3 Risks of Keeping Your Emergency Fund in Your Checking Account

Emergency savings memo and stack of money.
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An emergency fund is an important step in securing your financial stability. Without an emergency fund, you run the risk of falling into debt for any expense that may not be in your budget, from a hospital bill to a car repair to a family emergency. But where you keep your emergency fund is almost as important as having one in the first place. If your first thought is that you should keep your emergency fund in your checking account, you may want to think twice, for the following reasons.

It’s Harder To Track

Your checking account is likely where your paycheck is deposited, where you pay bills and where you draw spending money from. In other words, there are likely multiple transactions of money going in and out every month. In this scenario, it can be difficult if not impossible to keep a dedicated emergency fund separate from your daily spending. 

This is especially true if you add money to your emergency fund every month. It’s one thing to mentally reserve, say, $10,000 of your checking account as your emergency fund, but it can become quite cumbersome to keep track of the value of your emergency fund if you add $100 to it every month. Do you have $10,600 or $10,800 in your emergency fund this month? It can be very hard to tell if you commingle your funds unless you keep diligent records. 

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It’s Easier To Spend

When your emergency fund is in your checking account, it can be far too easy to spend. Despite our best intentions, humans are great at rationalizing financial missteps. If you have a large sum of money sitting in your checking account it can be too tempting for many to just dip into it, perhaps saying things like “I’ll pay myself back next month” or “this is a special occasion.” Life being what it is, it’s often difficult to replace that money once it’s gone. 

Keeping your emergency fund in a separate, dedicated account puts up a bit of a physical barrier between you and your money. This is particularly true if you keep your emergency fund in an account that doesn’t have check writing or ATM access. That way, if you want to access that money, you’ll have to take the extra step of transferring it to your checking account first. This can give you enough time to pause and reconsider whether or not you should really be tapping your emergency fund.

It Won’t Earn as Much Interest

Although there are all types of checking accounts, they generally don’t pay much interest. The national average checking account interest — for those that pay anything at all — was just 0.06% as of Feb. 21, 2023. Even online, high-yield checking accounts only pay up to about 1.25%. Many banks won’t pay any interest at all on a checking account, and may even charge fees. This is why there are much better options for where to keep your emergency fund.

Then Where Should You Keep Your Emergency Fund?

There are clearly numerous drawbacks to using your checking account as the home for your emergency fund. But what are some better options? 

The most obvious alternative choice is a high-yield savings account. These accounts carry the same FDIC insurance as checking accounts but typically provide much higher returns. Although the average yield for a savings account was just 0.35% as of Feb. 21, many online savings accounts paid 4% or more as of that date. With the Federal Reserve indicating it will continue to raise interest rates in 2023, those rates will likely continue to go higher for at least the first half of 2023.

Upgrade Your Checking Account

Although online savings accounts are liquid, many do not come with ATM access, which can actually be a plus when it’s the home of your emergency fund. Most online versions these days have no fees and no minimums as well. 

For all of these reasons, a high-yield savings account is often touted as the single best place for an emergency fund. However, there are other options to consider as well. 

If you rarely tap your emergency fund and have enough cash flow to cover your expenses every month, you might consider using CDs or Treasury bills as a place to keep your emergency fund. Those two options aren’t quite as liquid as a high-yield savings account, but they may offer higher yields in the current environment. CDs are also backed by the same FDIC insurance as high-yield savings accounts, while Treasury bills are backed by the full faith and credit of the U.S. government. Just bear in mind that you might have to forgo some interest if you need to tap either of these options before their maturity date.

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