Where To Keep Your Emergency Fund: Best and Worst Places Explained

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An emergency fund should be your go-to source of cash that’s easy to access in a crisis. You need to keep it somewhere that’s safe from market ups and downs and nonessential spending. See exactly where to keep an emergency fund to protect your savings, earn interest and be prepared for anything life throws your way.

Why It Matters Where You Keep Your Emergency Fund

Despite recent bank failures, your best option is to keep your emergency fund in the bank. You want your emergency fund to be readily available when you need it, but not so available that you take money out of it for something that’s not an emergency. But the most important thing about your emergency fund is that it’s safe — you don’t want to lose any of the money you’ve worked so hard to squirrel away.

Make sure the full faith and credit of the United States Government insures the account you choose for your emergency fund.

Two agencies do this: the Federal Deposit Insurance Corporation, or FDIC, which insures deposits held in banks, and the National Credit Union Administration, or NCUA, which insures deposits held in credit unions. If the institution where you have your money fails, one of these two organizations ensures you get your money — up to the limit.

Both the FDIC and the NCUA insure deposits up to $250,000 per depositor, per account type. So you can be insured for $250,000 in a regular savings account, plus another $250,000 held in a joint account. If you have more than these limits, spread your money to different banks or credit unions.

Best Places To Keep an Emergency Fund

High-Yield Savings Account

A savings account is the best place to park your emergency fund — it earns interest and it’s readily available should you need it. Online banks typically offer the best rates simply because they don’t have the expenses associated with brick-and-mortar banks.

Online banks, much like traditional banks, are FDIC-insured and protected against bank failure. Plus, your money is easily accessible–with most banks offering payment app integration with Zelle, Google Pay or Apple Pay.

Shop around for the best rate, because they can change quickly. And keep an eye on your rate — sometimes the bank reserves the right to change your rate at any time, and some will lure you in with a high initial rate, only to drop it later on. Don’t hesitate to move your emergency fund from one bank to another if you get a better rate.

High-Yield Savings Account Pros and Cons

Pros

• Easy to access funds
• Can earn higher interest rates than regular banks
• FDIC protected

Cons

• Transferring funds may take a while
• May not have ATM card access
• Rates may change without notice

Pro Tip

Keeping your emergency fund at a different bank from where you keep your checking and other accounts can be a deterrent to withdrawing funds for non-emergencies. When you have to think about moving it to another account, you may find you want to leave it in there after all.

Credit Union Savings Account

If you can’t find an online bank you like, a credit union can also be a good choice. Since credit unions are owned by their members, they don’t have to produce returns for shareholders. This means they can often offer higher interest rates than publicly or privately held banks.

Credit unions make it easy to access your funds–with most offering ATM cards that can withdraw funds from your savings account. Plus, many credit unions are getting up-to-date with technology–allowing their accounts to connect with payments apps like Zelle.

Credit Union Pros and Cons

Pros

• No account fees
• Better interest rates than banks
• Ease of access to funds

Cons

• May not support payment apps
• May have very few physical locations
• May not have the highest interest rates

Money Market Account

A money market account is a high-interest savings account that offers high rates and easy access to your emergency fund. Money market accounts may also come with check-writing privileges and an ATM card, making it easy to use your funds.

Some money market accounts impose monthly withdrawal limits, though, so it’s important to review the terms and conditions before signing up. For example, the government used to impose a limit of six withdrawals per month on money market accounts. Some banks still use this rule–so ask about this before getting a money market account.

Money Market Pros and Cons

Pros

• High interest rates
• Check-writing privileges
• FDIC insured

Cons

• May have lower rates than comparable high-yield savings accounts
• May impose transaction limits
• Not available at all banks

Certificates of Deposit

A certificate of deposit, or CD, is a time-deposited savings account that pays a high interest rate on deposits. You can choose the length of time to lock up your funds in return for rates that are better than most bank accounts.

CDs may penalize you for withdrawing funds early–making them less liquid than other types of savings accounts. If you want to use a CD for your emergency fund–it’s a good idea to choose a “no-penalty CD” that doesn’t charge fees for withdrawing funds before the maturity date.

CD Pros and Cons

Pros

• Can earn high interest
• Funds are FDIC-insured
• Available with most banks and credit unions

Cons

• May be penalized for early withdrawals
• Rates on “no-penalty CDs” may be lower
• Less liquid than a savings account

Standard Bank Savings Account

If an online bank or credit union doesn’t work for you — or if you find a brick-and-mortar bank with a better rate — you can put your emergency fund in a savings account at any bank. Be sure to shop around for the best rate, and don’t let fees eat up your earnings.

Regular banks may charge maintenance fees on your savings accounts–making them more expensive than other savings accounts. There are typically more physical locations allowing in-person help. And most large banks support payment apps and instant transfers of your savings account funds.

Standard Bank Pros and Cons

Pros

• Lots of in-person locations
• Connection to modern payment apps
• May offer promotional rates

Cons

• May charge fees to keep your account open
• Interest rates are usually lower
• May require a connected checking account

Where Not To Keep Your Emergency Fund

It’s tempting to want to grow your emergency fund faster, though that means taking on risk or giving up liquidity. You can’t take much risk, and you can’t lock up your money, but you do need to have this money available at any time in case of an emergency. For this reason, there are several places you don’t want to keep your emergency fund.

