Best Places To Keep Your Emergency Fund
JA
Summary:
While stashing your emergency fund under your mattress might seem like a good idea, it’s not necessarily the best way to safeguard your hard-earned cash. Some of the best places to keep your emergency fund instead include interesting-bearing bank accounts (both checking and savings), money market accounts, and Roth IRAs. These options offer great security, easy access to your funds, and the potential for earning some interest on your savings.
Most of us have found ourselves in a tight financial spot at some point in our lives — whether it was because of an unexpected car repair, a medical bill, or a sudden job loss. In these situations, having some extra cash on hand can make all the difference.
But where should you keep your emergency fund so it’s easily accessible and doesn’t lose value over time due to inflation? Read on to find out some of the best places to store your emergency savings.
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What is an emergency fund?
An emergency fund is a sum of money you set aside specifically for unexpected expenses. Many financial experts recommend having an emergency fund that covers at least three to six months of living expenses — in case of job loss or other unexpected events.
An emergency fund can help ease the financial stress of unexpected expenses and prevent the need to take on debt. And though building up an emergency fund takes time and discipline, it can be a worthwhile goal.
Why is it important to have an emergency fund?
You might want to start building an emergency fund for several reasons. First, when you have emergency savings, you can avoid piling on high-interest debt if you have a financial emergency. Second, knowing that you have a safety net in place can give you peace of mind, which is priceless.
Finally, an emergency fund can help you weather economic downturns or periods of high unemployment. If you lose your job, you’ll still have money to pay your bills and keep a roof over your head. Plus, you’ll have time to look for a new position that you actually like instead of settling for an awful employer because of financial pressure.
Best places to keep your emergency fund
When it comes to storing your emergency cash, it’s important to strike the right balance between accessibility and security. Keeping all of your savings under your mattress allows for immediate access, but it’s not the most secure choice. Plus, you won’t earn interest. Here are some of the best places to keep your emergency fund instead.
1. High-yield savings accounts
A high-yield savings account is a type of bank account that offers a higher interest rate than a traditional savings account. Unlike traditional savings accounts that only offer an interest rate of around 0.21%, most high-yield savings accounts allow you to earn around 2% or even 3% APY.
In addition, most high-yield savings accounts offer Federal Deposit Insurance Corporation (FDIC) protection of up to $250,000, which means that your money is safe even if the bank fails. However, savings accounts typically have a withdrawal limit of six times a month, and your financial institution might charge you a fee if you exceed this limit.
You can open a high-yield saving account with most financial institutions, including a bank or credit union. Some online banks like Ally Bank also offer high-yield savings accounts with competitive rates and low fees. However, for a more complete picture of the high-yield savings accounts available, take a look at the accounts below.
2. Money market accounts
Similar to a high-yield savings account, a money market account also earns higher interest than a traditional savings account. But unlike savings accounts, MMAs typically come with check-writing and debit card privileges, making it easy to access your money when needed.
Keep in mind that some money market accounts require a minimum deposit of around $2,500. And if your account balance falls below a certain amount, you might have to pay monthly service charges. Before opening a money market account, read the fine print and make sure you understand the terms and conditions.
3. No-penalty CDs
A certificate of deposit (CD) is a type of investment account that allows you to earn interest in exchange for a fixed term. As its name suggests, no-penalty CDs are similar to traditional CDs, but with the added flexibility of being able to withdraw funds without incurring a penalty. Plus, since no-penalty CDs typically have terms of 12 months or less, they offer a great way to earn a higher interest rate on your short-term savings.
Because of the added flexibility, no-penalty CDs may offer lower yields than traditional CDs. That being said, these accounts may still be worthwhile to the right investor.
4. High-yield checking account
Like high-yield savings accounts, high-yield checking accounts are interest-bearing accounts. But one key difference between the two is that high-yield checking accounts are designed for regular use. In other words, you won’t be penalized for frequently withdrawing from your account. Instead, most high-yield checking accounts require you to make certain numbers of transactions each month.
