The answer is different for everyone. If you have any savings at all, put it in a high-yield online savings account. That’s all there is to it. Now I’m not talking about your investment money or money that is earmarked for spending on bills. My ING DIRECT account holds my emergency fund. This is money to be used for EMERGENCIES ONLY. Car accident, hospital stay, vet trip, unexpected house repair. These are emergencies, things that you need money for that are not anticipated and you have not budgeted for. If you have a large amount of money for savings, I recommend a cd ladder (I’ll explain on a different post). There are many great choices online for savings accounts with a good apy interest yield. In fact, my online savings earns 2.4% apy. Now, this was 3.5% when I opened the account, but alas, rates are STILL dropping everywhere. Sadly, I can remember just a few short years ago when cd’s were earning well over 5% interest. Now a “special deal” at the bank where I work (a big one) is a whopping 2.15%apy!!! That is a deal!!?????!!! Really?
All people have different amounts of money and different goals for their money. Some just want to make it until Friday and have no savings and no plans for their future. Do not be this person! Some have plenty of nice things and enough to pay for them but nothing really to show for it. No backup funds and no real budget. Again, do not be this person!! Debt not withstanding, EVERYONE should have some form of savings that is NOT a retirement account. If you don’t, I suggest you start to put one together. Now.
I can’t really suggest how much you need in your emergency fund. I can only suggest that it be enough for you to live like you do now for at least 2 months. For some people that may be $2000, for others it may be $12000. Just remember, Life happens, and you will want to be as prepared as possible. You will also want to have that money available to you and earn the most interest possible on it. That is why I choose ING DIRECT. Their ease of use is amazing and I know that I can easily transfer funds between my checking account and ING with ease and most importantly, for FREE.
I’m sure I will mention the emergency account many many times in future posts. Savings and proper placement of money should be a priority. Dave Ramsey constantly stresses the importance of establishing an emergency account and creating a debt snowball (paying off smallest balances first while paying minimums of other debts until the money can be applied to the next largest debt). Although I don’t necessarily agree with every method Mr. Ramsey introduces regarding money management, I do firmly believe in an emergency account and debt snowball. Namely because they work. Never mind that you may have higher interest rates on larger balances, the debt snowball is more psychological than anything else.
I will post a detailed review of The Total Money Makeover and other titles that utilize the debt snowball approach and where to keep savings and an emergency account. These titles are wonderful tools to get started.