Where to Put Your Emergency Fund
Image courtesy of Chris.Violette
In an economy as uncertain as the one right now, a person can lose his or her job without any warning. Additionally, nobody can predict when an emergency such as a car accident, medical problem, or major home repair will occur. For this reason, it is important to have an emergency fund. The most recent recommendation for the amount you need in your emergency fund is eight months of income. Personally, I think it makes more sense to put away eight months of expenses into your emergency fund, since that is what you will actually need to stay afloat during a difficult time. Of course, how much you put into your emergency fund will depend a great deal on your situation. How difficult will it be for you to replace a lost job? What kinds of bills do you need to pay? Each person’s situation will be different.
Another question you need to think about when setting up an emergency fund, however, is where to put your money. Before I give you some suggestions, let me briefly point out some of the main requirements for a successful emergency fund location. First of all, the location must give you easy access to your money. In other words, your money must be liquid enough so that you can access it quickly in case of an emergency. Secondly, the location must be very safe. You do not want to place your fund in a very risky investment. And thirdly, if you think you will be tempted to use the money on things that are not emergencies, the location must be somewhere that requires a little bit of effort to access. This point may seem to go against my first consideration, but there are actually places that will satisfy both requirements, as I will show below. So, here are my top suggestions for the best locations to place your emergency fund.
1. A rewards checking account along with your everyday money. This option is likely to provide the best returns on your emergency fund and is the option I personally use (along with some cash). Rewards checking accounts are becoming more and more popular. I recently signed up for one at my local credit union that pays 5.85% interest compounded daily. In order to earn this interest, however, you need to use your debit card at least ten times that month and check your statements online. Because of this, you would have to have both your emergency fund and your everyday spending money in this account. You can only put a total of $25,000 into this account and still earn the high interest on it (of course, you can always open up another rewards checking account at another bank). This method is advantageous because it gives you a return on your money that you do not need to feel guilty about (sometimes I feel guilty with my emergency fund because I think of the returns I could get on it by investing it), it is easy to access, and it is very safe. The disadvantage to this method is that you have to be very disciplined in order to not spend your emergency fund money. It is very easy to spend the money in your emergency fund when it is located in the same place as your spending money. If you think this may be a problem for you, then you may want to try a different option.
2. A separate interest-bearing checking account. If you do not think you have the discipline to keep your emergency fund and spending money in the same account, you can open up a separate checking account just for your emergency fund. There are many interest-bearing free checking accounts available. Of course, the interest paid in these accounts will be MUCH lower than in a rewards checking account. The advantages of this method are that your emergency fund is easy to get to, you earn a little bit of a return on it, and there is virtually no risk. The main disadvantage to this method, though, is that you can earn better returns with a few of the other options.
3. An online high-yield savings account. This option is a good way to earn a little bit higher of a return than you would in a normal checking account (although not more than a rewards checking account) and also a little bit higher than most local bank savings accounts. This option usually allows you to access your money quite quickly; however, it usually requires a little bit more effort to access the money than it would for a checking account. A savings account is also quite safe. This is a great option for people who think they will have a hard time not touching their emergency fund unless they need to do so.
4. A money-market account. This is a pretty popular option for an emergency fund location. A money-market account is a relatively safe investment that can possibly earn better returns than a savings account. Some money-market accounts may even rival the rewards checking accounts in terms of returns (although the returns are not guaranteed like the rewards checking account returns are). However, money market accounts are still investments and, therefore, still carry a degree of risk. Some money market accounts make it extremely easy to access your money and may even give you checks. Other accounts make it more difficult to access your money. Make sure to shop around for a money market account that meets your needs.
5. A certificate of deposit. Certificates of deposit (CDs) offer you a guaranteed interest rate if you commit your money to the financial institution for a certain amount of time. The longer you commit the money, the higher your rate. This option often provides you with a higher return than a savings account (but by no means as high as a rewards checking account), but it is really lacking in terms of flexibility. It is, however, very safe. I would not recommend putting your entire emergency fund in a CD because you will have to pay a large fee if you need to withdraw the money early. However, depending on your circumstances, a CD may be a good option for a portion of your fund.
6. Cash. It might be a good idea to keep a portion, if not all, of your emergency fund in cash. With this option, you can choose a location within your house to hide your cash. Some locations will be easier to access than others. For example, if you think you will be disciplined enough to leave your cash alone except in case of emergency, you can hide it somewhere that is easy to get to, like a drawer or safe. If, however, you feel like you will be tempted to spend the cash, you may want to place it somewhere that takes some work to access. For example, you might hide it somewhere in your attic or insert it into the back of a picture frame. These hidden locations allow you to access your money quickly if you need it while also discouraging you to use it for non-emergency spending. Of course, the major disadvantage of using cash for your emergency fund is that you will not earn any returns on your money. Also, if you do not hide your cash well, you risk the possibility of it getting stolen.
Do you use any of these options for your emergency fund? Which is your favorite? Do you have any other suggestions? I would love to hear from you.
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What about Ally bank’s (formerly GMAC bank) “no penalty CD” that has no penalty whatsoever for withdrawal? http://www.ally.com/certificate-of-deposit/no-penalty-cd/no-penalty-cd-overview.html
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I keep my emergency fund at ING Direct, in one of their savings accounts. This works well because I also have a checking account with them, and instant transfers between the two accounts. That way, if I need the money quickly, I can have it in my checking account instantly (as long as I can get online). Although I should probably hold at least some of my emergency fund in cash.
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Great tip about the “no penalty CD” at Ally. Like Stephanie, I keep my emergency fund at ING, but the Ally deal sounds 2x better. Thanks!
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That’s a good suggestion. I am not familiar with the account but I will have to take a look at it. Thanks!
I love ING! I kept my money in a savings account with them right until I got my rewards checking account. At that point, the interest in the rewards checking was too high for me to justify leaving my money with ING. I still keep my account open in case I want to use it again, though.
All are the perfect ways to put your emergency fund, according to me CD’s and cash is best ways.
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