A few years ago, my wife and I had to pull a bunch of cash out of our emergency fund in order to fund the final year of her residency and cover some other big bills that came with her purchasing a practice and starting her career. Most people don’t realize it, but unlike medical residents – who get paid around $50,000 or so during their residencies – dental residents often make nothing and, in fact, actually have to pay tuition.
In this case, my wife’s residency cost about $20,000 per year which we were able to cash flow by using our savings and income. This wasn’t a problem since we have a pretty low cost of living and make good money, but in that final year, we found ourselves running a little low on cash. As a result, we had to turn to our emergency fund.
At its peak, our emergency fund sat at $40,000 – a massive amount of cash for most people. We ended up withdrawing about half of it last year and spent much of this past year building it back up. And a few months ago, we finally got our emergency fund back to its fully-funded state. It’s now sitting at $42,000 – even more than what we started out with!
$42,000 is a pretty big chunk of change – and the most common question (and criticism) would probably be, why? What’s the point of having so much money sitting in cash?
The answer lies in this fact – I have my entire emergency earning 5% or more interest per year, guaranteed, with no risk of loss. As a result, I basically get the best of all worlds – a strong cash buffer that can help me through any problems, plus cash earning an interest rate that beats inflation.
In a way, my emergency fund acts as a sort of bond allocation in my overall portfolio, but with the added benefit that it cannot lose money. And as long as this system exists, I’ll never stop keeping this much cash on hand.
A History Of My Emergency Fund System And How It Works
One of the things about my emergency fund is that it’s not really based on any amount that I need to survive. Instead, it’s based entirely on how much money all of my different emergency fund accounts can hold.
Here’s what I mean. For most people, emergency funds are based on covering a certain amount of expenses – typically three to six months of expenses.
When I first started getting interested in personal finance, that’s exactly what I did. I set up a high-yield savings account with Ally, estimated what my expenses were each month, and then went to work hitting that target number. At the time, Ally and other high-yield savings accounts were paying about 1% interest, which was essentially nothing. Today, they’re paying somewhere in the 1.5% to 2% range – still not much.
My emergency fund strategy changed dramatically when I learned that there were accounts out there that offered 5% interest in FDIC insured savings accounts. Using these accounts required some initial learning and setup, but once you got through the setup phase, the accounts all took care of themselves. The big catch was that there was a limit to how much you could put into these 5% interest accounts. However, you could open up multiple versions of the same account, which meant that you could put away much more money into these 5% interest savings accounts.
So, my goals changed. Instead of aiming to save 3-6 months of expenses, I wanted to max out all of these 5% interest savings accounts.
First, I opened up 10 accounts with Netspend. I opened these accounts in 2016, and back then, they actually let you put up to $5,000 in each account earning an interest rate of 5%, but that was eventually cut down to a max of $1,000 in each account earning 5% interest. Since you could open up 5 Netspend accounts per person, my wife and I needed to save $10,000 in order to max out all of our Netspend 5% interest accounts. We were able to do that pretty quickly.
After that, I learned about Insight. This account worked the same way as the Netspend accounts except that they let you earn 5% interest on up to $5,000 per account. The number of Insight accounts you could open per person was a little bit indeterminate, however. Some people could only get 2 accounts per person. Others were able to get 4 per person. I managed to get 3 Insight accounts for myself and 3 for my wife – or 6 total Insight accounts between us. Maxing out those 6 Insight accounts meant we had another $30,000 earning 5% interest.
This past year, I added another account to my 5% interest account portfolio when I discovered that Digital Credit Union offers a 6.17% savings account on the first $1,000. This account was an easy account to add to my emergency fund portfolio since it didn’t require going through hoops and worked like a normal, fee-free savings account. I opened an account for myself and one for my wife, which gave us another $2,000 earning over 5% interest.
There was a short moment a few years ago when Insight took away their 5% interest savings accounts, which was a bummer and reduced how much I had in my 5% interest accounts. But then, a few months after Insight took away the 5% interest accounts, they brought them back for current account holders with no explanation as to why they brought them back. I’m not asking questions, so as long as it’s still active, I’ll keep using it.
And so, as of 2020, my emergency fund sits, fully-funded, at $42,000, earning approximately 5% interest every year. It generates about $2,100 of interest each year without me having to do anything – and it gives me comfort in knowing that I have a lot of cash sitting there that cannot lose value and that I can access if I ever need to.
