This is How to Start an Emergency Fund — and Put It to Work for You
Unless this is the first time you’ve stumbled on a personal finance site (welcome!), you’ve definitely heard you need an emergency fund.
That’s the pile of easily-accessible funds you build to equal three to six months’ salary, in case you unexpectedly lose your job or feel an irrepressible need to venture into the desert for a journey of self-discovery.
I know that goal seems insane to some people. Say you take home $36,000 a year, or $3,000 a month. The common rule says you need an emergency fund of between $9,000 and $18,000.
While you’re living on a $36,000 salary? Sure.
Most people don’t know how to start an emergency fund with that kind of income.
But even if you toss the rules out the window, even some padding of savings will help you live more comfortably and breathe more easily.
I know that’s easier said than done. When you’re living paycheck to paycheck, and you get the tiniest bit extra, you don’t want to stick it in a virtual safe. You want to buy yourself something pretty. Or at least pay down some debt.
It’s totally understandable. But we had an idea that might make you more willing to build that emergency fund: What if your money could grow while it waited for that potential emergency?
Investment vs. Savings Accounts
I won’t dive deep into the weeds here, but I want to start with a quick explanation:
Because your emergency fund needs to be accessible in case of, you know, an emergency, you don’t typically stick it into an investment account like your IRA or 401(k).
Those come with fees and tax penalties for withdrawing, unless your emergency conveniently waits until you’re 59 ½ years old.
That leaves the fund to sit stagnant in a typical savings or checking account.
Pro: You can pull those funds out anytime you need them. Con: The money does absolutely nothing for you unless you lose your job or wander into the desert.
But we found some ways to make that money work for you — and still be there when you need it. Like a dedicated spouse. Or a dog.
How to Start an Emergency Fund (And Make Money Off It)
Unless you’re pragmatic to a T, sticking money in an emergency fund can be painful.
Yes, it’ll be nice to have when you need it… but in the meantime, that’s money you could use for anything else. And it’s just sitting there.
The solution? Stick your emergency fund into an account where it’ll grow and be available in an emergency.
Here are three options we love:
1. Invest Your Digital Change
Remember how easily you could save money in the olden days of cash? Spend a few bucks and collect a few dimes here, a few quarters there. Empty your pockets at the end of the day into the almighty change jar.
Now, like everything else, there’s an app for that.
Because a lot of your spending is probably on a debit or credit card, your pockets are empty at the end of a shopping spree. Enter Acorns.
The app connects to your debit and credit cards and rounds up your purchases to the nearest dollar, investing your digital change. You can do this automatically or review your purchases manually — or even deposit a set amount weekly or monthly — to build savings in your Acorns account.
You’ll decide how you want your money invested, from conservative to aggressive (i.e. low risk/slow growth to high risk/fast growth). Acorns invests your money in a simple portfolio, and you can follow its progress right in the app.
I did the math and figured out I could save more than $400 in a year with my normal purchases — and that would grow to more than $5,000 over 10 years.
That won’t last me through a six-month walkabout, but it’s a pretty sweet haul for savings I literally don’t have to think about.
Plus, unlike those traditional investments, you can pull money out of your Acorns account anytime. Choose the amount you want to withdraw, and it’ll be in your connected checking account within five to seven business days.
Sign up for Acorns here, and you’ll get a bonus $10 when you make your first investment!
2. Make the Most of Your Checking Account
One of the easiest ways I’ve found to build my emergency fund without thinking about it is to siphon part of my paycheck into a dedicated bank account.
The problem with most bank accounts? Terrible interest. You’ve seen those bank statements you get around tax season… like, yeah, I’ll be sure to claim the $3.27 I earned this year, thanks.
Yes, you can find a high-yield bank account that’ll pay you something like 5% interest on your balance. But those often come with minimum balance or spending requirements and monthly fees. If they’re a fit for you, go for it. That’s not my bag.
Instead of keeping track of all that, I keep my emergency fund in an Aspiration Summit checking account.
This gives me the perfect balance, because it’s a regular checking account that gives me a debit card, so I can access funds anytime I need. Aspiration covers ATM fees, so I can withdraw money anywhere in the world without worrying about those charges adding up.
Plus, the account pays 1% APY on a balance of $2,500 or more. If my balance is less, it pays 0.25% APY. That’s way more than the average savings account interest rate of 0.06%.
The account doesn’t require a minimum balance, direct deposits or some arbitrary algorithm of monthly activity. I don’t even have to pay a monthly fee. Aspiration works on a “pay what’s fair” model, so I can tip whatever I want — and I do, because I love the company’s service!
One more added benefit: 10% of the company’s revenue goes to charity, so I can feel good about where I’m putting my money. It’s easy for me to donate part of my balance to charity each month, too, so this is a great way to save and give without feeling much of a pinch on your budget.
If you want in, you can open a Summit account online here.
3. Build Your Savings $5 at a Time
One thing that’s always kept me — and tons of millennials — from investing is the belief that it’s restricted to wealthy elites. Don’t you need, like, a ton of money to get started? (Or get into some convoluted penny-stock situation like Leo in “The Wolf of Wall Street”?)
Not the case anymore. Millennials like things simple and accessible, and technology has made that possible, even for investing.
With robo-investment apps like Stash, you can get your feet wet in the stock market, just a few bucks at a time.
Stash curates investments from professional fund managers and investors and lets you choose where to put your money. But it leaves out the complicated investment terms. You just choose from a set of simple funds reflecting your beliefs, interests and goals.
Oh, and you only need $5 to get started.
You can set the app to pull a set amount of money (as little as $5) from your bank account at regular intervals, so your savings can grow over time.
Bonus: Right now, Stash will give you an extra $5 to get started.
Just like Acorns, you can pull your money out of your Stash account anytime. So this is a simple way to build your emergency fund $5 at a time — and grow it without the work of creating your own investment strategy.
Have Your Emergency Fund and Invest It, Too
Yes, I still feel the twinge sometimes when I think about setting aside money I could otherwise use to buy an extra flight home this year, or to move into an apartment where I can’t hear my neighbor practicing bass guitar for eight hours a day.
But I feel a little better knowing I’m sticking that money into a place where it’ll grow.
I have to give up a few hundred dollars this year, but it’ll help me get thousands of dollars ahead in the long run — because who wants to worry about money when it’s time for a mid-life desert crisis?
Dana Sitar (firstname.lastname@example.org) is a senior writer/newsletter editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.