Where You Should (and Shouldn’t) Keep Your Emergency Fund
As we said earlier , an emergency fund is a reserve of money set aside to cover unexpected expenses. Whether you suddenly have to get your car fixed, a medical bill, or a period of unemployment, you’ll be grateful you set aside funds for this purpose. But where exactly do you get these funds?
Stashing cash under your mattress may seem like an easy option, but there is a better option that will allow you to earn interest while keeping your funds safe and liquid.
Stuffing money under the mattress
(Or a shoebox, or a piggy bank – you get the idea.)
Pros : immediate access, no fees and minimum account size.
Cons : Zero interest, security risks, may be lost or destroyed.
While hiding money around the house seems like the easiest way to access it, it’s simply not a smart move. Your money will lose value over time due to inflation, and there is a risk of theft, fire, or simply losing track of where you hid those bills. An emergency fund should be safe, but also always available when you need it.
Traditional Savings Account
Pros : Fast access, FDIC insured, earns interest.
Cons : Very low interest rates, may have fees/minimums.
Savings accounts used to be a decent place to store funds for a rainy day. With easy access through your local branch or online transfers, they are highly liquid. And as long as your bank is FDIC insured, your money is safe. The downside these days is that most savings accounts pay interest rates of just 0.01%-0.05% per annum. So your money will grow very, very slowly over time. At least better than under the mattress!
High Yield Savings Account
Pros : Higher interest, still liquid, FDIC insured.
Cons : Must be compliant, rates may go down over time.
To earn more income without sacrificing access, consider opening a high-yield savings account online. Even though rates have dropped from their peak, you can still find accounts offering around 5% APY from reputable banks. Here’s our guide to choosing a high-yield savings account .
Money market account
Pros : Competitive interest rates, check writing, FDIC insurance.
Cons : May have high minimum balance and fees.
A money market account (MMA) is a way to earn higher interest rates than a regular savings account. MMAs are distinguished by the presence of checking account features such as debit cards and limited check writing rights. However, MMAs are not ideal for people starting out with little savings because they require a higher minimum balance than most savings accounts (typically $5,000 to $10,000).
Short term CDs
Pros : Higher interest rates than savings, low risk.
Cons : funds are less liquid, there are penalties for early withdrawal.
CDs are time-based and are typically offered for terms ranging from three months to five years. Longer terms mean higher interest rates. However, if you withdraw your money from the account before the specified time period, you will pay a penalty.
Bottom line
The key to building your emergency fund is finding the right balance between making a profit and keeping your money safe and accessible. While a high-yield savings account may be ideal for six to nine months of your full cash reserve , using a CD ladder or money market account for a portion can increase your earnings if you have enough liquidity. Just remember to review your rates and terms periodically, as the best accounts may change over time. But wherever you decide to keep your rainy day fund, be intentional about it, because money under your mattress won’t do you much good when you need it most.