Secure Money 2023: Is It Better To Use a Checking or Savings Account for Your Emergency Fund?

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Many financial experts recommend saving between three and six months worth of living expenses in an emergency fund (also called an emergency savings fund). That way, you’ll have enough money to cover your bills in case something happens like a lost job or surprise medical issues.

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But knowing that you should have an emergency fund doesn’t answer one important question: Where should you keep this money? After all, you have many options, including checking, savings, and even money market accounts. Each account type can keep your money secure, but each one also has its pros and cons.

With that in mind, here’s what you need to know about the best types of accounts to keep your emergency fund in — and whether one is better than the others.

Emergency Fund: Checking or Savings?

Generally speaking, you should keep your emergency fund in a savings account rather than a checking account.

Checking accounts are convenient, accessible and secure (if you’re using a FDIC insured bank or credit union). They’re also good for handling everyday expenses, paying bills or making transactions. Typically, they come with a debit card that you can use at ATMs or when shopping.

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Like checking accounts, savings accounts are also secure. Unlike checking accounts, savings accounts usually earn more interest. This makes them better for storing and growing your money in the long term.

“Your emergency fund should live in a high-yield savings account (HYSA),” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth. “A HYSA will earn you some interest on the money, but the money will be safe and accessible when you need it.”

High-yield savings accounts usually come with higher annual percentage yields (APY) than standard savings accounts. The APY depends on different factors like the bank you choose, any limitations it might have and your account balance. Here are a couple of examples of what the APY on a HYSA looks like at different banks:

A standard savings account has an average of 0.35% APY. The higher the APY and account balance, the more you could potentially save. This can make it easier to meet any goals you might have for your emergency fund.

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Besides choosing a high-yield savings account, it might also be wise to choose a different bank account from your normal bank. “Using another bank may help you to keep the emergency fund out of sight and out of mind so that you don’t use it for daily expenses,” said Zigmont. Plus, some banks have a welcome bonus or promotional offer for new customers that you could benefit from by opening an account with them.

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Other Types of Accounts for Your Emergency Fund

While a high-yield savings account is typically the best option for your emergency savings fund, there are other accounts to consider, too. Here are just a few.

Money market account

A money market account is similar to a savings account in that it often comes with a higher interest rate than a checking account. Most money market accounts also come with a debit card and the option of writing checks. This makes them more flexible than savings accounts, but also increases the risk of you spending the money you’re trying to save.

“Make [your emergency fund] accessible so that you can use it if necessary, but not so accessible that you might spend it when you shouldn’t,” said Meagan Dow, Senior Strategist, Advice and Guidance at Edward Jones. Keep the money in a separate account from your regular spending account. If the account comes with a debit card or checkbook, only use it for emergencies.

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Keep in mind that money market accounts sometimes come with fees. This includes account maintenance, ATM and annual fees. Compare different banks to see if there’s one that doesn’t charge these fees. “You want [your emergency fund] to be readily available without fees, penalties, or having to sell it at a discount,” said Dow.

Roth IRA

If you already have a fully established emergency fund, consider putting it in a Roth IRA — Individual Retirement Account. With a Roth IRA, your deposits are pre-taxed. This means you won’t have to pay taxes on your contributions when you withdraw them later. Roth IRAs also typically come with higher interest rates than traditional savings accounts.

However, these accounts come with certain limitations. For example, you can contribute a maximum of $6,000 (or $7,000 if you’re at least 50 years old) each year. If you contribute more than the maximum amount, you might end up being taxed.

You may also face a 10% early withdrawal penalty if you try to use the money before the age of 59 1/2 and your account is less than five years old. “The IRS does provide a few exceptions,” said Brian Hershman, Founder of BSH Accounting. “One being the ability to withdraw up to $10,000 for a first-time home purchase.”

Buying a home isn’t generally considered to be an emergency and the early withdrawal penalty can significantly cut into your account funds. Because of this, you may only want to use a Roth IRA for your emergency fund if you’re nearing 59 1/2 years old and want to take advantage of the higher interest rates.

Certificate of deposit (CD)

A certificate of deposit (CD) is a secure account that comes with a fixed, or guaranteed, rate of return. CDs also have a specific term — often anywhere from a few months to several years. Most CDs are FDIC-insured up to a specific amount — usually $250,000 — meaning your funds are protected against bank failure.

The main benefit of CDs is that they can help you generate more money over time. The downside is that you can’t withdraw the funds until after the CD has matured, or the term has ended. If you do, you may face an early withdrawal penalty.

You can get a CD from either a bank or a credit union. Each financial institution will have its own rates, terms and requirements, so shop around. Keep in mind that you might have to deposit a minimum amount to open a CD, which might not be doable if you’re just starting out with your emergency fund.

Best Way To Establish an Emergency Fund

If you haven’t started saving up for your emergency fund yet, here are some tips on getting started:

  • Start with small goals. Saving up three to six months of living expenses can feel overwhelming if you’re starting from scratch. That’s why it’s important to start with a more manageable savings goal and go from there. For example, you could start by saving up a week’s worth of expenses, or even two. Keep going until you have enough to feel comfortable.
  • Automate your contributions. If you’re using a high-yield savings account, you can link it to your checking account and set up automatic contributions. You could base these contributions on your paycheck or on a personal savings goal. “If you’re working, set up a direct deposit so part of your paycheck goes directly into your emergency fund,” added Dow.
  • Cut back on spending. Review your budget and see if there are any areas where you can reduce your spending. This could mean dining out a little less often or cutting back on unnecessary purchases at the grocery store. Take that extra money and deposit it directly into your emergency savings account.
  • Find more ways to save. “You can also save a portion of (or all) extra income, such as bonuses and tax refunds to stash away into your fund,” said Dow. “If you don’t have room to save, look for ways to reduce spending like canceling subscriptions you don’t use or shopping around for lower insurance costs (without sacrificing coverage).”
  • Monitor your progress and make adjustments. Check in on your account every couple of months to see how much you’ve saved up. Feel free to make changes based on your current financial situation.
  • Speak with a financial advisor. A financial advisor or credit counselor can help you establish a realistic budget and find more ways to save money. Even if you can only save a little, this can still keep you afloat if something comes up.

“Regardless of whether you can take small or big steps,” said Dow, “most of us can be making progress toward building confidence and financial security through an emergency fund.”

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About the Author

Angela Mae is a personal finance writer specializing in consumer loans, debt management, investing, retirement planning, and financial literacy. She comes from a journalistic background and pulls from hands-on experience and deep-dive research to breathe life into her stories. Her goal is to help others achieve financial stability and independence. When not writing, she can be found traveling, honing her yoga skills, hiking, or exploring new means of healthy, sustainable living.
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