What should you look for in a good emergency fund?

Should you keep it in the bank or is there somewhere better?

Should the funds get invested or stay in cash?

How much do you really need in an emergency fund? 

How do you know the funds are safe? 

Or maybe the question you’re asking right now is “Do I need an emergency fund?” I’ll go ahead and answer that one right now. Yes. Every working adult should have an emergency fund. 

Why? Because, as a healthcare professional, you know that life moves quickly. Things can be going according to plan in one minute, and drastically change course in the next. When that happens, it’s helpful to have a financial buffer that insulates you from long-term financial hardship. 

We call this financial buffer an emergency fund. An emergency can take a lot of different forms, but at its core, it’s money set aside for unforeseen financial hardship. Maybe you lose your job, crash your car, or get sick. None of these things are fun to think about, but they’re possible nonetheless.

Any of these things can put a major strain on your financial situation if you’re not adequately prepared. 

So what makes up a good emergency fund? Let’s discuss a few attributes to look for when deciding where to put your money, and the personal habits required to build the fund.

1| Keep it safe

Your emergency fund is not meant to be a high-growth account. It’s meant to be there when you need it. 

That’s why in most cases, it doesn’t make sense to invest this money in the market. The last thing you want is for the account to drop in value at a time when you need it the most. 

Instead, your emergency fund should be kept in a traditional bank account, high yield savings account, or a money market fund within a brokerage account. 

By doing this, the value of your money should stay stable over time, and you’re also protected by either FDIC or SPIC insurance. FDIC insurance is coverage that protects your money if your bank were to go out of business. SIPC insurance is a similar program that protects investment companies. 

Wherever you decide to keep your emergency fund, your first priority should be that it’s safe and stable so it’s there when you need it. 

2| Let it grow

Once you start to build your emergency fund, it’s common to ask whether or not a bank account is really the best place to keep it. It can be frustrating to see a large chunk of cash just “sitting there” and not earning interest.

When you start to build up your emergency fund, it’s a good idea to explore your options and pick an account that will pay interest on your savings. There are two ways to do this that maintain the stability and protections we discussed above. 

The first is a high-yield savings account. Over the last few years, high yield savings accounts have gotten a lot of attention, as various online banks have offered savings accounts that pay high interest rates. 

Although the rates have dropped since then, most of these accounts still pay higher interest than a traditional checking account, and they offer the same FDIC protection. 

Another option is to use a brokerage account and put your savings in a money market fund. A money market fund is meant to hold its value and pay an interest rate that’s usually attached to a benchmark like the Federal Funds Rate.  

Interest rates on money market funds are variable, but the value of the fund is extremely stable. Since money market funds are held in brokerage (investment) accounts, they create a good opportunity for those who already have investments. 

3| Keep it full

Let’s address the obvious for a moment. Your emergency fund isn’t very helpful if it doesn’t have enough money in it to cover your emergency. 

So how much do you need? 

We like to use 3-6 months worth of living expenses as a rule of thumb. That number may look different for everyone, but it’s a great place to start. 

This means that you should look at your essential monthly expenses (Rent/mortgage, food, gas, utilities, etc…) and calculate how much you would need to live for 3-6 months with no income. 

For some, saving that much cash may seem daunting. If that’s the case, start small. Create the account and start saving $20, $50 or $100 per month. Increase that number when you get a raise. When it comes down to it, having SOME savings when an emergency hits is better than having NONE. 

Some of you may be on the other end of the spectrum. You may have established investment accounts, steady income, and no financial need in sight. In that case, it still makes sense to have cash savings. It’s always possible for the stock market to drop, and when that happens it sure feels good to know that your emergency fund is still intact. 

Need help getting started?

Do you know you need an emergency fund, but you’re not sure how to start saving? Are you unsure if you should start saving while you have student loans? 

Maybe you’re an experienced investor, but you want to strategize how much cash you should have on hand. 

Whatever the case, we can help. 

Our Financial Roadmap is designed to help savers and investors at any level of experience. Once you have a plan, use our Investment and Savings accounts to carry it out. 

Wherever you are on your financial journey, we’ll be there to help.