Emergency Funds 201: Where to Stash Your Savings
Personal finance journalist and Get Rich Slowly blogger Kristin Wong knows a thing or two about emergency funds: She’s researched and written extensively about the topic.
In this two-part series about emergency funds, Wong answers our questions about this important vehicle for financial stability. Part one covered the basics of what an emergency fund is and why everyone should have one. Now, Wong goes more in-depth with specifics on how to set up an emergency fund.
What is the difference between a savings account and an emergency fund?
An emergency fund covers unexpected expenses you can’t plan for, while a savings account is for predetermined expenditures. Technically, you can keep your emergency fund in a savings account for easy access, but it’s important that you view the money for your emergency fund as separate from any other savings goals, such as money to buy a car or new home. Some people like to keep emergency and savings funds in separate accounts so they aren’t tempted to start dipping.
It’s important to view the money for your emergency fund as separate from any other savings goals. Twitter Icon
What type of account should you use for your emergency fund?
Your emergency fund should be liquid (easily converted to cash), accessible and FDIC insured – in other words, the type of account where you choose to deposit your money can be set up just like a traditional savings account. An emergency fund isn’t meant to be an investment. If you want your money to grow, consider putting some of it into a low-risk certificate of deposit or a money market account. But always keep at least some of it accessible in a risk-free FDIC-insured account.
What is your take on a credit card being used as a method of an emergency fund?
I don’t think it’s a good idea. Some people have done it effectively. They pay off the emergency before the bill is due, or maybe they even put the emergency on a card with 0 percent annual percentage rate (APR). But considering the statistics on consumer debt, it’s a little like playing with fire. It seems like a debt trap, and I know a lot of people find themselves stuck and desperate when an emergency arises. Most of us should probably avoid using credit cards to pay for emergencies, if possible.
What’s the craziest thing you’ve ever done to save money?
I once tried to grow my own vegetables. However, I found out my green thumb is actually black; it did not work out well.
Are there any expenses you refuse to give up no matter what in order to save money?
My cats eat well. I’ll make sacrifices in other areas just to buy them decent, healthy food.
Allstate Insurance Company is not affiliated with Kristin Wong or Get Rich Slowly. Allstate makes no warranties or representations and is not liable for any goods or services provided by this individual or organization. The views presented here do not necessarily represent the views of Allstate.