Complete Guide to Emergency Funds

Everyone is looking for the magic bullet to make it financially in frum society. Words like stocks, index funds, and business deals are thrown around, but before any of that can happen, something else needs to be addressed: emergency funds.

In case something goes wrong-which it almost inevitably will at some point-you need to have a safety net to fall back on. A broken car, a medical crisis, or a lost job becomes significantly more stressful if there's no way to pay for it. For this reason, an emergency fund is the first step to becoming financially stable.

Putting debt on a credit card is not recommended due to the high interest factor-even a relatively small amount can accrue an alarming amount of interest over time. Before you worry about investment accounts and IRAs, you need to have several months of living expenses set aside.

Having an emergency fund means you don't need to panic when unforeseen expenses come up; you can simply take the money out of the emergency fund and plan to replace it over the next few months.

The Magic Number:

One obstacle to setting up and maintaining an emergency fund is the numbers. Three months' worth of income-often the recommended amount for an emergency fund for a frum family is a lot, and attaining it can seem formidable. (Interestingly, the amount that a frum family needs in an emergency fund is often less than the average recommended amount because we have access to gemachim and tzedakah organizations.)

The truth is, though, that it doesn't really matter if you don't have the complete amount. Something is better than nothing. Just take some money and start. It can even be the minimum balance the account requires-in many cases a mere $25.

When it comes to finances, you can't optimize before you establish. It's very nice to plan to put away a big, impressive number, but if you don't actually put anything away, you get nowhere.

FINDING A HOME:

Just putting the money away is of primary importance, but where you put it matters too. Savings account? Money market? Checking account? What's the ideal place for your emergency fund?

Let's first discuss where not to put it. Leaving it in your checking account is a definite no-no. First, if there's extra money lying around, it will probably get spent. We have a limited amount of self-control. Personally, I prefer to save that discipline for my davening and learning rather than waste it on financial matters.

More importantly, you actually lose money by leaving it in a checking account, due to inflation, which decreases your money's value over time. A high-yield savings account or money market offers, on average, 10 times the amount of interest you'll get from a regular account at the bank.

People often wonder what the catch is. Why are these accounts offering so much more than the regular checking account at the bank? The answer is that there is no catch. The banks just benefit from people's laziness and lack of effort to look for better savings accounts. Keep in mind that a money market is not FDIC insured, but if it's with a reputable bank, it's very low risk.

However, don't leave your fund in a CD, even though the returns are better. There's a fee to remove money from a CD before it matures, which defeats the purpose of the fund.

The 80/20 Rule:

When it comes to high-yield accounts, the options are almost endless-so much so that interested consumers often go down the rabbit hole of finding the one with the highest amount of interest.

Should I put my money in the account that offers 4.25 percent or the one that offers 4.33 percent? But is that account legitimate? I never heard of that bank.

The 80/20 rule can serve as a guide. This well-known rule maintains that 80 percent of the results come from 20 percent of the work. In this case, a person can spend 20 minutes finding an acceptable savings account and then another two hours (or more!) delving deeper into the details of all the options, trying to figure out which one will get them the highest returns. But for most non-businessmen like myself, the extra .03 percent will net about $10 a year, hardly an amount that's worth that type of effort. Which is why the last time I wanted to set up a savings account, I decided that I would give myself 10 minutes to find an account. This was the process: I Googled the 10 best high-yield savings accounts, found a respectable website that listed them, and then looked for a name I recognized. When I saw Discover, I said, "Okay, that's a trustworthy company; they're not likely to go bankrupt anytime soon. I'll go with them."

Could I have found a little bit better? Sure. But it wasn't worth my time.