One of the common questions I see in the financial independence community is this: What is the best way to handle your emergency fund? It seems like this question has come up even more with the recent launch of high-yield savings accounts from fintech companies like Betterment and Wealthfront, not to mention all of the other high-yield savings accounts options available at the more traditional banks like Ally, Capital One, and Discover.
People that are into the financial independence movement are natural optimizers – indeed, optimization is implicit in the entire concept of financial independence and early retirement. So, it makes sense that there are a lot of questions about how to best optimize your emergency fund.
I’ve seen a lot of takes on this topic:
- The vast majority of people will tell you that you should save 3-6 months of expenses in a high-yield savings account earning between 2% and 2.5% interest. Ally is a popular (and good) choice. Betterment and Wealthfront are the new players in the banking space that are also interesting options to look at.
- A small number of people will tell you that you should invest your emergency fund in a conservative combination of stocks and bonds. The idea here is to trade a little more risk in order to get a better rate of return on your emergency fund. I know Betterment has been pushing this idea for a while with the recommendation that you overfund your emergency fund in order to cover potential market losses.
- Some people will tell you that you don’t need an emergency fund at all. Early Retirement Now has a very convincing post that supports why an emergency fund is unnecessary, primarily based on the fact that you can float emergency costs using credit cards, and worst case, you can dig into the investments that you already have. Mr. Money Mustache has said the same thing. Those of us on the path to financial independence are probably more advanced when it comes to money and have incomes that can cover potential emergencies, so I definitely get the argument.
Ultimately, all of these ways to approach the emergency fund are about striking the right balance between safety and return. You can play it safe and lose a little bit on the return front. Or you can take on more risk in hopes of getting a better rate of return on your idle cash.
I have a better strategy though – one that has provided me with what I think is the perfect balance of risk and safety. For those of you that enjoy optimizing things, this is the emergency fund strategy for you.
A Better Emergency Fund Strategy
For years, I’ve had what I think to be the optimal emergency fund strategy, combining the perfect combination of safety and return. It’s a strategy that has allowed me to keep a very sizeable emergency fund that earns at least 5% interest every year in FDIC insured savings accounts.
It’s broken up into three parts:
- $10,000 in Netspend savings accounts earning 5% interest. I have $5,000 in my five Netspend accounts and my wife has $5,000 in her five Netspend accounts.
- $30,000 in Insight savings accounts earning 5% interest. I have $15,000 in my three Insight accounts and my wife has $15,000 in her three Insight accounts.
- Typically $5,000 to $15,000 that I keep on hand solely for bank account bonus purposes. Over the past few years, I’ve consistently made between $2,000 and $4,000 each year from bank account bonuses.
As you can see, my emergency fund typically sits at around $40,000 to $55,000. That’s an admittedly massive amount of cash to keep on hand, but at the same time, it’s really not too problematic since it’s earning 5% or more interest every year with no risk of loss. In a way, my emergency fund acts as a sort of bond allocation in my overall portfolio.
Unfortunately, Insight shut down their 5% interest accounts to new customers about a year ago, so this exact strategy that I’ve been doing isn’t possible to do anymore unless you kept your Insight accounts open as I did. However, everyone can still take advantage of both Netspend accounts plus bank account bonuses to earn 5% interest or more every year.
Here’s what I suggest for a better emergency fund strategy.
1. Keep Your First $10,000 In Netspend Savings Accounts
The first thing I recommend everyone do is to take advantage of Netspend’s 5% interest savings accounts. I’ve written a massive 5,000+ word post about how these Netspend accounts work, so you’ll need to read that post to fully understand how to utilize these accounts for your emergency fund.
To briefly summarize, Netspend accounts are prepaid debit cards that are generally bad products to use and riddled with fees. However, each Netspend debit card also comes with an FDIC insured savings account that allows you to earn 5% interest on your first $1,000 in each account (everything above $1,000 in each account earns just 0.5% interest).
You can have a total of five Netspend accounts per person, which means that a two-person household can put away $10,000 earning 5% interest. That’s $500 of interest each year just for taking the time to set these up. As a comparison, you’d need about $25,000 in your typical 2% interest savings account to earn the same amount of interest.
Like any optimization strategy, it takes a little bit of upfront work to learn how to use these accounts. But once you do that, these Netspend accounts run themselves. You also won’t be charged any fees, and you’ll only need to look at them 1-4 times per year in order to pull out your quarterly earned interest.
By taking advantage of this financial hack, you can greatly optimize the first $5,000 to $10,000 of your emergency fund.
2. Use The Rest Of Your Cash For Bank Account Bonuses
Once you’ve maxed out your Netspend 5% interest accounts, your next step is to set aside a pot of cash that you can use to earn bank account bonuses. Bank account bonuses work similarly to how credit card sign up bonuses work – just like with credit card signup bonuses, bank accounts will regularly offer you a bonus if you open up a new bank account with them and meet certain requirements. This is a terrific way to get a high rate of return on your cash, albeit not necessarily in a passive way.
