My husband and I used to keep our emergency fund in a savings account at the same bank as our main joint checking account. In fact, we had the two accounts linked via online banking, making it super easy to transfer funds.
But that convenient arrangement also made it tempting to slide money over to cover shortfalls that couldn’t, by any stretch, be categorized as emergencies.
I knew the money was there to cover unplanned expenses such as getting the car repaired, replacing a broken appliance or fixing a leaky roof. But, a few times, I borrowed cash from our fund to cover stuff like an “emergency” dinner out after a stressful week.
So, when we met with a fee-only financial planner, we understood why she recommended we put our short-term savings somewhere a little more out of the way, where it also would earn a better interest rate. She suggested an online bank such as Charles Schwab Bank or Ally. So, we ended up opening an online account that earns .95 percent annual percentage yield.
I like the idea of knowing our money is easily accessible if we need it, but not too close at hand. I’m happy I no longer see it staring me in the face every time I log onto online banking.
So where should you keep your emergency fund? In short, it needs to be in a place where it’s accessible, safe and insured, according to The Simple Dollar.
First, let’s talk about accessibility. You want your emergency fund to be liquid, meaning you can get to your money quickly when emergency strikes, according to The Simple Dollar. “The king of liquidity is having cash in your hand. After that, having cash available at any ATM is pretty good. Almost everything else is less liquid,” The Simple Dollar blogger Trent Hamm writes.
You also want to make sure your money is in a place where its value will hold steady, so if you sock away $2,000 today, you know you’ll have at least that much next week, next month or next year.
So, here are three options for where to put your emergency fund:
1. A savings account. A good, old-fashioned savings account probably is the best place to keep your emergency fund, according to Hamm (and our financial planner). You can access the money quickly and earn a little interest. As our planner told us, you likely will get a better interest rate by going with an online bank.
2. A money market account. A money market account is another option, if you want your money to earn more than it would sitting in a savings account at your local brick-and-mortar bank. What’s the difference between a savings account and a money market account? The bank has more leeway on what it can do with the funds in a money market account, Hamm writes. But read the fine print on any money market account you’re considering, Hamm recommends. With some money market accounts, you have to keep a minimum balance or wait as long as a week to withdraw your money.
3. A breakable CD. Another option for earning more interest: a breakable CD. A breakable CD is a certificate of deposit that offers the ability to withdraw money, if needed, at a small penalty, says certified financial adviser Andrew Comstock. Again, it’s important to read the details carefully so you don’t run into any surprises when you need your cash.
One more option: You can split your emergency fund. Consider putting the amount you’d need for a sudden emergency in a savings account, then put the rest in a Roth IRA, Missouri financial adviser Clint Haynes recommends in The Wall Street Journal. You can withdraw money you’ve contributed (though not the earnings) without penalty at any time.
So, where shouldn’t you put your emergency fund? Steer clear of stocks, real estate and gold or other precious metals, Hamm recommends. Those are not liquid enough and can go up and down in value too much, he writes.
For now, Joe and I are happy keeping our modest emergency fund in our online savings account. In the future, as we pay off debt and our account grows, we’ll definitely consider splitting our fund so we can earn more money.