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What type of savings vehicle should I use for my emergency fund, and how much should I save?
It's best to keep your emergency fund in a money-market account or money-market mutual fund. Look for low fees and liberal check-writing privileges.
More than anything else, your emergency-fund money has to be safe and accessible. You can't afford to keep it in the stock market and risk having to sell for a loss when your investments are down (talk about adding insult to injury). And it shouldn't be tied up in CDs or any other investment with a minimum holding requirement because you don't know when you'll need to access it.
Money-market accounts, offered by most banks and credit unions, are federally insured -- you can't get much safer than that. Money-market mutual funds do not carry FDIC insurance but they have a long safety record. For more on money-market accounts and funds, see Supercharge Your Savings.
The downside to all this safety, though, is lousy returns. Bank of Internet USA (877-541-2634) offers a money-market account paying 2.09%, according to the latest survey by Bankrate.com. Money funds pay even less. Russell Money Market fund (RMMXX), yields just more than 1%. You can search for the best deals on money-market accounts and money-market funds on our Yields and Rates page.
A poor return is the primary reason why you don't want to tie up too much money in your emergency fund.
Set your sites on saving between three and six months worth of living expenses -- enough to cover your mortgage or rent, food, utilities, debt payments and other regular expenses you can't put off even in an emergency.
Three to six months of expenses is still a fairly broad range. Where in that spectrum you'll fall depends on a number of factors. If, for example, you are the sole bread winner, have high homeowners and health insurance deductibles and a car that breaks down frequently, then you'll want to save more. On the other hand, if you're in a two-income family, have a secure job, and home equity you could tap with a low-interest loan, then you could get by saving less.
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