In a recent article I discussed how to use your upcoming stimulus check. One of the recommended options was to start, replenish or increase your emergency fund. Emergency funds are important to everyone trying to achieve financial security because they protect you from falling into additional debt when your income cannot support your daily expenses. So many of life’s surprises can cause your income to temporarily drop below what you need to pay for your monthly bills – car problems, leaky roofs, a global pandemic to name a few. Most financial experts recommend having 3 to 6 months of living expenses in your emergency fund. I personally am moving to the 6 to 12 months of living expenses in my emergency fund because some of my investments will become more illiquid as I invest in opportunities if the economy continues to falter. I will need greater liquidity through my emergency fund to handle any life surprises thrown my way.
Do Not Store Your Emergency Fund at a Big Bank
If you have started to build your emergency fund or have some money set aside you may just have it in a separate account with your local bank. The chances are you bank with one of the big four banks – Chase, Bank of America, Wells Fargo, or Citigroup. These banks control nearly 50% of all consumer deposits in the country.
They are also the worst places to keep your emergency fund. Well, maybe your mattress is a worst place to store your emergency funds. The big banks currently offer savings rates between 0.01% and 0.03%. These rates may get worse in this low interest rate environment and hidden fees are more likely to be part of the terms with these banks. Stay away from these banks when it comes to storing your savings.
Use an Online Bank to Store Your Emergency Fund
Online banks have been around for a while and most of them offer interest rates (commonly referred to as Annual Percentage Yields or APYs) for your checking/savings account that are significantly higher than traditional banks. They also typically have very low maintenance fees. Why? Online banks do not have significant overhead costs to support – online banks do not have branch locations or physical ATM locations. Chase bank, as an example, has over 5,000 branches and 16,000 ATM locations that have leases and other overhead costs. The lower costs of online banks means they do not need such a big spread on how much they loan money out on and how much they pay you for your deposits. This means interest rates paid to you on your online account can be more than 50 times greater than what is offered to your using your traditional bank’s savings account options.
My four favorite online accounts right now are Discover Bank, Ally Bank, Marcus by Goldman Sachs, and American Express Private Savings.
Here is a brief comparison of some traditional banks and online banks (based on what is available on each banks website) and key features each bank offers regarding its savings accounts:
Chase Bank | Bank of America | Discover Bank | Ally Bank | Marcus | American Express | |
APY | 0.02% | 0.03% | 1.5% | 1.5% | 1.7% | 1.6% |
FDIC Insured | Yes | Yes | Yes | Yes | Yes | Yes |
Interest Compounded/Paid | Monthly/ Monthly | Monthly/ Monthly | Daily/ Monthly | Daily/ Monthly | Daily/ Monthly | Daily/ Monthly |
Monthly Fee | $5 | $8 | $0 | $0 | $0 | $0 |
Minimum Balance to Waive Monthly Fee | $300 | $500 | $0 | $0 | $0 | $0 |
The Difference in Interest Paid to You Piles Up Over Time
To drive the point home that you need to take the time to open and use an online account I put together a few charts on how much you would earn if you deposited your emergency funds at Chase Bank (the Big Bank example) versus any of my favorite online banks. For me, a conservative 12 months of living expenses is $100,000 but I am not quite there yet. Therefore, I modeled 3, 6 and 12 months of emergency funds in these accounts and how much interest I would earn in 1, 5 and 10 years.
You can see that the difference is quite startling.
| 3 Months – $25,000 Emergency Fund (Interest paid; non-compounded) | ||||
| APY | 1 year | 5 years | 10 years | |
| Chase Bank | 0.02% | $5 | $25 | $50 |
| Ally Bank | 1.5% | $375 | $1,875 | $3,750 |
| Discover Bank | 1.5% | $375 | $1,875 | $3,750 |
| Marcus | 1.6% | $400 | $2,000 | $4,000 |
| American Express | 1.7% | $425 | $2,125 | $4,500 |
| 6 Months – $50,000 Emergency Fund (Interest paid; non-compounded) | ||||
| APY | 1 year | 5 years | 10 years | |
| Chase Bank | 0.02% | $10 | $50 | $100 |
| Ally Bank | 1.5% | $750 | $3,750 | $7,500 |
| Discover Bank | 1.5% | $750 | $3,750 | $7,500 |
| Marcus | 1.6% | $800 | $4,000 | $8,000 |
| American Express | 1.7% | $850 | $4,250 | $8,500 |
| 12 months – $100,000 Emergency Fund (Interest paid; non-compounded) | ||||
| APY | 1 year | 5 years | 10 years | |
| Chase Bank | 0.02% | $20 | $100 | $200 |
| Ally Bank | 1.5% | $1,500 | $7,500 | $15,000 |
| Discover Bank | 1.5% | $1,500 | $7,500 | $15,000 |
| Marcus | 1.6% | $1,600 | $8,000 | $16,000 |
| American Express | 1.7% | $1,700 | $8,500 | $17,000 |
I have used two of these online accounts for over 5 years and it has been hassle free. In fact, I consider them to be more responsive than many of the traditional banks that I have used in the past. I still think having a traditional banking relationship has its place but I think that your emergency fund should be parked in an online account earning you a greater amount of interest. All you need to do is go online and you could have this account set-up in 15 minutes. Over ten years it will earn you thousands of dollars more.
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