Money: Step one – Emergency Fund and High Interest Direct Banks
No matter how much debt, no matter how many things you want… one thing everyone needs is an emergency fund of readily accessible cash. Plus Shaun’s smart move, put it into a high interest FDIC insured electronic savings account.
Why do I need an emergency fund?
- Unexpected car problems
- Trips to the doctor where insurance will reimburse you… someday
- Losing your job!
- Worst case scenario, the unknown other
How much do you need?
Generally speaking 3 to 6 months of total expenses saved is adequate. What are total expenses?
- Rent / Mortgage
- Car Insurance
- Health Insurance
- Car Payment
- Gas
- Food
- Debt – School / Credit Cards / Alimony
- Other stuff I have to have
Take all the expenses above plus others that you pay and multiply x3. Do not be conservative; you want to make sure you have enough for the unknown case.
Okay, you convinced me (after I did a Google search on your advice and see it repeated everywhere) I have decided I want to save up for emergencies. Now what do I do with the money?
High Yield Direct Savings accounts. These differ from Money Market Accounts.
|
|
Direct Savings |
MMA |
| Fees |
$0 |
Depends on Account, usually 1% yearly |
| FDIC |
Yes |
Depends on provider |
| Rate |
Linked to Fed Prime Rate |
Adjustable daily |
Either type of account will earn you money. However, as this is a savings account, I would recommend the Electronic Savings account.
Where did these come from? The US Federal government passed an act that provided for online savings accounts and protection of those banks by the FDIC. There is no physical location that you can visit, however they do have superb phone and digital communication channels.
This lack of a walk up location can be disconcerting for the more traditional bank customer. However, when you consider, you check your accounts online and pay bills electronically it isn’t that strange. Plus, think, when was the last time you visited your local bank?
How do these direct accounts provide 4% or 5% interest rates? Lower costs, no physical location, no snail mail paper trail. Plus, the banks earn a small amount of interest above what they pay you monthly.
Choosing the best direct savings account:
- You should always choose an institution that is FDIC insured
- You should always choose an institution with a long track record of banking
Two notes about direct banks:
- Money you deposit will earn interest but generally will not be available for withdrawal for 5 business days
- You are limited to no more than 6 withdrawals per billing period (1 month)
- No big deal you are supposed to be saving!
Shaun’s recommended institutions:
- Emigrant Direct
- www.emigrantdirect.com
- The oldest bank in New York City
- Why? It has an old school website, but its money withdrawals are high speed (1 full business day)
- Usually one of the highest interest rates
- ING Direct
- HSBC Direct
- www.hsbcdirect.com
- Worlds largest bank
- Decent website
- Dreadfully slow money withdrawal
- Runs frequent high interest promotions
- List of other virtual banks here:
In summary, save enough for unexpected expenses and place your cash in a high interest federally insured direct savings banks.
Emigrant Direct savings rate is 4.55% as of 1/11/2008