How Much Should You Keep in Your Emergency Fund & Where to Put It?

 In this episode of The Retirement Guide, George Jameson, CFP® and founder of Capital Wealth Group, explains how to determine the right amount to set aside in your emergency fund and explores smarter alternatives to traditional savings accounts. He offers practical tips on maintaining liquidity, navigating rising costs, and ensuring your money works harder for you in today’s unpredictable economy. 

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

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This is for education only.It is not tax, legal, or investment advice. Before  acting on any information consult your tax, legal, or investment advisor.

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Transcript

How Much Should You Keep in Your Emergency Fund & Where to Put It?

I'm George Jameson, a Certified Financial Planner with Capital Wealth Group, a fee-only fiduciary firm. I've taken a break from my weekly podcasts but am glad to be back and hope to continue biweekly episodes throughout 2025."

Many people are asking me how much they should keep in their savings accounts, especially now that we have a new president in office. Of course, this question comes with concerns about how changes in leadership will impact finances and expenses. However, the amount you should have in savings really depends on your own situation, not who’s in charge. This isn’t about political preferences; it’s about managing your personal finances wisely.

Let’s start by talking about the typical guidelines you might hear. A general rule is to keep three to six months of expenses in a “rainy day fund.” But, in my personal opinion, I think that’s on the low side for most people. Whether you’re still working or retired, I recommend holding at least six to twelve months' worth of expenses in your savings. Why? Because most of us tend to underestimate the real cost of emergencies. We don’t often anticipate how much unexpected situations can impact our day-to-day lives.

Think about it — inflation has been a major factor in rising costs for quite a while now. While I hope the worst of it is behind us, we’re still facing new challenges. For instance, there’s the threat of up to 25% tariffs on imported goods. While that could boost domestic job markets, it’s also a potential risk for consumers, as everyday costs could increase. Higher tariffs mean businesses might raise prices to cover their costs, and as consumers, we could feel that impact in everything from grocery bills to healthcare expenses.

Having additional funds in your savings account, instead of locking it all up in long-term investments, gives you the flexibility to handle these rising costs and unexpected emergencies. Liquidity is key here — you want to make sure you can access your money quickly if something unexpected happens.

Speaking of emergencies, let’s break down what that could look like. Emergencies are often more than just an inconvenience — they can have a major financial impact. When I think of an emergency, I picture large, unexpected expenses like an AC unit breaking in the middle of summer, a water heater failing, or needing a new roof on the house. Sometimes, the issues are more hidden, like mold in the ductwork or major car repairs. For those of us with high-deductible health insurance plans, medical bills can also catch us off guard. These emergencies don’t always happen in isolation either. Often, it’s one thing after another. You might get hit with a car repair bill one week, followed by a home repair the next. That’s why you want to make sure you have enough savings to cover multiple emergencies at once.

For those still working, a big emergency could be losing your job or seeing a reduction in hours. If you lose a high-paying job, it could take anywhere from six to twelve months to find a comparable one. That’s a lot of time without income, which is why a robust emergency fund is so important.

Now, let’s tackle the next big question: where do you put that emergency fund? When I talk about savings accounts, I’m not recommending traditional savings accounts at your bank. Right now, most banks are offering extremely low interest rates, often close to zero. Unfortunately, I see this too often when I work with clients — they’ve got substantial amounts of money sitting in traditional savings accounts, earning little to no interest. If you’re saving money for emergencies and you’re not planning to access it immediately, you should look into better alternatives.

One option is prime money market funds from large discount brokers like Schwab or Fidelity. These funds offer much better interest rates while still giving you liquidity. Another option is high-yield savings accounts from online-only banks. These accounts are generally better than what you’ll find at your local brick-and-mortar banks, which are paying next to nothing right now. However, it’s important to read the fine print. Some banks offer "teaser rates" that might be high for the first few months but drop significantly after that, so you don’t want to get caught by surprise.

As of February 10, 2025, Schwab and Vanguard Money Markets are still paying over 4% annually, with interest paid monthly.  That’s a huge improvement over the typical savings account interest rate of almost nothing. However, it’s important to note that these funds do take time to liquidate — typically a day to sell and another day to transfer to your checking account. It's not as quick as a regular savings account, but in my opinion, 4%+ is still better than earning nothing, especially when compared to the low rates that most banks are offering these days. Even credit unions aren’t paying much better.

 Additionally, a few online-only banks are paying in the high three’s to low fours in their high-yield savings accounts,. These rates are also subject to change, so it’s crucial to keep an eye on them, but based on my experience, online banks and money market funds will typically offer better rates than traditional savings accounts.

Another option to consider, though not as liquid as money markets, are short-term Treasury bills or three-month CDs. While these can be low-risk options, they come with their own set of challenges. The main drawback is that you’ll need to wait for the bill or CD to mature before you can access your funds, which means it’s not ideal for an emergency fund. You also need to be disciplined enough to reinvest every few months. For most people, a money market or high-yield savings account from a trusted online bank is probably the best way to go.

In the end, the goal is to ensure that your emergency fund is accessible and earning as much as possible while remaining safe and liquid. I personally recommend sticking with well-established, reputable names like Schwab, Vanguard, or large online banks that are known for offering competitive rates. And once again, be sure to read the fine print to avoid any surprises down the road.

To sum it all up: While traditional savings accounts have their place, they’re not the best option for building an emergency fund that actually works for you. You want a place where your money is earning interest, but still easy to access if you need it. Look into prime money market funds, high-yield online savings accounts, or even short-term Treasury bills, but be sure to factor in liquidity and read the fine print when comparing options.

By planning ahead and choosing the right place to put your emergency fund, you can protect yourself from unexpected financial strain — and potentially even make your money work a little harder for you.

Disclaimer
The information discussed in this podcast is for general explanations and education only. It is not tax, legal, or investment advice. Before considering acting on any information heard here, first consult with your tax, legal, or investment advisor. Thank you and have a great day. 

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George can be reached at (803) 250-6464 orgeorge@capitalwealthplan.com

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