The best places to keep your emergency fund

Along with saving for the days you dream of – taking a vacation or putting down a down payment on a house, for example – you need to save for the days you hope will never arrive. By working to set aside six months of spending in an emergency fund, you’ll be prepared when the worst-case scenario comes true. Having an emergency fund is only part of a successful personal finance strategy; you also need to find the right house for it.

The best places to put your emergency savings

You need to be able to sleep at night with the confidence that your emergency fund has no chance of going missing, so safety is a key ingredient. Accessibility is also essential. Because you might need the money in your emergency reserve at all times, you will want to be able to withdraw funds without the risk of delay or penalties. Here are some ideal options.

Online savings account or money market deposit account

These accounts may have different names, but they are both well suited for your emergency fund. In addition to insurance coverage from the Federal Deposit Insurance Corp. or the National Credit Union Association, these accounts offer the most competitive interest rates on savings products. In normal times and without a pandemic, these also have a safeguard that will prevent you from thinking about spending with them: a limit of six withdrawals per month.

One thing to note: Transfers from an online savings account can take 1 to 2 days, while transfers from a savings account at your main bank can take place immediately. You may decide to keep a small amount of money in your main bank for immediate access and most of your emergency savings in the online account.

You can compare the best savings and money market accounts on Bankrate.

Bank or credit union savings account

You can also consider opening another savings account with your primary banking institution. It simplifies your financial life by keeping everything under one roof while distinguishing your emergency fund from the one you use for your day-to-day finances. And again, transfers from your primary bank can happen immediately.

However, you can sacrifice the possibility of earning interest. Institutions with large networks of physical branches offer a paltry return compared to online banks only at low overhead.

Money market mutual fund

These funds represent another relatively safe place for emergency funds. Although they do not come with the guarantee of insurance protection, they are low risk and easily accessible parking spaces for money. Interest income, however, is not very attractive – a key difference between this and money market accounts.

The worst places to put your emergency savings

Knowing where not to keep your money is an equally important lesson. These places can be useful for your other financial needs, but they are not designed to be kept in an emergency.

Current account

Consolidating your emergency savings with the checking account you use regularly presents the challenge of being too much accessible. It is better to completely separate these two from each other. Otherwise, you run the risk of dipping into your emergency stash with the promise that you’ll replenish it when your next paycheck arrives (and the potential to break that promise). The other major downside is the lack of earning potential. Standard current accounts offer nominal returns and in some cases offer no interest income.

Certificate of deposit

A traditional CD comes with a penalty for any early withdrawal of funds. So if you put your emergency savings in a one-year CD and need the cash in four months, you’ll lose interest and potentially even have to hand over extra cash to access it. There are other CDs without penalty, but some of them still have access limitations.

The stock market

With an average annual return of 10%, the stock market is ideal for the long term. However, when you have the potential to play a very short game – needing your money next week, for example – avoid the market at all costs. If you want evidence of the high-risk bet stocks present for your savings, look back at the four-day period in March 2020 when the Dow Jones Industrial Average fell 26%.

Savings bonds

Savings bonds could work for part of your emergency fund. However, there are significant drawbacks to using them for your safety pad. After you buy a savings bond, you can’t cash it for a full year. And although these pay interest, you will have to lose three months of that income if you cash the bond within five years of purchase.

At home

If you are thinking of keeping your emergency fund under a mattress or in a safe at home, now is the time to rethink your strategy. In the event of an emergency at home such as a fire or theft, it creates another serious emergency: your money will be gone, with no way to get it back.

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