Best Places To Keep Your Emergency Fund
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Chances are you’ve faced events or obstacles in life that could be categorized as being an emergency. These are events that catch you off guard and usually have financial ramifications. An emergency can be as simple as having a furnace break down or it can be a health issue that turns your world upside down.
While we can’t predict the next emergency, we can prepare for it. Creating an emergency fund is the ideal way to deal with the potential financial consequences of emergencies. What’s the best place to keep your emergency fund, though? While you can just open a new account at your local or online bank, there are other options to consider.
In this article, we’ll look at five of the best options for your emergency fund.
The word emergency evokes different images depending on who you are. An emergency fund should only be used for true emergencies, though. It’s not a backup cash account or vacation fund. If you get into a car accident, that can create an emergency need for funds. Or emergencies could be unexpected hospital visits, home repairs, losing your job or a death in the family. The bottom line? Emergencies aren’t selective. They happen to everyone.
Here are some of the best options for where to build your emergency fund.
With that said, a high-yield savings account is still reasonably accessible and allows you to receive a higher interest rate than a traditional savings account. Many high-yield accounts earn between 1% and 2%, depending on the size of your account and other factors.
A number of online banks offer high-yield savings accounts, including:
Another difference, which could affect your decision on where to keep your money, is that money market accounts generally require a larger minimum deposit to open an account. They also may require that you maintain a higher balance to earn the higher rate. Many banks have tiered interest rates based on account balances. Depending on how much you plan to save in your emergency fund, a money market account could be the perfect solution for you.
You can open a money market account at most local banks, as well as at online banks. You may find higher rates online. Online-only banks can offer better rates because they don’t have all the overhead costs that traditional banks face. Whichever you choose, be sure you understand how to access your funds in a hurry, if necessary.
As with savings accounts, federal law limits the number of withdrawals or transfers you can make from a money market account to six per month. You’re likely to face a fee if you exceed this limit. However, if your money market account is being used for your emergency fund, this shouldn’t be an issue.
Earning a higher APY is great, but there is some risk with having your emergency fund tied up in a CD. What if you face an emergency before your CD has fully matured? You can still withdraw money from a CD during this time, but in most cases you’ll have to pay an early withdrawal penalty. Some banks charge a flat fee, while others may charge a percentage of the interest earned on your CD.
Having to pay a fee isn’t ideal and can defeat the purpose of choosing an account that earns higher interest. In a way, it’s like gambling as to whether or not you’ll face any emergencies during that time period. There are a few no-penalty CDs, but you’ll need to read the fine print to be sure that the no-penalty feature isn’t tied to a specific circumstance like losing your job.
One way around this is to create what’s called a CD ladder. This involves rolling over several CDs of varying term lengths. Doing this allows you to earn at a higher rate while leaving some of your emergency fund accessible. You could have one CD with a 3-month term, another with 12 months, another with 18 months, and so on.
Individuals can open a CD account at almost any bank. There also are online banks that offer CDs with more favorable rates or better term options. Some CDs have minimum deposit requirements, while others don’t.
One risk with this strategy is that keeping your emergency fund in a traditional bank account could lead to your withdrawing money when it’s not truly an emergency. To combat this, you could open an account at a different bank from your other checking and savings accounts. This can at least add a degree of difficulty that may help keep you from pulling funds out when you’re not facing a real emergency.
There is a risk to keeping your emergency fund in a Roth IRA because it could lose value. Choosing more conservative investment options can help lessen the risk of loss.
You can withdraw your contributions from your Roth IRA at any time with no penalty. There may be tax implications and early withdrawal penalties for withdrawing earnings.
A better option may be to create a starter emergency fund and then work toward a more long-term plan. A good starter fund could be $1,000, which would cover many emergencies you could face. Then, work toward adding money to your emergency fund as part of your overall financial plan, along with investing, retirement and other financial goals.
If you have existing debt, it’s better to work toward paying it off than to build up a big emergency fund. Whether it’s from credit cards, student loans or something else, having debt is your emergency. Saving for a future financial issue doesn’t make as much sense when there’s a current problem that needs to be addressed.
The ideal emergency fund is one that gives you peace of mind, knowing you are prepared for most of the storms you may face in life. This could be a month’s income or six to eight months’ living expenses. It’s really about what makes you most comfortable. What’s the ideal emergency fund size for you?
While we can’t predict the next emergency, we can prepare for it. Creating an emergency fund is the ideal way to deal with the potential financial consequences of emergencies. What’s the best place to keep your emergency fund, though? While you can just open a new account at your local or online bank, there are other options to consider.
In this article, we’ll look at five of the best options for your emergency fund.
What is an emergency fund?
An emergency fund is money that you set apart from other savings. It’s there to help you deal with the unexpected events of life. Emergencies can take the form of an unpredictable expense, such as your car breaking down. They also can take the form of an unexpected loss of income, such as having to change jobs or not receiving a bonus you were expecting.The word emergency evokes different images depending on who you are. An emergency fund should only be used for true emergencies, though. It’s not a backup cash account or vacation fund. If you get into a car accident, that can create an emergency need for funds. Or emergencies could be unexpected hospital visits, home repairs, losing your job or a death in the family. The bottom line? Emergencies aren’t selective. They happen to everyone.
Where are the best places to keep an emergency fund?
When the time comes to start building your emergency fund, where is the best place to keep it? It’s best to keep your emergency fund separate from your other bank accounts. You want your emergency fund to be accessible in case you need access it quickly. And yet you also want it not to be too convenient to reach, so that you’re not tempted to dip into these funds when it’s not necessary.Here are some of the best options for where to build your emergency fund.
