The Structure of Your Emergency Fund

As I mentioned in Part 1, it is important to have six to nine months of living expenses saved, but there is a specific way that you can structure those funds to be most effective. Using the example from Part 1, if one has $2,000 of monthly living expenses, he/she would need to have a total of $18,000 to have a full emergency fund of nine months of living expenses. However, it is not important to have it ALL in cash.  Here is a breakdown of where these funds should be located.

1 Month of Living Expenses

These funds should be held in a checking account so that you have immediate access to these funds at all time.  In the above example this individual should have a minimum of $2,000 in their checking account. If your checking account has 1 month of living expenses in it, one needs to act as if they have no money in the account and never go below that level.

5 Months of Living Expenses

These funds should be held in high yield savings account and you should be able to have access to these funds within 1-3 days without penalty or fee.  In the above example, if your monthly living expenses are $2,000 one should have $10,000 in a high yield savings account (how to choose a high yield savings account is below).

3 Months of Living Expenses

These funds are not cash at all, but you have access to these funds in a line of credit through a credit card.  As stated earlier, the only time that one should be using a credit card is to improve upon his/her FICO score or in the case of emergencies. So to go along with the earlier example, if your monthly living expenses are $2,000 one should have at least $6,000 in a total line of credit in case of emergencies.

So, if there is ever an emergency in your household and your emergency fund is full, you should first tap the cash in your savings account. Secondly, if those funds become depleted you should use your line of credit to help provide for your monthly living expenses.

Selecting the Right Emergency Fund

There was an elderly man who was sitting on a bench with a dog sitting next to him. A young man walked by him and asked, “Hello Sir…does your dog bite?”

The elderly man stated, “No…my dog doesn’t bite.”

The young man walked over to the dog and reached out his hand to pet the dog. The dog snarled loudly, and bit the young man hard on his hand, causing him to bleed.

The young man grabbed his hand in shock and yelled at the elderly man, “I thought you said your dog didn’t bite!”

The elderly man casually looked at the young man and said, “That ain’t my dog.”

We always need to have the good practice of asking the right questions or risk getting bitten. This is true in finance and especially true when selecting an emergency fund.  Below is a list of basic questions that should be asked and answered before you select the bank which will hold your emergency fund. Remember that this should not cover all of your due diligence, as you must still read those long boring disclosures that are on the company website and in most sales literature.

What is the APY that I will earn in this account?

This is the amount of money that you will be earning on this account on a yearly basis. It is important to note that online, high yield savings accounts have lower overhead than traditional banks; therefore, they will probably have higher savings rates than traditional bank accounts. Also, I am a strong advocate of joining local credit unions that you are eligible to join. Credit unions don’t have the problem of having to please shareholders, so they are usually able to provide higher interest rates on their savings accounts than traditional banks as well. Also, when you join a credit union you essentially become an owner of the organization and reap the benefits accordingly, which include higher interest rates on savings, lower interest rates on loans, and more effective services. Credit unions are not concerned about profits because they are non-profit organizations; they are only concerned about you.

Is this account FDIC insured?

One of the great programs that spurred from the Great Depression of 1933 was the Federal Deposit Insurance Corporation (FDIC). The massive amounts of bank failures forced the US Government to create this corporation that alleviated the concerns of the public that they would lose their money in a bank if it failed. The FDIC is an agency of the US Government that insures deposits in banks as well as thrift institutions. They also supervise the risks associated with the banks that they have insurance and limit the negative impacts that can be caused when a bank or thrift institution fails.

The FDIC insures up to $250,000 of the following kinds of deposits.

If you have $260,000 in your emergency fund/savings account (which is a very large emergency fund for most in America) $10,000 of your funds will not be insured.  If the institution fails that his holding your funds there is a possibility that you could lose $10,000 of your funds. However, it is a pretty safe bet that the insured being held in your account are safe because the FDIC has never lost a penny of funds that it has insured.

