Everybody knows they should have an emergency fund. There are many articles and discussions about how much one should have in the emergency fund and where to keep the emergency fund in order to earn the most interest. This post is not about either of those topics. Having an emergency fund is one thing. Having access to your emergency fund when you have an emergency is quite another. When an emergency strikes, is your emergency fund able to deliver?
Money market funds and online high yield checking or savings accounts are popular choices for where people keep their emergency fund. I keep mine in a money market fund in Fidelity mySmart Cash account. My two recent episodes of emergency showed that my emergency fund was inadequately prepared for real emergencies (see previous posts BBG Communications: $27 for a 1-Minute Phone Call and Credit Card Cash Advance Saved the Day). When I needed money, I couldn’t get hold of it easily. I must find a better way to emergency-proof my emergency fund. How fast can you get money from your emergency fund when you have an emergency?
ACH transfer. When you have your emergency fund in a money market fund or in an online high yield checking or savings account, you access your emergency fund primarily through ACH transfer. On average, ACH transfers take two business days. Some institutions take longer. Some like Fidelity can do it in one business day. There’s usually a cutoff time for the transfer request. Request submitted after the cutoff time is processed on the next business day. If your emergency can wait two business days, you can use ACH. If you think you can deal with all your emergencies that way, you can skip the rest of this long post. What if you need money sooner than that? An emergency that can wait two business days isn’t so much an emergency.
Deposit a check. Money market funds usually have check writing. Online savings accounts usually don’t. If you have a local checking account, you can deposit a check from your emergency fund to your local checking account. You should ask your bank when they will make that check available to you. The answer will likely depend on the size of the check. Wells Fargo told me they can give me cash the next business day if they don’t hold the check, but if I want money on the same business day, they can only give me $100 for my first check deposit on any given day. What if you need more than $100 today?
ATM/Debit Card. Some online high yield savings accounts issue ATM/debit cards; some don’t. Online high yield checking accounts usually do. Plain money market funds like Vanguard money market funds usually don’t issue ATM/debit cards. Brokerage cash management accounts, like Fidelity mySmart Cash, usually do. There is a daily maximum on the amount of cash you can take out with the ATM/debit card. You should know what your daily maximum is. If the institution allows cash advance against the debit card, you should also find out what the daily maximum is for cash advance. For Fidelity mySmart Cash, it’s $500 per day from an ATM and $2,499 per day through a cash advance. You can withdraw from an ATM 24/7/365. Cash advance usually can happen only when banks are open. If your institution charges a fee for either ATM withdrawal or debit card cash advance, you should find out what the fee is. Fidelity mySmart Cash does not charge a fee for either ATM withdrawal or debit card cash advance.
Wire Transfer. Wire transfer can happen on the same business day. It usually needs prior setup. You can preauthorize wire transfers from your emergency fund to a local checking account. It can take a week or two for them to set that up. After that, when you need the money, you just request a wire transfer online or by phone. Wire transfer on-the-fly usually won’t work, due to security precautions. Both the outgoing account and the incoming account may charge a fee for the wire transfer. There’s also a cutoff time for wire transfer requests. Requests received after the cutoff time cannot be done until the next business day. The incoming account may also need time to "see" the wire. Fidelity charges $15 for an outgoing wire. Vanguard does not charge. My Wells Fargo PMA checking account does not charge for incoming wires.
Savings Account at a Local Bank. If you have your emergency fund in a savings account at a local bank, you can just walk in and do your withdrawal immediately. You don’t have to bother with ACH, cash advance against a debit card, or wire transfer. The problem with this setup is that a savings account at a local bank usually doesn’t pay much interest. You give up yield for the immediate access to cash. If you are willing to use a local "rewards checking" account that pays a good interest rate but requires 10-12 debit card transactions in a month, you can have both high yield and immediate access to cash. I’m not convinced rewards checking accounts will last in the long run.
Credit Card Cash Advance. I did a cash advance against my credit card when I was short $300 for a mortgage refinance. It was done within minutes for a $10 fee. It works if the amount needed is small. If I needed $5,000, the 3% cash advance fee would be $150. That’s too expensive.
Line of Credit. A line of credit through the same bank where you have your checking account works like the credit card cash advance without the cash advance fee. When you need money, you request a transfer from the line of credit to your checking account. It can be done online, over the phone, or in a branch. The transfer can happen immediately. If you own a home, you can get a Home Equity Line of Credit (HELOC) which is secured against your home. Or you can get an unsecured personal line of credit. The interest rate on a HELOC is lower, typically around prime rate, currently 3.25%. The interest rate on an unsecured personal line of credit is much higher, close to the rates you see on credit cards. Some banks charge an annual fee for the line of credit.
After weighing all these options, I decided to apply for an unsecured personal line of credit with Wells Fargo, where I also have a checking account. This will provide emergency cash needs that cannot wait two business days for an ACH transfer. For having a PMA checking account package with Wells Fargo, the annual fee on the line of credit will be waived. I chose an unsecured line over a HELOC because a HELOC will complicate my mortgage refinance in the future. For emergency purpose, the interest rate doesn’t matter much. Borrowing $5,000 from a line of credit at 20% interest rate will cost me $5,000 * 20% / 365 = $2.74 per day. I also set up preauthorized wire transfer between Fidelity and Wells Fargo. If I need a large amount for more than a few days, I will just do a wire transfer for a $15 flat fee.
Companies do fire drills every so often. We should also do fire drills on our emergency fund. Test the whole process from time to time and see how soon and how much you can get from your emergency fund. Do you know the answers to these questions:
- How long does it take for an ACH transfer from your emergency fund to your checking account? What is the ACH transfer request cutoff time? What is the maximum amount you can transfer per day?
- Can you write checks from your emergency fund? How fast can you turn that check into cash?
- Do you have an ATM/debit card from your emergency fund? Do you know the PIN? Can you get cash advance against the debit card? Is there a fee? What is the daily withdrawal limit?
- Do you have pre-authorized wire transfer set up between your emergency fund and your checking account? What is the cutoff time for a wire transfer request? How long does it take from the time you request the wire to the time you see the money in your account? What’s the fee for sending and receiving a wire?
- Do you have a line of credit from the same bank where you have a checking account? What is the maximum you can transfer from the line of credit? How do you request a transfer? How long does the transfer take? Is there a fee for the transfer? Is there an annual fee for the line of credit?
Be prepared before a real emergency comes.