So You Started Saving Money
Awesome! You’ve made the first step in a sound financial future. So where do we go from here? Start by putting 3 months of your living expenses away in a savings account. Now why a savings account? This is your emergency fund, it will earn less interest than the rest of your savings, but will be accessible in case of emergency, an unforeseeable expense, job loss, etc. It is important for this money to be as liquid as possible. It is also a good idea to have a separate debit card for this account (so you can’t fall into the bad habit of over drafting from your usual checking account into this account when you are low on money). Now how quickly you get to this point will vary based on your savings rate (we’ll get more into that in a later post) so don’t stress yourself out thinking about what interest this could be earning elsewhere. Buckle down and save it, it is absolutely worth it. Personally it took me over a year to set up a large enough emergency fund.
Where To Save It
There are a few great savings accounts I would recommend for this, Ally Bank comes to mind, they offer a 1% interest rate, are FDIC insured, have no monthly fees and compound interest daily. My Savings Direct is much the same, offering 1.1% interest rate with no monthly fees, minimum balance and can be accessed online 24/7. Other savings accounts of note include Barclays, GE Capital, and Synchrony. Don’t forget to check out your local credit union’s rates as well many of them have competitive savings account interest rates sometimes even higher than those listed above.
NerdWallet is a good resource for finding other high interest savings accounts if you really want to shop around.
Why Emergency Funds Are Important
Now besides the obvious benefit during an emergency there is another large reason to take this approach, stress. Knowing you have enough money to stay out of debt in the case of a medical issue, job loss, inability to work due to illness, etc. is beyond beneficial for your mental health. You can proceed in a career change or move with confidence. This also pays dividends in other ways that could actually be ore beneficial than going interest rates. For instance, it keeps you in a position to avoid debt, no more 20% APR credit card bills, no more payday loans, loans for car repair, etc. So you may not be making 10% interest on the money you have sitting in savings, but you are avoiding up to -30% interest in debt.
(I do not receive any compensation for advertising/posting about any companies mentioned above, they are simply companies that I personally use and/or recommend.)