Where Should You Keep Your Emergency Fund?

You’ve done the hard part and built a budget, stuck to the plan, and amassed some savings – now what?

Choosing where to store your emergency fund is a toughie. Does it belong in your checking account? Behind that pizza in the freezer? Should you just spend it and let your worries melt away? (That last one is a definite “no”). 

To help you decide, we’re laying out our top three picks for places to store your emergency fund. Ready to find the perfect digs for your dough? 

#1 Rule of Emergency Funds: Keep it Liquid!

While it may seem counterintuitive to keep a huge chunk of cash out of your investments, one of the most important aspects of an emergency fund is a little something called liquidity.

Liquidity is a measure of how available your money or assets are – how easy it would be to get ahold of that cash in the event that you need it. The cash in your wallet right now? That’s as liquid as it gets. The money you’ve put into purchasing and updating your home? That’s not very liquid, because you’d have to first sell the home (or liquidate it) in order to access those funds. The money in your 401(k)? Sure, it’s yours and you can grab it, but early withdrawals from retirement accounts come with a lot of penalties and tax implications. 

Emergency funds are intended to be used for emergencies, so you need the cash to be easily accessible – but that doesn’t mean you should start stuffing your mattress with cash. Your emergency stash can still work for you while being on call 24/7. 

The 3 Best Places to Keep Your Emergency Fund

Even though cash is the most obvious liquid form of savings, it’s likely not the best option. Other account types, such as high-yield savings accounts or CDs, offer a little more bang for your buck in the long run.

1. High-Yield Savings

If you have a savings account through your local bank, you’ve probably noticed those occasional deposits labeled “interest” popping up every now and again – that’s the money your bank pays you for keeping your cash in their hands.

But that interest rate, called an annual percentage yield (or APY) is likely next to nothing. In fact, the national APY right now sits at a measly 0.07%

But fear not! There is another, newer savings account type that is here to save the day: the high-yield savings account!

High-yield savings accounts are typically offered through online-only banks, such as Citibank or Ally. Since these banks don’t have brick and mortar locations, they’re able to use the money saved to offer higher APYs than traditional banks. 

Ally offers a whopping .90% APY, and Citibank offers a 1.01% APY – much higher than the national average. In the long run, you could earn a lot more interest just by switching to an online bank. It may not be the same as investing in the S&P 500 (which boasts an average return of about 10%) – but it’s a less risky way to still generate a bit of passive income. 

Of course, keep in mind that an online bank is slightly less liquid than a traditional bank – you can’t just pull up to the drive-thru to withdraw your funds. But if you’re okay with waiting a few days to access your emergency fund, then a high-yield savings account might be the best option for you. 

2. Certificates of Deposit (CDs)

It’s time to talk CDs – and not the ones you were burning in your mom’s basement in the 90s. 

Certificates of Deposit, aka CDs, are another way to boost your interest rate. Offered through banks and credit unions, a CD is basically an agreement between you and the issuer: you promise to not touch the money for a certain amount of time, and they give you an APY boost in return. The end date of the agreement is referred to as the “maturity date.”

The good and bad on CDs: Along with higher interest rates, a CD can give you a little extra motivation to leave your savings untouched. That’s because CDs incur penalties if you withdraw your funds before the maturity date. While some banks make allowances in the event of an emergency, you’ll want to be clear on what exactly counts as an “emergency” before you sign on the dotted line. Scraping together this month’s rent probably isn’t on the list. 

Generally seen as a safer investment, CDs do offer lower return potential than investments like stocks and bonds – but they also offer more peace of mind. The interest rate is fixed, so unlike the stock market, you’ll know exactly how much money you’re going to receive at the end date. For example, a 5-year CD currently has an average interest rate of .51% 

Pretty much every financial institution offers some assortment of CDs, so you can shop around to find your perfect match. Inquire about lengths of time, APYs, and terms of early withdrawal to find the CD that best matches your emergency fund needs.

3. Roth IRA

A Roth Individual Retirement Account, or Roth IRA, is an account generally reserved for long-term retirement planning. This type of account is the riskiest of the three options, but also offers the most earning potential as far as passively growing your savings. 

It’s risky because you’re investing in the stock market, and there’s always the chance that as the market loses value, your funds will also whittle away. However, with more conservative investments, past market performance tells us that in the long run your Roth IRA has a better chance of keeping up with inflation rates than a savings account or CD. 

The best part of a Roth IRA? You can withdraw your contributions tax-free at any time without penalty (heck yeah!). The caveat is that your contributions are taxed when you add the money to the account – and there are also tax implications and penalties associated with withdrawing any earnings before your retirement. So if you contributed $12,000 to your emergency fund and it’s grown to $15,000, you’re in the clear as long as you leave that extra $3k in earnings alone. 

Another important thing to remember is that there are contribution limits. In 2022, the cap is $6,000 per year for those under the age of 50 and $7,000 per year for those over the age threshold. 

And there you have it: three great options for storing your emergency savings, all with unique benefits to fit your needs and grow your funds. 

Still not sure which option is right for you? You can always ask an expert. Connect with a financial advisor to get personalized advice and stash your cash with confidence. 

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