thevicenarian.com

Stash some cash (online)

Posted by Tad Johnson - Feb 3rd, 2008 at 12:02

You’re young, you’re employed, and you’re making some money. Good for you!

You’re paying down your school and credit card debt, and you’re contributing to a retirement account. Great!

Do you have an emergency cash supply? Is it enough to float you for 3-6 months? We have some work to do.

It’s always a good idea to have a 3-6 month supply of cash that you can access quickly in case of emergency. This could be something like losing your job or something worse–heaven forbid–like a car accident that leaves you injured and in need of a new vehicle. Even if you have medical or auto insurance, there’s often a period of time between your spend and the insurance company’s reimbursement. For emergencies like this, you don’t want to take on additional credit card debt. This is where the emergency cash supply can really save you.

When I say cash, I am not talking about a shoebox full of 20’s under your bed. Your emergency cash fund should sit in a high interest rate savings account, helping it grow (or at least counter inflation). One of your best bets for high interest rates is an online bank. These have become very popular in the last few years, since the bank’s low costs are passed on as high interest rates. And don’t worry–they’re safe. Just like a brick & mortar bank, your online savings are backed by the FDIC (aka Uncle Sam).

There are a few caveats to keep in mind:

1. It will take a few days (usually 2-5 business days) to transfer money into or out of the account. This is fine for you, since the cash is for emergencies only.

2. You can only make 6 withdrawals per month. Again, this is fine for your needs. (And I believe it applies to offline accounts as well).

3. You need to link your online bank account to a traditional brick & mortar account for easy access (and check writing, ATM access, etc.)
* Note that some online banks will give you an ATM/debit card, but caveat #2 still applies.

The key feature to an online bank is the high interest rate. During the high-flying days of 2006/2007, you could fetch 5% on these accounts. With recent interest rate cuts, these accounts are down to 3-4%. Shop around a bit and find the best rate. (Keep in mind that the rates can change at any time, and watch out for the fine print–like minimum balance requirements or temporary teaser rates).

Plan on saving 3 months worth of your current take-home pay (minus your monthly savings amount). If you are married or have children, double that amount.

With a reserve of cash, a minor (or major) setback won’t throw you into debt. Rest easy, knowing your emergency fund is safe, secure, and earning a healthy interest.