May 17, 2021 09:00 PM EDT
Is a Bank a Safe Place for Your Emergency Fund?
Banking is an essential part of someone's finances. These institutions are where most people store the majority of all their wealth and cash assets.
But during recent years, some individuals have grown to be mistrustful of banking institutions in general. If you're looking for banking alternatives, here are some of your best options.
What Is an Emergency Fund?
An emergency fund is a portion of your money set aside for usage during an emergency. This fund should only be used for emergency purposes to help you during financial distress when something unexpected happens. Without an emergency fund, it would be more challenging to come back to your feet.
Some examples of an emergency are job loss, car accidents, unintended time-off, and more. Late payments on loans are not considered an emergency. Paying a loan is an expected activity because debt payments always have a due date.
On the other hand, appliance or electrical malfunctions are emergencies because these scenarios can appear unexpectedly.
The larger the emergency fund is, the better it can cushion you out of a sticky situation. Experts suggest at least three to six months' worth of expenses for a good emergency fund starter. Your lifestyle choices will surely affect your emergency fund's final amount.
When Should You Build Your Emergency Fund?
Being debt-free is essential, but paying your loan should not always be the priority.
Building an emergency fund is as important as paying your debt because emergencies happen unexpectedly. If you don't have an emergency fund, you will likely end up in more debt just to make ends meet.
Once you got the chance to save money, you should build your emergency fund right away. Debts don't always have to take the front seat, especially if you don't have job security from your current employment. You don't have to save for an emergency fund again unless you need to replenish it.
Important Considerations for Storing Emergency Fund
Storing your emergency fund is also an important matter. Since this is an emergency fund, you should focus on two things: ease of withdrawal and income earning potential.
If you can't withdraw your fund easily during an emergency, then it doesn't serve its purpose.
On the other hand, storing money somewhere without any income earning potential is a wasted opportunity to make your money work for you.
That's why high-yield banking accounts are so famous for storing emergency funds. However, there are still viable non-bank options that check liquidity or high earning potential, which will be discussed later on.
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Banks for Emergency Fund: Yes or No?
In general, using banks for your emergency savings fund is the popular option. It offers numerous conveniences that are just simply not present on non-banking alternatives.
Additionally, the funds in banks are relatively safe due to the FDIC insurance. All banks insure each depositor's account up to $250,000. The average emergency savings for Americans is $8,863.
As long as you deposit your savings account to an FDIC-insured bank, your money will be safe even during an economic recession. The problem during these troubled times is usually the decreased buying power.
Your money is worth less than before during high inflation. That's why people who manage their portfolios would often put some of their money on inflation hedges like gold and other precious commodities.
FDIC-insured banking is the way to go if you want to secure the availability and security of your emergency fund. Remember: any fund that you save while you're capable of doing so will help you during harder times, especially during the economic upheaval. It's better to prepare than be sorry later on.
Like other things in the world, there is an advantage and disadvantage in using banks to hold your emergency fund.
Depending on your lifestyle and personal finance needs, a non-bank option might be better for you. Here are some of the points to consider when deciding whether to put your emergency fund in the bank or not.
When it comes to convenience, using a bank is hands down the better option. Almost all the major banks in a country have access to ATMs and other withdrawal options.
This means that if you genuinely need the money, you will always have the means to access it. Fund liquidity is where the banks usually have the upper hand compared to non-banking options.
Besides, there are high-yield savings accounts offered on numerous banks. These high APY accounts might not give a lot of income, but the rate is still higher than traditional banks.
For a "save and forget" fund like an emergency fund, the high APY is always a welcome thing. You might also want to consider time deposit options for high APY, but you need to sacrifice fund liquidity.
If you're an impulsive person, the ease of withdrawal might instead serve as a disadvantage for you. Banks don't give penalties to people who want to withdraw their cash (unless you have a time deposit.)
There are service fees on ATM and on-the-counter withdrawals. However, these fees are often not big enough to penalize impulsive withdrawals.
And lastly, there are cases wherein people reportedly had a case of identity theft when banking. When this happens, the victim might temporarily not use his or her account until the issue is resolved. In this case, a non-bank option is inevitable.
Other Non-Bank Options for Storing Your Emergency Fund
In reality, using bank accounts for managing finances is still considered easier and more convenient.
But if you need a non-bank alternative for some reason, rest assured that there are options available in saving your emergency fund.
Here are some of the best non-bank options that you can choose from.
1. Federal Bonds
What's safer than banks and other financial institutions? The central body that manages their operations, of course.
The US Treasury and the Federal Reserve would accept deposits from ordinary citizens and issue securities out of each deposit.
Federal bonds are indeed safe, but note that there is a low income earning potentials in bonds. And you can't withdraw your funds easily because federal bonds have a maturation period.
2. Prepaid Debit Cards
Prepaid debit cards are a very curious alternative. In this method, you can buy a debit card and load cash onto it.
However, the money is in your card account and not funneled from your bank account. Although it does not offer a high earning capability, a prepaid debit card offers almost the same flexibility when it comes to convenience.
Most of these prepaid debit cards support withdrawing on ATMs.
3. Inflation Hedging Commodities
Precious commodities like gold, silver, and copper can be considered some of the oldest objects with a store of value in the world.
Due to their usefulness and scarcity, there is always a demand for precious metals. Hence, even if the country's economic condition comes to a halt, you will always retain the value of your precious metals.
In fact, metals like gold usually increase in value when there are economic upheavals. That's how people are confident in their inherent value, making them a good option for diversifying investments.
Cryptocurrency is a relative newcomer in the finance scene. However, its potential is already seen by most investors and people.
It's primarily the case for people who want to get rid of their dependency on banking services. Cryptocurrencies offer both ease of withdrawal and high earning capability.
However, do note that cryptocurrency has a very volatile market and is considered a very high-risk but high-reward investment. Other than that, cryptocurrency is relatively safe and easy to withdraw.
5. Luxury Products
Luxury products can be a good option if you know what you're doing. This method includes buying one-of-a-kind items or collectibles and reselling them later for a higher price.
The obvious problem with this method is that you need to sell your item first before getting your fund. Not to mention, the saleability of the product is affected by its popularity.
Otherwise, it is a good alternative for people who want to see their money going toward a tangible asset. You might as well consider the last option below, as it can be a better match for most people.
6. Stashed Away Somewhere
You can always stash away some of your cash somewhere safe in your home. And yes, you can put it under the mattress, if it's the safest place you can think of (usually inside a safety deposit box or somewhere well hidden).
This method can be helpful during times when liquidity is a problem, but you would forego all your chances of earning passive income.
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