How To Create Your 5% Interest Emergency Fund
The steps to create your own emergency fund using 5% interest accounts are still out there, although word of warning – this will take some initial upfront work. It’s admittedly not for everyone, although if you’re the type of person that is into financial independence and travel hacking, doing something like this might be right up your alley.
Below is the basic framework for this emergency fund and the accounts you’ll need to use if you want to replicate this strategy. You’ll want to read the in-depth posts I’ve written about each account in order to make sure you set them up correctly and know how to use them.
1. Netspend. Netspend allows each person to open 5 Netspend accounts per person with a max of $1,000 in each account earning 5% interest. What this means is that each person can put away $5,000 per person. If you’re a two-person household, you’re looking at being able to put away $10,000 total – which isn’t a bad cash buffer to have.
Note that there are five “flavors” of Netspend cards that you’ll need to open in order to max out all of your Netspend accounts – the regular Netspend card, the Ace Elite card, the Western Union card, the H-E-B card, and the Netspend MLB card. Be sure to read my post on how to set these Netspend accounts up before you dive into this, as there is a lot that you need to know to use these accounts correctly.
2. Digital Credit Union. Digital Credit Union is an online credit union that offers a 6.17% interest savings account on the first $1,000 you put into it. You can open 1 DCU account per person, so a household can easily open two accounts and put away $2,000 earning over 6% interest. You can also open custodial accounts for your kids, which means that you can put away a little bit more depending on how many kids you have.
DCU has no fees and no hoops to jump through. The only thing you have to do is make a one-time, $10 donation to Reach Out For Schools (this is the cheapest donation you can make to join this credit union). You don’t have to pay this donation each year – only the one time when you set up your account. Make sure to open the savings account only – you don’t need to open the checking account for this one.
3. Insight. Insight is a bit of a strange one with a status that is sort of up in the air at the moment. The accounts work the same way as the Netspend accounts except that each account allows you to earn 5% interest on up to $5,000. In the past, it was possible to open up somewhere between 2-4 Insight accounts per person (for whatever reason, the number of accounts you could open seemed to vary).
A few years ago, Insight shut down their 5% accounts, but then randomly brought them back for people that kept their accounts open (which was good for me because I never closed my Insight accounts after they were nerfed). New users, on the other hand, have only been able to open Insight accounts with 1% interest savings accounts, which makes it worthless.
Recently, however, there have been data points in which new users have been able to open Insight accounts and still get access to the 5% interest savings account. This includes a friend of mine that opened an Insight account a few months ago and was able to access the 5% interest savings account even though it seems like it shouldn’t be available.
Others have reported that the 5% interest accounts are available for Insight cards if you open them at a retail location. I’ve never opened an Insight card at a store, but apparently you can get them at check-cashing places. I have a friend that has opened several of them at a check-cashing place near his house and has never had any issues.
Your mileage is going to vary on this and unfortunately, I don’t have any exact tips on how to get the Insight 5% accounts if you’re a new user. Depending on how much work you want to do, it might be worth seeing if you can open an Insight account and get access to the 5% interest saving account. If you can’t, just close it out.
Thoughts On My $42,000 Emergency Fund
There’s a lot of comfort in having this much cash sitting around, and as I mentioned before, as long as this method sticks around, I’ll continue maxing out these accounts. My $42,000 emergency fund generates $2,100 of interest per year, which is not a bad amount to get for something that takes me no work to maintain at this point. I’ve automated everything and the only thing I do is pull the interest out once per quarter (which takes me a few minutes every 3 months).
In a way, I think of this emergency fund as a sort of bond allocation for my overall portfolio. I’m very aggressive with the rest of my investing in the form of equities and businesses, so keeping a pretty big chunk of money in cash accounts like this one helps to balance out some of the more aggressive investing I do.
An added benefit of using these 5% interest accounts for my emergency fund is that it also adds an extra layer between me and the money. One of the temptations with any emergency fund is to use it for non-emergency spending, but by keeping my emergency fund in these accounts, I know that if I want to pull the money out, it’ll take me a little bit more work. A little friction is enough to keep me from dipping my hand into the cookie jar.
I will admit that most people probably won’t be able to replicate this exact system – at least not without Insight working the way it works for me. That said, most households should still be able to put $12,000 into 5% interest accounts without much work or hassle (10 Netspend accounts + 2 DCU accounts). That’s not a bad amount to have as a cash buffer. And if you’re able to earn 5% on it, there’s almost no reason not to keep the cash on hand.
*If you’re interested in replicating this emergency fund system, be sure to carefully read my step-by-step Netspend guide to understand how these accounts work.