One of the common questions I see in the financial independence community is this: What is the best way to handle your emergency fund? It seems like this question has come up even more with the recent launch of high-yield savings accounts from fintech companies like Betterment and Wealthfront, not to mention all of the other high-yield savings accounts options available at the more traditional banks like Ally, Capital One, and Discover.
People that are into the financial independence movement are natural optimizers – indeed, optimization is implicit in the entire concept of financial independence and early retirement. So, it makes sense that there are a lot of questions about how to best optimize your emergency fund.
I’ve seen a lot of takes on this topic:
- The vast majority of people will tell you that you should save 3-6 months of expenses in a high-yield savings account earning between 2% and 2.5% interest. Ally is a popular (and good) choice. Betterment and Wealthfront are the new players in the banking space that are also interesting options to look at.
- A small number of people will tell you that you should invest your emergency fund in a conservative combination of stocks and bonds. The idea here is to trade a little more risk in order to get a better rate of return on your emergency fund. I know Betterment has been pushing this idea for a while with the recommendation that you overfund your emergency fund in order to cover potential market losses.
- Some people will tell you that you don’t need an emergency fund at all. Early Retirement Now has a very convincing post that supports why an emergency fund is unnecessary, primarily based on the fact that you can float emergency costs using credit cards, and worst case, you can dig into the investments that you already have. Mr. Money Mustache has said the same thing. Those of us on the path to financial independence are probably more advanced when it comes to money and have incomes that can cover potential emergencies, so I definitely get the argument.
Ultimately, all of these ways to approach the emergency fund are about striking the right balance between safety and return. You can play it safe and lose a little bit on the return front. Or you can take on more risk in hopes of getting a better rate of return on your idle cash.
I have a better strategy though – one that has provided me with what I think is the perfect balance of risk and safety. For those of you that enjoy optimizing things, this is the emergency fund strategy for you.
A Better Emergency Fund Strategy
For years, I’ve had what I think to be the optimal emergency fund strategy, combining the perfect combination of safety and return. It’s a strategy that has allowed me to keep a very sizeable emergency fund that earns at least 5% interest every year in FDIC insured savings accounts.
It’s broken up into three parts:
- $10,000 in Netspend savings accounts earning 5% interest. I have $5,000 in my five Netspend accounts and my wife has $5,000 in her five Netspend accounts.
- $30,000 in Insight savings accounts earning 5% interest. I have $15,000 in my three Insight accounts and my wife has $15,000 in her three Insight accounts.
- Typically $5,000 to $15,000 that I keep on hand solely for bank account bonus purposes. Over the past few years, I’ve consistently made between $2,000 and $4,000 each year from bank account bonuses.
As you can see, my emergency fund typically sits at around $40,000 to $55,000. That’s an admittedly massive amount of cash to keep on hand, but at the same time, it’s really not too problematic since it’s earning 5% or more interest every year with no risk of loss. In a way, my emergency fund acts as a sort of bond allocation in my overall portfolio.
Unfortunately, Insight shut down their 5% interest accounts to new customers about a year ago, so this exact strategy that I’ve been doing isn’t possible to do anymore unless you kept your Insight accounts open as I did. However, everyone can still take advantage of both Netspend accounts plus bank account bonuses to earn 5% interest or more every year.
Here’s what I suggest for a better emergency fund strategy.
1. Keep Your First $10,000 In Netspend Savings Accounts
The first thing I recommend everyone do is to take advantage of Netspend’s 5% interest savings accounts. I’ve written a massive 5,000+ word post about how these Netspend accounts work, so you’ll need to read that post to fully understand how to utilize these accounts for your emergency fund.
To briefly summarize, Netspend accounts are prepaid debit cards that are generally bad products to use and riddled with fees. However, each Netspend debit card also comes with an FDIC insured savings account that allows you to earn 5% interest on your first $1,000 in each account (everything above $1,000 in each account earns just 0.5% interest).
You can have a total of five Netspend accounts per person, which means that a two-person household can put away $10,000 earning 5% interest. That’s $500 of interest each year just for taking the time to set these up. As a comparison, you’d need about $25,000 in your typical 2% interest savings account to earn the same amount of interest.
