Where to keep an emergency fund

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In a Nutshell

When setting aside money for your emergency fund, it’s important to put your money in low-risk accounts where it can easily be accessed if you need it. There are a variety of good options available. Select the one that’s right for you and get saving.
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There are many secure places to keep your emergency fund that provide easy access to your money when you need it.

Because an emergency fund is meant to be a safety net that protects you when something unexpected occurs, it’s not a good idea to put your rainy-day funds in high-risk investments that could sustain large losses. After all, it doesn’t matter how much money you’ve saved today if it’s not available tomorrow.

Instead, opt for low-risk accounts with minimal fees that won’t charge you a penalty when you need to withdraw your money. Here are four options you may want to consider.

High-yield savings account

Putting your emergency fund in a savings account is better than keeping it under your mattress, but the average interest rate on a savings account is around 0.09%, according to the FDIC. While your emergency fund isn’t meant to be an investment, chances are you want it to earn as much interest as possible while keeping your money safe.

If you do choose to keep your emergency cash in a savings account, look for one with higher yields. Some offer rates of 2% or more. Check with your local bank or credit union, but don’t forget to look at online banks as well. Since online banks don’t maintain a network of brick-and-mortar branches, they often have higher interest rates on deposit accounts than traditional banks.

Before opening an account, find out what the fees and minimum balance requirements are. They vary among financial institutions. And you want to make sure the interest you earn offsets whatever fees you’ll be charged. If not, you may be better off selecting an account with a lower rate but fewer fees.

If you do have an emergency, you likely won’t be able to pay for it with money from a savings account by writing a check or using a debit card. Consider opening a checking account where you have your high-yield savings account, so you can easily transfer money to the checking account when you need to pay for emergency expenses.

Money market account

Money market accounts are another way you can keep your emergency fund secure. You earn interest on your deposits like you do with a savings account, but you also have the check-writing and debit card capabilities of a checking account, making it easy to pay for sudden expenses.

Typically, money markets have higher minimum balance requirements and interest rates than many savings accounts. But in the current environment, you can probably find high-yield savings accounts with higher rates.

Some banks and credit unions offer tiered money market accounts, which means the interest you earn varies based on the balance in the account with a larger balance receiving a higher interest rate. But money market accounts typically have fees attached to them, so be sure to find out what they are before you open one.

Certificate of deposit

A third option is a CD, or certificate of deposit. They often have higher rates than savings and money market accounts, but many have early-withdrawal penalties, which means you can be charged a fee if you withdraw your money before the end of the CD’s term.

Since it’s impossible to predict when you might need to use the money in your emergency fund, you may not want to put all your money in a CD unless there are no early-withdrawal penalties. If you do choose this type of account, consider creating a CD ladder, where you purchase multiple CDs with different term, or “maturity,” dates. This way, you can access some of your money without having to lose some or all of the interest you earned.

CDs typically have higher minimum-deposit requirements than savings accounts. And they may not be as convenient as a money market, because if you need the money from your CD, you’ll have to work with your bank or credit union to cash it out.

Treasury bills

A final, lesser-known alternative you may want to consider is purchasing Treasury bills, also known as T-bills. Treasury bills are short-term debt obligations of the U.S. government. Typically, you buy them for less than face value, and then sell them at face value when they mature. The difference between the amount you pay to buy them and the amount they reach at maturity is the interest you earn.

Certain Treasury bills are auctioned on a weekly basis, and the discount rate at which you buy them is determined at auction. They’re available in increments of $100 and come in terms of maturity of a few days to one year. You can purchase T-bills through TreasuryDirect, banks or a broker. After you buy them, the bills are issued to you electronically.

Although interest is only paid at maturity, you can sell Treasury bills before they mature if you really need the cash quickly.


Are Treasury bills insured by the FDIC?

Unlike money you deposit in a savings, money market or CD account at an insured institution, Treasury bills are not insured by the FDIC (or NCUA if your account is with a credit union). But they are backed by the full faith and credit of the U.S. government.

Bottom line

To keep your emergency fund secure, avoid placing your rainy-day savings in high-risk investments like the stock market. Instead, opt for low-risk alternatives that offer a guaranteed return without jeopardizing your hard-earned money. Having the extra funds available during emergencies can help you pay for unplanned expenses and preserve your financial health.

About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Towson University. She’s committed… Read more.