High-yield checking accounts typically offer APYs between 1% and 4%. But to qualify for the higher rate tier, you may need to have a large checking account balance, like $5,000 or above.
5. Roth IRAs
Many experts recommend putting your emergency fund in a savings account, but a Roth individual retirement account (IRA) can also be a good option. With a Roth IRA, you can withdraw your contributions without penalty or tax at any time.
If you do need to tap into your earnings, you’ll need to pay income taxes on the amount you withdraw as well as early withdrawal penalties if you’re under 59½. But if you’re over 59½ and have had the Roth IRA for more than five years, you can withdraw your earnings tax and penalty-free.
How to build an emergency fund
Saving for a rainy day is always a good idea. Here are four tips on how to build up your emergency fund:
- Analyze your budget. If you’re struggling to save money each month, take a closer look at your budget and see where you can cut back on expenses. Consider using a budgeting app like Mint to help you identify where you can cut back to free up more money to contribute to your emergency fund. By living below your means and managing your money wisely, you can drastically increase your savings rate and build up your emergency fund savings.
- Generate extra income. If you have extra time and a bit of entrepreneurial spirit, you can start generating extra income for your emergency fund. There are endless possibilities when it comes to side hustles. You could start a dog-walking business, offer freelance writing services, drive for rideshare services, or even sell handmade jewelry online.
- Set a concrete goal. Figure out how much money you need to cover your expenses for three to six months, and then start setting aside money each month until you reach your goal. For example, if your goal is to build an emergency fund of $10,000 within a year, you’ll need to stash away $833 per month or around $27 a day. Once you know the exact dollar amount to save, it’s easier for you to take actionable steps to reach your goal.
- Automate your savings. Setting up automatic transfers from your checking account to your savings account is a great way to ensure you regularly contribute to your emergency fund. You can even set up different accounts for different purposes, such as short-term and long-term goals. This way you’re less tempted to dip into your emergency fund for non-emergency expenses.
Pro Tip
Keep in mind that not all savings accounts come with an automatic transfer feature, so be sure to review the fine print before opening an account. To make your search easier, the below accounts all come with automatic transfers.
FAQs
Is $10,000 enough for an emergency fund?
Well, it depends. How much you need in emergency funds will depend on your lifestyle, monthly expenses, and income. Generally, financial experts recommend that you have enough money stashed away to cover three to six months of basic living expenses.
So if you spend $1,500 a month, your emergency fund should be anywhere from $4,500 to $9,000. In this case, $10,000 is more than enough. But if your monthly expenses are $4,000, you may want to aim for at least $12,000 in emergency funds.
Where is the safest place to keep cash at home?
The best place to store cash at home is anywhere thieves would have a hard time accessing. This could include a safe deposit box, a locked drawer, or even a hidden compartment in your home. While these options may not be 100% foolproof, they will make it much harder for thieves to get their hands on your money.
Should you keep cash in your car?
Many people like to keep a small amount of cash in their car in case they need to pay for valet parking or a parking meter. However, keeping large amounts of cash in your car is typically not a good idea. If your car is broken into, the thieves may find the cash and take it.
Should you keep emergency cash at home?
To minimize loss from inflation, it’s best not to keep too much emergency cash at home. However, this doesn’t mean you should have any cash at home either.
If a catastrophe knocks out electricity in your town and ATMs don’t work, you may not be able to access your bank account. So it’s important to strike a balance between keeping enough cash at home to cover unforeseen expenses and not storing so much that it loses its value over time.
Key Takeaways
- The best places to keep your emergency fund are in a high-yield savings account, money market account, no-penalty CD, high-yield checking account, or Roth IRA.
- You can automate your savings by setting up regular transfers from your checking to your savings account.
- To build an emergency fund, first figure out how much you need and set aside money each month until you reach that goal.
- Having an emergency fund is important because it can help you avoid taking on high-interest debt, give you peace of mind, and help you weather economic downturns.
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