another emergency is always around the corner!
If you can pick up overtime or ramp up your side hustle game, now is the time to do it. A low balance in your emergency fund doesn’t have to send you into crisis mode, but it should definitely give you a sense of urgency to build it back up as fast as you can.