The Stock Market

Don’t invest your emergency fund in equities. This means no individual stocks and no mutual funds. These investments will fluctuate in value and you can lose money in them.

The last thing you want is an emergency to occur right after a market downturn. Your emergency fund will now last just four months instead of six. Don’t put your emergency fund in the stock market.

Bonds

Bonds are less volatile than stocks, but they require that you invest your money for a fixed period. You can buy Treasury bills–for example, there’s one type of bond with a period as little as four weeks, but some emergencies won’t wait that long.

Stay away from bonds for your emergency fund.

Cash at Home

People often joke about keeping their money in a mattress to avoid losing it in the stock market. If you keep your emergency fund in cash at home, you may think you’re protecting it from loss. The truth is that inflation erodes your buying power.

While the number of actual dollars you have stuffed in the mattress will remain the same, the amount of stuff you can buy — or bills you can pay — with that money will decrease over time.

It’s also at higher risk of being stolen or destroyed in a fire or other disaster.

Do You Need an Emergency Fund?

The short answer is, yes, you do. Before you start saving for those big goals like a down payment on a house or a new car, be sure you have some funds set aside in case disaster strikes. You should have at least six months’ worth of expenses stashed away in a safe place. This means your monthly expenses, not just your rent or mortgage. You should be able to live off your emergency fund for six months.

An emergency fund can be a lifesaver if you are unexpectedly laid off from your job or if you’re unable to work. In these instances, you may be able to collect unemployment insurance or disability insurance, which would extend your savings. But what happens if you have to leave your job to care for a child or parent who is ill? The Family and Medical Leave Act can protect your job, but it’s unpaid. These are the kinds of scenarios that make an emergency fund a necessity.

How To Build Up an Emergency Fund

If you are starting, or if your current expenses are eating up just about all of your paycheck, the prospect of saving six months’ worth of expenses can seem daunting. But just as even the longest journey begins with a single step, saving for emergencies begins with the first dollar.

Follow these steps to help you get started.

1. Set a savings goal of about three to six months of living expenses.
2. Open a high-yield savings account.
3. Include savings in your monthly budget.
4. Have automatic transfers set up with every paycheck.
5. Use windfalls like a tax refund to add more to your savings.
6. Reassess each year or after a big life change.

To put it simply, the two ways to build your emergency fund are to spend less and earn more.

Spend Less

To find that first dollar — and hopefully, a few more like it — take a hard look at your budget to see what you can cut out. Do you need all those streaming services? Can you pack your lunch instead of eating out every day? Start with one or two small things. Once you see your balance grow, you’ll be more motivated to find other places to cut back.

Earn More

If you’ve trimmed your spending as much as you can (or care to), look into ways to earn more. Can you pick up a side hustle to do outside of your regular job? Do you have items that you no longer use and could sell? There are plenty of ways to generate some cash.

Here’s one that’s underrated: when you get a raise or a bonus at work, send that money straight to your emergency fund. Your mother was right when she told you to “pay yourself first.” Move your savings directly into your emergency fund account before you are tempted to spend the money.

Best Places and Worst Places To Keep Your Emergency Fund

Here are a few examples of where you should park your emergency fund–and some of the worst places to deposit your emergency fund:

High-Yield Savings Accounts

Several high-yield savings accounts are offering over 4.00% APY on deposits right now. If you deposit $20,000 into a high-yield savings account paying 4.00% APY, you’ll earn $814.43 in interest within the first year. Because interest is deposited monthly, the compounding allows you to earn more and more each month.

Money Market Accounts

Some money market accounts are paying over 4.00% APY on deposits. But they also offer check-writing privileges. This means if you have a financial emergency and need to pay for it right away, you can use your money market account checkbook to take care of the expense. This is especially powerful since online ACH bank transfers can take up to three business days to complete.

Stock Market

If you deposited your emergency fund into the stock market at the beginning of 2022, you’d be in for a shock. The market dropped around 20% during the year. This means if you deposited $20,000, by the end of the year, you’d only have $16,000. If an emergency came up, you’d be forced to sell your best stocks with the market down and lose up to $4,000!

Bonds

While bonds feel like a safe investment, they can certainly lose value in a hurry during inflation. If you bought a bond market fund in 2021 in hopes of earning interest, you’d be unpleasantly surprised to see it lose over 15% of its value by the end of 2022. Yes, the bonds still pay some interest, but the value lost could have cost you thousands of dollars.

Cash

If you don’t trust banks and decide to hold your $20,000 emergency fund in cash, it could easily be lost in a fire or even stolen. But even if it isn’t lost, cash’s value continues to erode due to inflation. Not depositing funds into a high-yield savings account could cost you hundreds of dollars per year.

Final Take

Creating an emergency fund should be one of the first steps on your path to financial security. Knowing where to put that money is a big part of that important first step — and a high-yield savings account is your best option.

Karen Doyle contributed to the reporting for this article.

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