After one decides that they need an emergency fund, and hopefully you agree that you do, the next step is actually setting one up. This is different than setting up a 401k, 529 Plan or IRA because there’s no real thing or product called ’emergency fund’ – it’s just a concept. In theory you could put all your money in an old sock and it could be your emergency fund. Or you could simply mentally set aside money in an account you already have and say “I will not touch this $XX unless it’s an emergency”. But, while we’re here we might as well focus on what would be the ideal and forget about the old sock.
There are a few requirements for a good emergency fund:
It should be safe – The money you put in must be there when you need to take it out. This rules out the old sock, drawer or freezer. Even a safe in your home doesn’t suffice. Why? Because these things can be stolen, misplaced, lost or burned up in a fire. Better it should be somewhere very secure and insured against whatever may happen.
It should not go down in value, but grow safely – You do not want to put this money into any sort of investment that carries risk. The last thing you want is for the money to not be there when you need it. This rules out things like stocks, mutual funds, baseball cards and gold. All of these items have the potential to crash overnight right when you need an emergency head transplant. Even better, it should grow safely on its own to help keep up with the rising costs of emergencies.
It should be easy to access – When life throws you a curve you don’t want to have to fight to get your own money out to deal with it. You want they money in cash and not anything you have to wait for a market to open to sell.
Basically, put the money in a FDIC insured bank. If you prefer to use your local credit union that’s fine too, just make sure they’re insured as well.
Just go there, or online, create a new account that you’ll only use for emergencies and start putting money in it. If you can tie a bank card or checks to the account even better. After all, emergencies happen on Sundays and holidays too.