Like any optimization strategy, it takes a little bit of upfront work to learn how to use these accounts. But once you do that, these Netspend accounts run themselves. You also won’t be charged any fees, and you’ll only need to look at them 1-4 times per year in order to pull out your quarterly earned interest.
By taking advantage of this financial hack, you can greatly optimize the first $5,000 to $10,000 of your emergency fund.
2. Use The Rest Of Your Cash For Bank Account Bonuses
Once you’ve maxed out your Netspend 5% interest accounts, your next step is to set aside a pot of cash that you can use to earn bank account bonuses. Bank account bonuses work similarly to how credit card sign up bonuses work – just like with credit card signup bonuses, bank accounts will regularly offer you a bonus if you open up a new bank account with them and meet certain requirements. This is a terrific way to get a high rate of return on your cash, albeit not necessarily in a passive way.
Typically, I recommend setting aside $15,000 that you can utilize just for bank account bonuses. You can make do with less, but if you have $15,000, you’ll be able to earn most bank account bonuses out there. At a minimum, I recommend having at least $5,000 that you can dedicate just to bank account bonuses.
Like with Netspend accounts, bank account bonuses do take some initial learning and setup work, but once you get through that process, you’ll find that the amount of time you have to spend on these accounts is very minimal. And the return can be very lucrative.
To get a sense of how lucrative bank account bonuses can be, simply take a look at what I’ve made from bank account bonuses over the past few years:
- 2019: $2,178 (to date – this will likely be closer to $3,000 by the end of the year)
- 2018: $3,262
- 2017: $1,300
- 2016: $935
These numbers increase even more when you also add in the $1,000 or so that my wife makes each year from her bank account bonuses.
The reason you need to set aside cash for bank account bonuses is due to the fact that many banks will require you to keep some minimum balance requirement in order to earn the bonus. As an example, I recently earned $500 from a Citi bank account bonus which required me to keep $15,000 in the account for 60 days, then keep $10,000 in the account for another 90 days in order to keep the account fee-free. If you do the math, even on $15,000, that would be an annual rate of return of about 6.6% with no risk to principal.
There’s a lot of information you need to know in order to properly utilize bank account bonuses. I wrote a massive 5,000+ word guide on bank account bonuses, so be sure to read that guide to fully understand how to incorporate bank account bonuses into your emergency fund strategy.
As a quick win, below are a few of the easiest bank account bonuses that you can do that don’t require anything beyond simply moving money into the account. You should be able to make about $200 from these three bank accounts in 30 minutes or less. Each of these bank accounts is also 100% free, so there are no fees or minimum balances to worry about.
- Chime (Offers a $50 bonus. The bonus requires a $200 direct deposit, but all of the data points show that ACH transfers from pretty much any bank count as a direct deposit. I used Discover bank to trigger the bonus.)
- Varo (Has a $75 to $100 bonus. Like Chime, a transfer from pretty much any bank will count as a direct deposit and trigger the bonus.)
- SoFi Money (Gives you a $50 bonus once you open and fund the account with $100.)
3. Keep Any Remaining Cash In Regular High-Yield Savings Accounts
The last part is pretty simple – you should keep any remaining funds in a regular high-yield savings account that earns at least 2% or more interest and has absolutely no fees or minimum balance.
In my experience, Ally has proven to be the best overall bank account due to the fact that: (1) it offers a good interest rate, (2) it allows you to link up to 20 external bank accounts with no problems, and (3) it allows you to transfer out a lot of money at once (many banks will limit how much money you can transfer in a month, which can be a real hassle if you’re playing the bank account bonus game or want to get a lot of your money out quickly).
Other high-yield savings accounts that you can consider are:
- Discover (2% interest and also typically has a good bank account bonus for new customers)
- Betterment (currently has a 2.69% promotional interest)
- Wealthfront (2.57% interest savings account)
- SoFi Money (2.25% interest checking account and it gives you a $50 bonus if you open an account with a referral link and fund your account with $100)
Takeaways
The above is what I consider to be the optimal emergency fund strategy currently available. Traditional emergency fund advice says that you should keep 3-6 months of expenses in an emergency fund. According to the Bureau of Labor Statistics, your average household spends about $60,000 per year. That means according to traditional financial advice, most households should have between $15,000 and $30,000 set aside as an emergency fund.