Typically, I recommend setting aside $15,000 that you can utilize just for bank account bonuses. You can make do with less, but if you have $15,000, you’ll be able to earn most bank account bonuses out there. At a minimum, I recommend having at least $5,000 that you can dedicate just to bank account bonuses.
Like with Netspend accounts, bank account bonuses do take some initial learning and setup work, but once you get through that process, you’ll find that the amount of time you have to spend on these accounts is very minimal. And the return can be very lucrative.
To get a sense of how lucrative bank account bonuses can be, simply take a look at what I’ve made from bank account bonuses over the past few years:
- 2019:$2,178 (to date – this will likely be closer to $3,000 by the end of the year)
- 2018:$3,262
- 2017:$1,300
- 2016:$935
These numbers increase even more when you also add in the $1,000 or so that my wife makes each year from her bank account bonuses.
The reason you need to set aside cash for bank account bonuses is due to the fact that many banks will require you to keep some minimum balance requirement in order to earn the bonus. As an example, I recently earned $500 from a Citi bank account bonus which required me to keep $15,000 in the account for 60 days, then keep $10,000 in the account for another 90 days in order to keep the account fee-free. If you do the math, even on $15,000, that would be an annual rate of return of about 6.6% with no risk to principal.
There’s a lot of information you need to know in order to properly utilize bank account bonuses. I wrote a massive 5,000+ word guide on bank account bonuses, so be sure to read that guide to fully understand how to incorporate bank account bonuses into your emergency fund strategy.
As a quick win, below are a few of the easiest bank account bonuses that you can do that don’t require anything beyond simply moving money into the account. You should be able to make about $200 from these three bank accounts in 30 minutes or less. Each of these bank accounts is also 100% free, so there are no fees or minimum balances to worry about.
- Chime (Offers a $50 bonus. The bonus requires a $200 direct deposit, but all of the data points show that ACH transfers from pretty much any bank count as a direct deposit. I used Discover bank to trigger the bonus.)
- Varo (Has a $75 to $100 bonus. Like Chime, a transfer from pretty much any bank will count as a direct deposit and trigger the bonus.)
- SoFi Money (Gives you a $50 bonus once you open and fund the account with $100.)
3. Keep Any Remaining Cash In Regular High-Yield Savings Accounts
The last part is pretty simple – you should keep any remaining funds in a regular high-yield savings account that earns at least 2% or more interest and has absolutely no fees or minimum balance.
In my experience, Ally has proven to be the best overall bank account due to the fact that: (1) it offers a good interest rate, (2) it allows you to link up to 20 external bank accounts with no problems, and (3) it allows you to transfer out a lot of money at once (many banks will limit how much money you can transfer in a month, which can be a real hassle if you’re playing the bank account bonus game or want to get a lot of your money out quickly).
Other high-yield savings accounts that you can consider are:
- Discover (2% interest and also typically has a good bank account bonus for new customers)
- Betterment (currently has a 2.69% promotional interest)
- Wealthfront (2.57% interest savings account)
- SoFi Money (2.25% interest checking account and it gives you a $50 bonus if you open an account with a referral link and fund your account with $100)
Takeaways
The above is what I consider to be the optimal emergency fund strategy currently available. Traditional emergency fund advice says that you should keep 3-6 months of expenses in an emergency fund. According to the Bureau of Labor Statistics, your average household spends about $60,000 per year. That means according to traditional financial advice, most households should have between $15,000 and $30,000 set aside as an emergency fund.
Assuming a $30,000 emergency fund, your typical two-person household can utilize Netspend accounts to set aside $10,000 of their six-month emergency fund earning 5% interest in FDIC insured savings accounts.
You can then take another $15,000 and use those for bank account bonuses. If done correctly, most people should yield well over 5% each year from that $15,000.
The remaining $5,000 can be kept in regular high-yield savings accounts earning about 2% interest each year.
This is what I call the better emergency fund strategy. It’s not for everyone because it takes some work to set up, but if you’re looking for the best way to balance rate of return with safety, this is the emergency fund strategy you should be using.
It’s exactly what I’ve done for years and why I’m so comfortable keeping a sizeable emergency fund.
Any questions about how this emergency fund strategy works? Hit me up!
More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- Webull (20 free stock shares) – Webull's current promotion gives you 20 free shares valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free shares using Webull.
- Moomoo (15 free stocks) – Moomoo is a free investing app currently offering 2 different referral bonuses if you open an account using a referral link. Read my Moomoo referral bonus guide for more information.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with just $10 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- SoFi Money ($325) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $300 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Fairwinds Credit Union ($175) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Upgrade ($150) – Upgrade is a free checking account that’s currently offering a $150 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $150 Referral Bonus – Step By Step Directions.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- US Bank Business ($800) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- Fifth Third Bank ($325) – This offer is limited to customers in the following states:Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account onlinebut you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements.Read my guide on this bonus here.
- GO2Bank ($75) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $75 referral bonus.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link. Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($30) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $30 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.32% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $800 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $250 for opening an account.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
