One question that is often on my mind is: how much should you keep in an emergency fund? I’ve fielded this question from a few friends that know I am engulfed in the personal finance space. My wife and I also debate how much our family should keep in our emergency fund. But where should you keep the cash you have in your emergency fund?

There are many different arguments that address both questions.

In today’s post, I will review how much money you should have in your emergency fund and where you should keep your money in your emergency fund.

How much money should you have in your emergency fund?

A common argument most folks, like Dave Ramsey, suggest that you start with $1,000.

Mark Cuban says you should keep at least 6 months of expenses, ” If you don’t like your job at some point or you get fired or you have to move or something goes wrong, you’re going to need at least six months’ income.”

Suze Orman, former CNBC host, and a financial expert says you should keep closer to one year of expenses. She believes three to six months isn’t enough.

My family personally keeps a little over 6 months of expenses in an online savings account. We use Ally Bank, and year-to-date, we’ve made over $300 just in interest accumulation.

I wasn’t always a fan of keeping so much in savings. However, my wife instilled in me a good trait for saving into an emergency fund when we met. I think we’ve always had at least $10,000 in cash since we moved in together seven years ago to combat anything life throws our way.

Thanks, Babe 🙂

Where should you keep your money?

I’ve read quite a few different strategies on where to keep your money for emergency funds. I don’t agree with some of them, but again, this is a choice that is up to you…

Keep it in cash under your bed…

This option is easy and straightforward. It is also extremely stupid.

I’ve heard so many people argue that their money is safer under the mattress because the stock market is so volatile. Yes, the market is volatile. It is extremely volatile if you attempt to time it. You need to stick in the market for the long-haul. So when something tragic like what happened in January of 2009 happens, you stay in it.

Why?

Well, take a look below. In January 2009, the S&P 500 hit a low of 735. The market is up over 212% today from where it was in 2009. So, if you run some quick math on what $10k invested in January 2009 would look like today…

$33,945

AND, if you invested an additional $5,000 each year on top of that, you would have over $125k. 

emergency fund

Credit to Yahoo Finance

Stock cash away with your current bank…

How exciting does a whopping 0.1% return sound? Maybe more like 0.01%

The quick math… If you have $10k in a savings account, after one year you will have made $10 with a 0.1% interest rate. That is right, $10 dollars…

If you keep cash in one of the big banks like I used to you it is basically like storing the money under your bed. You do get FDIC insurance, so your money is much safer than under your bed. But you are actually losing money because you are not keeping up with inflation.

Keep your money in an online bank like Ally

Online banks, like Ally Bank, is where I keep our emergency fund. I like Ally Bank over traditional big banks for a few reasons:

  • Better rate of return – 1% – compared to 0.1% (check out my old savings account interest rate)
  • Quick access to cash – it is easy to transfer money to and from Ally to my normal bank to access my cash. You can also get an ATM card from Ally to access cash immediately.
  • You still get FDIC Insurance up to $250k so your money is safe
  • Ally gives you the ability to open multiple savings account for free. And it is easy. Therefore, you can keep separate accounts like a vacation account, savings for large, off-cycle bills like car insurance, and your emergency fund!

Fund your Roth IRA because you can withdraw contributions at any time tax and penalty free

Grant over at Millennial Money writes that you should invest your emergency fund. He likes the idea of using your Roth IRA instead of having cash on hand, “I find having cash emergency funds and a Roth IRA redundant and I’ve always invested my emergency fund.”

Matt, who writes over at the Simple Dollar, also agrees with Grant that you could use your Roth IRA instead of keeping cash in an emergency fund.

I really like this concept, but I am late to the game saving into a Roth IRA. I do not have enough money in my Roth to cover 6 months of living expenses.

Why not invest the money instead?

As much as I like the idea of using the Roth IRA as an emergency fund, I still think I’ll stay with keeping cash in Ally. For me, investing in my Roth, 401(k), and Taxable is about accumulating wealth. My emergency fund isn’t an investment but a safety net.

If something were to happen to me or my family, we have the cash in our emergency fund on hand and ready to use. My investments are about building long-term wealth so we have freedom later in life to have more flexibility. So I would prefer not to tap into them when a rainy day comes…

Readers, where do you keep your emergency fund?