Assuming a $30,000 emergency fund, your typical two-person household can utilize Netspend accounts to set aside $10,000 of their six-month emergency fund earning 5% interest in FDIC insured savings accounts.
You can then take another $15,000 and use those for bank account bonuses. If done correctly, most people should yield well over 5% each year from that $15,000.
The remaining $5,000 can be kept in regular high-yield savings accounts earning about 2% interest each year.
This is what I call the better emergency fund strategy. It’s not for everyone because it takes some work to set up, but if you’re looking for the best way to balance rate of return with safety, this is the emergency fund strategy you should be using.
It’s exactly what I’ve done for years and why I’m so comfortable keeping a sizeable emergency fund.
Any questions about how this emergency fund strategy works? Hit me up!
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the sharing economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the sharing economy and you can see all the ways he makes extra income every month in his side hustle reports. (If you want a quick side hustle win, check out Job Spotter)
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- Personal Capital. One of best apps to monitor your portfolio and track your net worth. Plus, it's free to use and you get $20 for creating an account.
- SoFi Money. A really good 2% interest checking account with absolutely no fees. Even better, you'll get $50 if you open an account and fund it with $100.
- Dobot. This is a great microsaving app that monitors the cashflow in your bank account and saves away small amounts for you each week. It's free and you'll get $5 when you use it.
Feel free to send Kevin a message here.
This is great. I’ve recently opened a high yield savings account to save for real estate. The Netspend account is something I’ll be looking at for optimization. Definitely referencing this article again!
Be sure to read my long article on Netspend so you can understand how it works. There’s some initial set up work that looks scarier than it actually is.
“Unfortunately, Insight shut down their 5% interest accounts to new customers about a year ago, so this exact strategy that I’ve been doing isn’t possible to do anymore unless you kept your Insight accounts open as I did.”
This is news to me. I thought Insight shut down the 5% interest accounts for all customers. Are you saying you are still earning 5% interest on the Insight accounts? In the post you linked, it doesn’t say anything about existing customers retaining the 5% savings account. In the comment section of that post, you said you were “probably” going to close your Insight accounts.
Yep, I need to update that post.
Insight 5% interest accounts are working again for people who kept their accounts open. If you go to my Insight 5% post, you’ll see that a lot of people in the comments noticed that they came back around the end of March.
I reactivated all of my insight accounts last quarter and got a few bucks of interest. The terms and conditions show it’s 5% interest still. This only works for people that already had the Insight cards open last year before they got rid of the 5% interest accounts.
Wow, Kevin. This is new to me too. I kept my accounts opened after pulled out the funds last year. I am not sure if they are still working. Thank you!
Yeah, I only found out about this after folks told me about it on my Insight post (it’s sort of become a quasi-messageboard about Insight). Move at least $10 back onto the Insight cards and you’ll be able to open up the savings account again with Insight. You’ll see that the terms are the same as they were before, so looks like they grandfathered in people who already had an account.
That’s news to me. I recommend you write a dedicated post detailing the process you followed. I never “closed” the accounts but I did delete the linkage between my bank and the Insight accounts. I’ll have to reestablish them i.e. send two test deposits and then confirms the amounts.
Yeah, I learned about this just a few months ago. No special thing needed. Just move at least $10 onto your Insight card so you can open the savings account. Remember to automate the bi-monthly $1 transfer onto the card to avoid the inactivity fee.
My point w.r.t. the proposed post is to better inform people that Insight has changed policies. Otherwise, people have to sort through the comments of old posts and parse your new posts with a fine tooth comb to realize Insight has changed policies.
At the very minimum I would recommend a 2nd update for this post:
https://financialpanther.com/insight-card-5-percent-interest-savings/
You may want to change the title too to reflect the 5% is back – something like “Insight Card: 5% Interest is Reinstated and A Step-By-Step Guide.”
The bi-monthly transfer is new. My recollection is that you needed quarterly activity to avoid the inactivity fee.
Actually, the step-by-step guide is no longer valid. You have to have already done that to be eligible for the reinstated 5% savings accounts. That makes a dedicated new post more appropriate as opposed to updating the old post.
Good idea. I just need to stop being lazy and get that post updated!
Timely – I’ll need to read your Netspend post again. I’ve been VMMXX(ing), and need a better that.
