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Savings Accounts & Emergency Fund

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Between 10% and 20% of your annual income should be automatically routed towards your savings account and cash based savings vehicles. Your saving account primarily holds your emergency fund. The emergency fund is six months of your annual compulsory expenses reserved for financial disasters. Financial disasters mean losing your job, watching your home burn down, extended hospital stays, wrecking your car, and other potential major problems. It is not for spending.

Savings Accounts & Emergency Funds

The reason you deposit your emergency fund within your savings account instead of your checking account or certificates of deposit is simple. You want this money to be easily accessible, but not so accessible that you spend it without thinking. It should never be in a maturity locked vehicle, which eliminates Certificates of Deposit. Emergency Fund principal should never be at risk since it’s absolutely essential you have over six months of expenses preserved when disaster hits. This eliminates Money Market Mutual Funds. Money Market accounts are considerable if they do not risk principal and allow withdrawals a minimum of three times per month.

Saving account based emergency funds are moderately accessible, but may have a limit of a few withdrawals or transfers per month. This accessibility has caveats: You will not be able to write checks against the balance of the account or charge against it with a debit card. You will have to access the account via human teller or possibly ATM card. These accounts offer higher interest rates than checking accounts, but still offer very little interest. Your earnings from savings account interest is almost guaranteed to always be below the inflation rate.

If you’re depositing your emergency fund into a savings account, avoid withdrawing money. Unless you encounter expensive emergencies, your savings account should be a deposit only place location for your money. You will only transfer money from your savings account to investment accounts if the funds are above your emergency fund’s requirements.

Fees & Interest Rates

Savings accounts often have fees that destroy the benefits of their interest. Since the account’s interest rate is already low, if fees are not minimally charged they will actually eat into the principal you’ve deposit into the account. Fees can be increased under certain conditions, such as falling below the minimum balance. It’s best to find a savings account with the lowest possible fees. Note: don’t keep more money than your emergency fund in your savings. Inflation will crush your purchasing power long term, since your funds will no longer purchase the same amount of goods. Invest the rest, but be aware inflation also affects your emergency account needs. Over time you will have to add additional funds to balance increases in the cost of living. Don’t assume the dollar amount of six months of expenses will remain the same long term.

FDIC Insurance

Savings accounts provided by qualified banks are insured by the Federal Deposit Insurance Corporation in the United States.  You don’t pay for this insurance. At the time of this writing, the FDIC insures accounts up to the first $250,000. You should rarely keep money exceeding that amount in your account anyway unless that is 6 months of your emergency fund. The low-interest rates mean that money would be earning pathetic amounts of return. They would be skipping substantial investment returns potentially earned in bond, equity, commodity, or other alternative markets.

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