Within the past few years because of the recession, the limits of insurance were extended from $100,000 to $250,000. There are discussions of whether or not they are going to continue to keep the levels where there are currently, so you need to make sure that you are fully abreast of the amounts of coverage being provided by the institution that you choose. There are banks and thrift institutions that are not insured by the FDIC so be mindful to look out for the FDIC logo before depositing your funds.

Is this account protected under the NCUSIF?

If you decide to choose a bank or thrift institution you need to look out for the FDIC logo.  However, if you are a part of a credit union, they have protection that works in a similar way as the FDIC. The National Credit Union Administration (NCUA) administers the National Credit Union Share Insurance Fund (NCUSIF) for the purpose of providing insurance to protect the deposits of credit union members of the insured institutions in the United States.  The NCUSIF was created in 1970 shortly after the creation of the NCUA as an independent regulator of credit unions. The beauty of the NCUSIF is that it is funded completely by participating credit unions, the tax payers have never been called to bail out a credit union, and it has the backing of the full faith and credit of the United States government for amounts of up to $250,000.

What are the fees of this account if any?

The worst thing to unexpectedly realize is that you are being charged a monthly or yearly fee in your account. I remember reading the fine print on an account and discovering that if a customer didn’t use their funds, or had a period of inactivity, the bank would begin to charge that customer a monthly maintenance fee.  Ideally, you wouldn’t have ANY activity in your emergency fund after you have fully funded it because you want to only touch that account in times of emergencies. The last thing that you would like to have happen is that you are being responsible by not touching your account and because of that you begin getting charged.  So make sure that you are aware of ALL the fees that are affiliated with that account. Inactivity fees, fees for dropping below a minimum level, withdrawal fees, and any other fees are required to be listed in the disclosure…READ IT!

What is the minimum deposit required to open this account? Must this deposit be maintained and is there a fee involved if it isn’t?

Have you ever seen an ad for a savings account that has an extremely attractive savings rate only to find out that you need to deposit $50,000 to qualify for it? The way that banks make money is to take your money and then invest it for a higher return. The more money that they get from you the more money they can earn. So it is beneficial for them to offer you a slightly higher interest rate if you deposit more money because they will earn more money from your deposit. However, the less money that you deposit, the less they earn. This is why many banks will charge a monthly fee on your account because they want to find a way to make money from you somehow. Don’t take it personally, it’s only business. You have a right to shop around for those banks that don’t have a minimum balance and don’t charge a fee if you dip below a certain level. You can find out all of this information at

Is there a minimum amount of withdrawals that are allowed on this account per month?

There are banks that only allow a maximum amount of withdrawals per month. This is important to know, but when you are using an emergency fund, your withdrawals should be very limited. This IS NOT a checking account and as far as you are concerned, unless it is an emergency you should act as if these funds don’t exist.  So just be cognizant of the amount of withdrawals that you are allowed and take note. You never know of what type of emergency you will run across in life and you will need to have this information to help with your planning if/when that time comes.

Does this account provide 24/7 telephone banking services and do I have 24/7 access to my account online? Are these services free?

In times of an emergency you want to be able to have access to your account 24 hours of the day because emergencies don’t have a time limit. If you need to expedite the transfer of funds into your account because of a costly emergency, you don’t want to have to wait until the morning during company hours.

Can I electronically link this savings account to my checking account for transfers?

This is a level of convenience that is being provided by most banks and credit unions, but you want to be sure that your institution of choice is up to date with the times.  Having to mail a check to deposit into your savings account can be a hassle, as well as having to do the same to take funds out of your savings and insert them into your checking account. However, this blessing can also be a curse.  Don’t let the increased ease of access to your funds tempt you into dipping into your account for anything but an emergency. And, NO…a new sale at your favorite store that only lasts until midnight is NOT an emergency!


Help! …Establishing an Emergency Fund, Part 1

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt – Part 1

Dealing With Debt – Part 2

Dealing With Debt – Part 3