Best Place for Emergency Funds
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Hooray! You have started on your journey putting away money into the emergency fund bucket. Now, your question is – “What is the best place for my emergency funds?” This is a very logical question. It must be in an account that is FDIC insured up to $250,000, secure, readily available, and earning interest. Stock and bond market is not the place to park your emergency funds.
Access to Emergency Funds
You must place your emergency funds where it is just slightly difficult to access. If you have easy access to it, you might feel tempted to use it for something else. Here is where “out of sight, out of mind” works in your favor.
If you have your checking account in your local area bank, I would suggest placing your emergency funds in a savings account in another online bank.
If at all you need the money, you could do an Electronic Fund Transfer (EFT) online and move the money from an online bank to your local bank and use it.
Now let us see what your choices are:
#1 Savings Account or Money Market Account
The easiest route would be to place your emergency funds in an interest bearing Savings Account like Discover Online Savings, which provides a 0.95% APY at the time of this writing, or any other bank of your choice.
#2 No Penalty CD
Typically, banks have a penalty for early withdrawal on Certificates of Deposits (CD’s). You could place your emergency funds in No Penalty CDs – banks like Discover and Ally Bank have this feature. You might be able to earn a little more interest than a regular savings account.
#3 CD Laddering
For example, if you have saved 6 months worth of living expenses, you could split it evenly, and invest in 6 CD’s with different maturity dates. You could set it up in such a way that you will have each CD maturing every 30 days consecutively. This option maximizes your yield. To learn more, please read my post on how CD Laddering works and how you can maximize your yields.
A Note on Inflation
An important thing to note is that you should not keep anything more than the intended reserve (3 / 6 / 12 month) of emergency funds in any of these accounts. Rest of your money should be invested. Inflation has historically averaged about 3%. Today, the best savings account provides about 1% APY. That means, you are essentially losing money to inflation in today’s market interest rates. However, that shouldn’t stop you from keeping money in a savings account, because it is truly meant for emergencies.
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