Interest rates are up — no, wait, now they’re down. Bonds are great until they’re not. Banks are safe — or are they? There’s a lot going on these days, and you may be wondering where to keep your emergency funds.
Here’s what you need to know.
Where Should You Keep an 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 to you 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 account you choose for your emergency fund is insured by the full faith and credit of the United States Government. There are two agencies that 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 will make sure 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 held in a regular savings account, plus another $250,000 that’s held in a joint account. If you have more than these limits, spread your money around to different banks or credit unions.
Online Bank 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 in a hurry. The best savings rates are typically offered by online-only banks, simply because they don’t have the expenses associated with brick-and-mortar banks.
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’ll get a better rate.
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.
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. Just be sure to shop around for the best rate, and don’t let fees eat up your earnings.
Avoid Keeping Your Emergency Fund in These Places
It’s tempting to want to grow your emergency fund faster, but that means taking on risk or giving up liquidity. Since you need to have this money available to you at any time in case of an emergency, you can’t take much risk, and you can’t lock your money up. For this reason, there are several places you don’t want to keep your emergency fund.
The Stock Market
Do not 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 to have an emergency just after a market downturn when your emergency fund will now last just four months instead of six. Don’t put your emergency fund in the stock market.
Bonds are certainly less volatile than stocks, but they require that you invest your money for a fixed period of time. You can buy Treasury bills — one type of bond — for as little as four weeks, but there are some emergencies that won’t even wait that long.
Stay away from bonds for your emergency fund.
People joke about keeping their money in the mattress so they don’t lose any of it in the stock market. If you keep your emergency fund in cash at home, you may think you’re protecting it from loss, but the truth is that inflation erodes your buying power.
So 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 I 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 all of 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 are 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 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 just starting out, or if your current expenses are eating up just about all of your paycheck, the prospect of trying to save 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.
There are two ways to build your emergency fund: spend less and earn more.
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 start to grow, you’ll be more motivated to find other places where you can cut back.
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 that you can do outside your regular job? Do you have items around the house you no longer use that you could sell? There are lots 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. And 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.
Creating an emergency fund should be one of the first steps you take 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.
- Where should an emergency fund be kept during high inflation?
- Your best option for storing your emergency fund during times of high inflation is a high-yield savings account. It might not entirely keep up with inflation, but you'll still have quick access to the money if you need it, and it won't fall as far behind as a lower-yield account or just keeping cash.
- You'll probably find the best rate on a savings account at an online bank, but you might consider a money market account, as well.
- You'll see higher rates with a certificate of deposit, but even short-term CDs require you to lock down your funds for a specified time period, so if you do opt for a CD, look for a no-penalty option in case you need to withdraw before the end of the term.
- Where can I put my money instead of a bank?
- The safest option for your emergency fund is an account with a bank or credit union.
- However, if you're looking for an option for regular savings that you won't need quick access to, consider investing in mutual funds or ETFs.