Emergency-Proof Your Emergency Fund

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 Cash Management 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:

  1. 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?
  2. Can you write checks from your emergency fund? How fast can you turn that check into cash?
  3. 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?
  4. 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?
  5. 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.

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  1. Dave says

    One thing to think about with ACH transfers: when I initiate an ACH transfer with an external bank from my USAA checking, USAA makes the first $1000 available immediately. I think you need to have a USAA Mastercard to get this perk. This is really nice when you have a cash crunch, because you could initiate the transfer and access $1000 immediately. To be a USAA member you need to be active or retired military or related to someone with a USAA account.

  2. TIE says


    This is mind expanding. I always thought of my emergency funds as money for either (1) a long-term emergency like job loss, or (2) a big unforseen emergency like needing a new hot water heater. In neither of those situations do I require *cash now*.

    Perhaps it would be instructive to develop a typology of emergencies. A “cash now” emergency puts the greatest burden on one’s personal finance infrastructure. I think that’s the situation you’re contemplating. It is not one to which I have given much thought.

    Usually when I’ve been in a “cash now” situation I saw it coming. When I needed a large certified check for a closing (as you did) I knew in advance. When I was overseas I brought some travelers checks.

    What if I have a “cash now” that I can’t see coming? Well, up to a certain size I’d be fine. After that I’d have to scramble, as you did. I could prepare in advance as you suggest. That’s a good idea.

    This comes back to a fundamental problem I would love to see addressed by someone: what is the risk/reward trade-off for various emergency fund set-ups. That is, in general, the more liquid the less risk and the less reward. But maybe it is sensible to invest one’s emergency fun in less liquid assets and to suffer high interest borrowing in the rare case one has an emergency. If emergencies are sufficiently rare then this is better.

    I have not seen sufficient empirical work on such things.

  3. The Weakonomist says

    I keep my emergency fund in an online savings account and so far have never needed it. However if something were to come up I would use my credit card to take care of it and them transfer the funds to pay it off. It’s pretty much the same as setting up an unsecured LOC only interest is compounded monthly.

  4. Wm Tanksley says

    Under “line of credit” you should mention a margin account drawn against a small pool of stocks. I do most of my banking (including direct-depositing my paycheck) through my online broker; I can write checks, use a credit/debit card, and access through ATMs.

    The fact that it’s a margin account means that everything deposited into it becomes available for use instantly; even large transfers (which would normally take a full week). It also means that overcharges act merely as margin charges, changing them from $25 emergencies (plus a possible bounced check, depending on how mean your bank is about it) to just a few cents margin cost plus no bounced check.

    The only problem I have is that all the online financial planning sites (Wesabe, Mint, etc) seem to assume that because it’s a brokerage, the only thing I’d EVER want to track in it is stock prices (grr); they refuse to download transaction data (Quicken used to work fine, but I didn’t upgrade and Intuit doesn’t allow old Quickens to access online bank data). Buxfer works with my broker’s CSV downloads, and perhaps some other broker has more convenient downloads (I encourage you to do your own comparison shopping, which is why I’m not naming my broker).

    And, of course, the money is swept into a money-market fund, which during better economic times puts at least a few dollars in my pockets every month. (Now it’s pennies — this ain’t a 5% account.)


  5. Harry Sit says

    @Wm – Because most brokerage accounts are not local and brokerage branches do not dispense cash (with the exception of brokerage arms tied with a bank, like Wells Fargo or Bank of America), accessing money from a margin account is similar to accessing a money market fund or online savings account: ATM/debit card, check, ACH, or wire transfer. That’s why I didn’t include it as a separate item. A LOC linked to a local checking account can provide money sooner.

  6. KD says

    I think you are trying to marry competing goals. Money that’s as good as cash lying with you is never gonna generate high yields and for money to generate high yields it needs to be locked away from frequent or an anytime transaction. Rewards checking finds a way out by rewarding customers who make the effort to meet the requirements at the expense of customers who do not. I agree the rates are going to drop from astronomical 6% sooner than later but to remain competitive they are going to match or better online savings rates ..this is a clear given from the Banc Vue model of rewards checking. Some local banks can get away with rates less than online savings yields because of their extreme local nature, but mostly in more populated and/or urban areas that is not going to be the case.

  7. Don says

    I keep about half my emergency fund in (paper) US Savings Bonds, specifically EE bonds. My bonds are old enough that they follow interest rates up and down, but generally they’ve had better rates than a savings account at the bank. Once you hold past the initial holding period, you can pretty much cash them at a moment’s notice.

    To do the same today, I’d probably be inclined to use I bonds instead, since I don’t consider fixed rate EE bonds particularly attractive. Of course I bonds aren’t so attractive right now either because the fixed portion is so low.

    There is a downside to having your funds in savings bonds, and I discovered that when I had a quick land purchase to get together. If you are like most people, you’ll defer your taxes until you cash your bonds rather than track the paperwork from year to year. What that means is that just when you need your emergency money you will owe extra taxes (on the interest income).

    After I bought my land, I decided to keep more of my emergency fund in online savings accounts so my tax is paid from year to year. I accept that there is going to be a delay of a few days to get access to that part of my emergency fund.

    I try to keep a fair amount of cash on hand, and I don’t even feel bad about that with the low interest rates we enjoy right now. There’s no cash faster than that.

    I also keep $500 in a savings account. It doesn’t have as good a rate as my other online accounts, and is mostly inferior to them in every way really. But it does come with ATM cards. Since $500 is the typical daily limit on an ATM, that’s what I keep in the account. It’s sort of my “I need cash in hand right now” cash. I think I got a $25 bonus for signing up.

  8. indexfundfan says

    tfb, I mentioned it in your other post. You can overdraft your PMA account from a Wellstrade margin account. These is no fee for the overdraft and current margin interest is 7%

  9. Harry Sit says

    @indexfundfan – Yes, I can use margin if I set up my Wells Fargo brokerage account as a margin account. I couldn’t do it the other day because I hadn’t signed the margin agreement. Since there might be implications on qualified dividends in a margin account, I’m keeping my brokerage account as a straight cash account.

  10. Harry Sit says

    @AM – Because a HELOC has a secondary lien to the home, before the first mortgage can be refinanced, the new lender has to obtain a “resubordination” from the HELOC lender, basically having the HELOC lender agree to stay at 2nd position after the new loan. The HELOC lender can refuse. Or they can take their time and delay the process. Or they can charge a fee for the resubordination. To avoid such trouble, the new lender sometimes requires closing the HELOC during the refi. Then you have to open a new HELOC again after refi is done.

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