High-Yield Savings Account
Opening a high-yield savings account to start an emergency fund makes a lot of sense. Almost all high-yield accounts are found at online banks. However, you can’t go to a brick-and-mortar bank location to withdraw funds. You’ll need the use of another bank account for transferring money in and out of your high-yield savings account. This could create a delay in receiving funds when an emergency arises.With that said, a high-yield savings account is still reasonably accessible and allows you to receive a higher interest rate than a traditional savings account. Many high-yield accounts earn between 1% and 2%, depending on the size of your account and other factors.
A number of online banks offer high-yield savings accounts, including:
- CIT Bank
- Capital One
- Discover
- Marcus by Goldman Sachs
- UFB Direct
- HSBC Direct
- Barclays
- Citizens Bank
- Axos Bank
- Ally Bank
Money Market Account
Money market accounts are similar to high-yield savings accounts. While both earn a higher APY than traditional bank accounts, they are different in other ways. Money market accounts sometimes come with a debit card and check-writing capabilities, making them more convenient, especially in a pinch.Another difference, which could affect your decision on where to keep your money, is that money market accounts generally require a larger minimum deposit to open an account. They also may require that you maintain a higher balance to earn the higher rate. Many banks have tiered interest rates based on account balances. Depending on how much you plan to save in your emergency fund, a money market account could be the perfect solution for you.
You can open a money market account at most local banks, as well as at online banks. You may find higher rates online. Online-only banks can offer better rates because they don’t have all the overhead costs that traditional banks face. Whichever you choose, be sure you understand how to access your funds in a hurry, if necessary.
As with savings accounts, federal law limits the number of withdrawals or transfers you can make from a money market account to six per month. You’re likely to face a fee if you exceed this limit. However, if your money market account is being used for your emergency fund, this shouldn’t be an issue.
Certificates of Deposit
Certificates of Deposit (CDs) are another possibility for your emergency fund. They are different from other options on this list because they require you to keep your money in the account for a specific period of time in exchange for receiving a guaranteed rate of return. This could be as short as a month or as long as five years. When the term ends, you can access your initial funds and any interest you earned. CDs typically earn a higher interest rate than other bank accounts.Earning a higher APY is great, but there is some risk with having your emergency fund tied up in a CD. What if you face an emergency before your CD has fully matured? You can still withdraw money from a CD during this time, but in most cases you’ll have to pay an early withdrawal penalty. Some banks charge a flat fee, while others may charge a percentage of the interest earned on your CD.
Having to pay a fee isn’t ideal and can defeat the purpose of choosing an account that earns higher interest. In a way, it’s like gambling as to whether or not you’ll face any emergencies during that time period. There are a few no-penalty CDs, but you’ll need to read the fine print to be sure that the no-penalty feature isn’t tied to a specific circumstance like losing your job.
One way around this is to create what’s called a CD ladder. This involves rolling over several CDs of varying term lengths. Doing this allows you to earn at a higher rate while leaving some of your emergency fund accessible. You could have one CD with a 3-month term, another with 12 months, another with 18 months, and so on.
Individuals can open a CD account at almost any bank. There also are online banks that offer CDs with more favorable rates or better term options. Some CDs have minimum deposit requirements, while others don’t.
Traditional Bank Account
If the idea of keeping your money in an online account or tied up for an extended time doesn’t sound ideal, you can always keep your emergency fund in a traditional checking or savings account with a brick-and-mortar bank. You won’t earn as much interest, but you have the peace of mind that comes from knowing you can access your funds almost immediately at any time.One risk with this strategy is that keeping your emergency fund in a traditional bank account could lead to your withdrawing money when it’s not truly an emergency. To combat this, you could open an account at a different bank from your other checking and savings accounts. This can at least add a degree of difficulty that may help keep you from pulling funds out when you’re not facing a real emergency.
Roth Individual Retirement Account
There is a case to be made for putting money into an investment account instead of keeping a more conventional emergency fund. Even bank accounts that earn high-yield interest won’t keep up with rising inflation. Investing your money in a Roth IRA would probably earn more money in the long run.There is a risk to keeping your emergency fund in a Roth IRA because it could lose value. Choosing more conservative investment options can help lessen the risk of loss.
You can withdraw your contributions from your Roth IRA at any time with no penalty. There may be tax implications and early withdrawal penalties for withdrawing earnings.
Why is having an emergency fund important?
Emergencies happen. It’s a fact of life. You don’t create an emergency fund in case there is ever an emergency. You do it because you want to be prepared when it happens. Having an emergency fund has several benefits, including two essential functions:- It provides you with financial help when something breaks, there’s an accident or health issue, a loss of income or another emergency.
- It provides you with peace of mind.
How much should you save in your emergency fund?
There is no simple one-size-fits-all correct answer to this question. Most experts say to save between three and six months of expenses. Depending on your income, though, that could be a lot of money to save. Also, depending on how well you budget your finances, saving up six months’ expenses could take a considerable amount of time.A better option may be to create a starter emergency fund and then work toward a more long-term plan. A good starter fund could be $1,000, which would cover many emergencies you could face. Then, work toward adding money to your emergency fund as part of your overall financial plan, along with investing, retirement and other financial goals.
If you have existing debt, it’s better to work toward paying it off than to build up a big emergency fund. Whether it’s from credit cards, student loans or something else, having debt is your emergency. Saving for a future financial issue doesn’t make as much sense when there’s a current problem that needs to be addressed.
The ideal emergency fund is one that gives you peace of mind, knowing you are prepared for most of the storms you may face in life. This could be a month’s income or six to eight months’ living expenses. It’s really about what makes you most comfortable. What’s the ideal emergency fund size for you?
