Having an emergency fund of 6 to 9 months of basic expenses is a major step on the path to becoming wealthy. Of course saving this money up is difficult to begin with, but once it is there the temptation to DO SOMETHING with it is large; especially in a market like today’s where the stock market is on a large upswing. Some financial experts recommend keeping their emergency fund invested in their ROTH IRA, since Roth contributions can be withdrawn at any time penalty free. The problem with this thinking is that “emergencies” occur often. Whether it is a vehicle break down, injury, period of unemployment, roof leak, broken window, etc; emergencies happen multiple times a year. As you are saving for retirement in your ROTH you would have to routinely remove money as emergencies happen. Using a ROTH IRA in this manner will greatly reduce your long term gains. So what do I recommend doing with this money?
There are several credit unions that offer high interest checking accounts. Most of these yield 3%, but occasionally you can find one for 5% or more. Several years ago when we first developed our emergency fund we found a local bank paying 6%. That bank changed its rate after about 2 years, so it requires vigilance to ensure that if rates change you know about it and can react. With these accounts you typically must: Have a direct deposit, sign up for e-statements and do a minimum amount of transactions (usually around 10). Different banks have different caps on the amount of money that will earn the high interest amount.
Lake Michigan Credit Union offers 3% on balances up to $15,000.
Honor Credit Union offers 5% on balances up to $5,000.
While these deals can change at any time, for the time being this is the best way to handle an emergency fund. It earns a return that is far above what a typical bank account or even CD or bond fund will return in today’s market. These checking accounts also offer ATM fee re-reimbursement, usually up to $20 a month. Between the interest and this perk, these accounts give an excellent benefit. Just make sure to keep an eye on things to verify you meet all the requirements each month, or you will miss out on the interest. This extra bit of income is another step in maximizing your budget delta.