My first question for you today is: do you have an emergency fund? My second question is: if you have an emergency fund, how much money do you make on it each year with your current savings account? My post today tackles these two questions, and I share how I made an easy $300!

Do you have an emergency fund?

If the answer is yes, you can skip down to the second part of this post. If you do not have an emergency fund – you should. Emergency funds are important whether your finances are in check and you have no debt or if you have debt. The purpose of the emergency fund is to have money set aside for any events life may throw your way that are unexpected.

Let’s say you live in Florida and your AC unit goes out in July. After a quick Google search, I see the cost to get this replaced is between $3,692 and $7,134. Most of us do not have that much in cash just sitting around, and I strongly encourage you not to just throw that expense on a credit card.

However, if you follow the guidelines for building an emergency fund, which most financial folks that I follow advise three to six months of your monthly expenses, you will be in a much better position to handle that expense. Some people really want a number that other people have in their emergency fund, and from what I can tell most folks have between $15,000 to $30,000 available in cash.

If you want to read more on how to get your finances under control – check out this post. It reviews the five steps my wife and I used to eliminate $97k in debt!

How much money are you making on your emergency fund money?

I am willing to bet that most of you are receiving an extremely low interest rate on your savings account. I’ve had my emergency fund money sitting at one of the large banks making me less than $30/year. Well, I finally took action and I am turning that $30/year into $300/year.

Now, is an extra $270 over the course of a year a great deal of money? To me it is!!

How did I do this? I moved my emergency fund to Ally Bank. Ally is an online bank (fully FDIC insured) that offers a 1% return for its savings accounts. 1% doesn’t seem like much, but if you have $20k in savings that is $200/year! In addition to my emergency fund, I opened up two other savings accounts – a vacation fund and a car savings fund.

You can easily open up multiple different savings accounts. It is very simple 🙂

Other ideas for having multiple savings accounts:

  • Save ahead for large bills that happen once or twice a year (many insurance payments, which you can save money paying once a year instead of monthly).
  • As I mentioned earlier, having my own account for family vacations is nice.
  • Create a savings account for your next car, so you do not have to finance it (pay in ca$h!).
  • Kids stuff – my wife and I just had our first kid. Most of you with kids know there are always expenses popping up; therefore, trying to get ahead and save for these expenses I’m sure will be helpful!

Ally is not the only option – Capital One 360 is another popular online savings account that yields better returns on your money. There are others, but Ally and Capital One appear to be the most popular and they have the best reviews.

Finally, I have read posts that discuss investing your emergency fund in the stock market or using your Roth IRA money. I am not a fan of investing your emergency fund – my take on this is pretty simple. First, you want to have your money accessible quickly. Second, you want to avoid fees. Last, and most importantly, you don’t want to mess with your emergency fund money. Let’s say you invest your money and the market is down – if you need the money and you pull it out, you may not have enough money to cover your emergency. Investing works much better when you give your money time to work.

Does anyone currently use Ally or Capital One?

Do any of you invest your emergency fund and have a counter argument?