The 6 best places to put your emergency fund

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An emergency fund is the foundation of your financial plan, as it can prevent you from taking on debt when unexpected expenses arise.

But, according to a Bankrate survey, 48% of Americans have enough to cover three to six months’ worth of expenses. Around 1 in 5 have no emergency savings at all.

If you don’t want to be part of this statistic, it’s time to start building your emergency fund. But where should you keep this money? While you could keep it in your checking account, there are better places to put your emergency savings. Here are six alternatives.

1. Traditional savings account

A traditional savings account is one of the most accessible places to keep your emergency fund. Chances are your bank offers one of these accounts.

The most significant benefit of these accounts is your money is very safe and highly liquid. Most banks and credit unions are FDIC-insured for up to $250,000 per person, per account. Plus, if you have a savings and checking account at the same bank, you can transfer money in a pinch in seconds.

Most traditional savings accounts come with meager interest rates, around 0.01%. So, while these accounts are a reliable option, they might not be the most lucrative in terms of long-term growth. There are often better savings alternatives out there.

Some accounts may have minimum balance requirements or charge a monthly service fee.

2. High-yield savings account

When it comes to emergency funds, accessibility is critical. A high-yield savings account offers easy access to your money and high interest rates.

Online banks often offer these accounts, meaning lower overhead costs and higher rates compared to traditional brick-and-mortar banks. Despite this, high-yield savings accounts are also almost always FDIC-insured.

The best high-yield savings accounts boast interest rates as high as 5%.

You can easily withdraw or deposit money by connecting your high-yield account to an external account. Remember that these accounts may limit the number of withdrawals you can make each month.

Some high-yield savings accounts require a minimum deposit to earn the highest yield. It's crucial to compare rates and fees across different banks to ensure you're getting the best deal.

3. Money market account

Like a high-yield savings account, a money market account offers competitive interest rates and easy access to your money.

It's an excellent option for those who want a higher return on their emergency cash while getting more flexibility with their money. Money market accounts often come with check-writing or debit card privileges, making them convenient for scenarios where you need quick access to your funds.

Traditional banks, online banks, credit unions, and brokerage firms offer money market accounts. These accounts are generally safe but may have a minimum balance requirement and limited withdrawal options.

4. Money market fund

For those willing to take on a bit more risk, a money market fund can be appealing. These funds invest in short-term debt securities and aim to provide higher yields than traditional savings accounts.

It’s important to note that the FDIC does not insure money market funds, and their value can fluctuate. They can be a suitable option if you're comfortable with a bit of volatility in exchange for potential higher returns.

“While these funds are technically not risk-free, they’re about as close as you can get, investing in short-term instruments from high-quality companies,” says Chris Diodato, a certified financial planner and founder of WELLth. He adds that the rates on these accounts are usually higher than traditional and high-yield savings accounts.

The only downside of these accounts is that it may still take a couple of days to access your money, Diodato says, as you’ll need to transfer it from the fund to an external bank account.

5. Certificates of deposit (CD)

Certificates of deposit (CDs) are accounts that require you to deposit your money for a set period, typically three months to five years. Once you deposit your money into a CD, it's locked in for the term, and early withdrawal may result in penalties.

But CDs can have several advantages. For one, they have some of the highest rates you’ll find. Rates are also fixed, meaning they won’t change for the entire term. This can allow you to lock in a high yield when interest rates are high.

CDs are also considered very low risk and are FDIC-insured.

The biggest downside with CDs is that it’s difficult to access your money before the end of the term. There are some no-penalty CDs available, but they often have lower rates.

6. Treasury bills or bonds

Treasury bills and bonds are government debt issued by the U.S. Treasury. These securities are backed by the full faith and credit of the U.S. government, making them very low-risk investments.

Treasury bills have short-term maturities, typically between four weeks and one year. Treasury bonds have longer maturities, often around 30 years.

If you have a Treasury bond with a long term, you can also sell them on the open market, which is very active. Most treasuries offer high liquidity, so getting your money early shouldn’t be an issue.

Treasury bills are also exempt from state income tax, says Diodato, making them a good deal if you like in a high-tax state.

It’s important to note that the returns on these investments are generally lower than other options. Investing can also take more work than putting money in a savings account, as you have to go through TreasuryDirect or a brokerage.

What to consider when choosing a place to put your emergency savings

When choosing an account to store your emergency savings, there are several factors to consider:

• Safety: Prioritize the safety of your funds. Consider options with FDIC insurance, which helps safeguard your savings. This will ensure your money will be there when you need it.
• Liquidity: Emergency savings should be readily accessible. Having at least some savings you can access quickly with no penalties or delay is essential.
• Interest rates: While the primary purpose of your emergency fund is to offer security, it's worth considering options that offer a return. Look for accounts with a competitive interest rate to ensure your savings keep pace with inflation over time.
• Fees and minimums: Some accounts may charge monthly fees or require a minimum balance to earn the highest interest rate. If possible, look for accounts that don’t have these caveats.

The bottom line

An emergency fund is meant to provide financial security during unexpected times. It's essential to strike a balance between accessibility and growth.

When choosing an account for your emergency fund, the key is to align your financial goals and risk tolerance. By evaluating your options, you can be sure that your emergency fund is in the right place, ready to support you when you need it most.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.