Online Savings Accounts — The Right Choice for Your Emergency Fund

A 2018 study conducted by the Federal Reserve Board concluded that 40% of Americans are unable to cover an emergency expense of $400 without having to sell something or borrow money.

This perspective is extremely troubling as it means four in every ten people in the US will experience a financial crisis should they get laid off, have car trouble, or need to undergo medical treatment.

$400 may not sound like much, but that is until you need them and can’t get them.

So, how do you avoid getting in such an unfortunate situation?

The Solution to Unpredicted Expenses — Emergency Funds

What are emergency funds?

In a nutshell, that is money you have set aside to only use in times of dire need due to unexpected circumstances.

When are emergency funds necessary?

  • Sudden unemployment
  • Car breakdown
  • Health problems
  • House repair
  • Major appliance breakdown
  • Paying for damage inflicted on someone else’s property
  • Unexpected travel
  • Loss of a relative

The list goes on.

It is true you can’t predict when trouble will come your way, but surely you can be prepared when it does. Setting up an emergency fund in an online savings account is your safest bet. Why? Because with spiking interest rates on credit cards reaching an all-time high of 17.73%, getting into further debt is not something you want to do. But putting money aside is.

Your financial security depends on you having the best online savings account possible. Why not a regular one, a time deposit, or an investment account, you might ask? Because the money you invest in online savings accounts is more liquid, and you can easily acquire the funds at short notice.

What to Look for in a Savings Account

When you want to find the best online savings account for your emergency fund, you need to look for conditions, such as:

  • High Annual Percentage Yield (APY)

It shows how much your money could earn in a year. Unlike simple interest rates where you earn the same amount of interest each month, APY includes compound interest. Therefore, the higher the APY, the faster your money grows. Why? With compounding, the interest is earned on the money you put into the account, as well as on the interest you receive over time. This is why differences of as little as 0.09% in APY can have a big impact on how quickly your account grows.

  • No (or bearable) minimum deposit requirement

Some banks impose restrictions on the deposits they accept, so beware of those and whether the thresholds are bearable given your financial capabilities.

  • Easy to set up online

You can open the account from the comfort of your own home without having to set foot outside, waiting in line, and wasting precious time. And should you need further assistance, you always have a customer service representative at your disposal.

  • Lower fees

Online banks don’t have the overhead cost that brick-and-mortar ones have, so you get to enjoy higher rates and lower operational fees.

  • Good reviews

Look for reviews with substance that explain the actual benefits of having an online savings account with the bank you are interested in. Good reviews are ones that give an insight into investor experience of the services provided.

How Much Should You Put Away?

By now, you know why you need an online savings account and how to recognize a good one. The natural question of how much should you put away in your emergency fund arises. Best practices dictate you need to put away anywhere between one and six months of total living expenses with one month being the bare minimum. As this is not the same for each person, you need to carefully calculate your expenses.

You can take a different approach and decide on a set sum you want to set aside, but that is more difficult to plan and overall not recommended.

For reference, according to a 2017 Statista report, 31% of men and 20% of women in the US have more than $10,000 in their saving accounts. That, however, does not mean you should start with such sums if they are outside your capabilities. No minimum deposit restriction on your online saving account means you can start with smaller amounts.

Get Saving!

It may seem daunting if you are now starting to think about setting up an emergency fund but the sooner you begin, the sooner you will start gaining financial stability.

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