Yeah, nothing wrong with that, but when I look at the ways to store your emergency fund, this is the way to do it. If you’re into the FIRE movement, travel hacking, and things like that, chances are optimizing your emergency fund is something you’ll want to do too.
I got pretty excited reading this thinking I’d been missing out on an opportunity with the Insight cards haha. Shame they’re not open to new customers.
I’ve been using the Netspend strategy in combination with a Safety Net fund at Betterment, but I would probably avoid selling the Betterment assets unless absolutely necessary, so I haven’t found that to be the best strategy for me personally. Just another investment at this point.
Overall, I think your strategy and advice is spot on, although I think the generally recommended total amount is a bit high for me. There’s definitely room for optimization with the bank account bonuses in my case, though. Thanks for the reminders!
I meant to add this in my original comment, but another cheap and easy opportunity is opening a checking and brokerage account with Schwab. It only requires a $100 deposit and you’ll receive $100. You can refer yourself here (https://www.schwab.com/public/schwab/nn/refer-prospect.html) with the code REFER.
Yep. But note, Schwab does a hard pull for their accounts, so something to consider. The Schwab account is good though because of no foreign transaction fees so you can get money abroad. But remember that it’s a hard pull, which some people might want to avoid.
Good point, I wasn’t aware of that. It’s been a while since I did it so good to know for anyone else considering it.
When the Insight cards were working for everybody, that was huge and I was telling everyone I could to jump on that.
So that Safety Net fund I think is going away at Betterment and they’re converting everyone to that Betterment savings account that earns 2.69% interest.
Definitely take a look at bank account bonuses. I think most everyone can earn at least $1,000 per year from bank account bonuses without a ton of work. On $15k, that’d be 6.6% interest with no risk of loss to principal. Beats every other emergency fund strategy out there I think.
Where did you hear the Safety Net is going away? I certainly haven’t heard anything from Betterment about that, although they’ve been pushing the savings account pretty hard, and a quick Google search didn’t yield anything.
Will definitely be following up on the bank account bonuses. Thanks again for all the great resources!
I thought I had read something but maybe I made that up to be honest, haha.
Bummer to get the update on Insights. I liquidated my accounts and shut the whole thing down. I’ve done the Netspend strategy and have also chased sign up bonuses; however, I’m at a point where I feel I need to start decluttering and start chasing options that might be more influential to the bottom line. Yes, you could have 20+ checking/savings accounts but is the juice worth the squeeze? Maybe the answer is yes for some people which is totally cool, but I’m not sure where I’m at today. My goal before the end of the year is to rack the bonuses from all the accounts I’ve signed up for. Shut down Netspend and essentially keep my OPPORTUNITY fund at Ally and Citi. I thought about Betterment/Wealthfront but I don’t want to be chasing what in my opinion is an immaterial better interest rate. Paula Pant wrote a post about optimization so I’m slowly but surely weighting more simplification than optimization. In the end is up to everyone so we can all agree to disagree on this and many more topics in the PF space.
Yep. I totally agree that it’s not everyone. Some of us optimize our meals and keep massive spreadsheets. Some of us get crazy into other stuff. Up to each individual to decide what things they want to do and what isn’t worth it to them. I have my system down where I find it all pretty easy, which is why I stick with it, but of course, I also put in a lot of time to learn how to do this stuff and I have some unique things that make it easier for me to do too.
I use an offset account on my home loan to earn (not pay interest) up to 4.5% interest on my emergency fund. This is super simple if you have a home loan in your life still.
Interesting. Do you have any resources about how that works?
Maybe it’s not available in USA. I’m in Australia.
An offset account is just a savings account attached to your home loan. The accounts balance is “offset” daily against your mortgage balance. And you only pay interest on the difference between the 2.
So 100K loan with 80K emergency funds in offset will mean you only get interest on 20K. If your interest rate is 4.5%, that’s a good rate of return for emergency fund.
Aaron
I received notification from Wealthfront on 8/2 that the interest rate would be 2.32% effective immediately. I had been a customer for literally a week. 🙂
Yeah bummer. All of the banks are cutting interests rates slightly with the recent fed announcement. Just remember that the change isn’t very much in a real sense. On 10k, the difference in interest on 2.59% vs 2.32% per year is like $20. It’s meaningless.