Best Places To Keep Your Emergency Fund (2024)

Chances are you’ve faced events or obstacles in life that could be categorized as emergencies. These are events that catch you off guard and usually have financial ramifications. An emergency can be as simple as having a furnace break down, or it can be a health issue that turns your world upside down.

While we can’t predict the next emergency, we can prepare for it. Creating an emergency fund is the ideal way to deal with the potential financial consequences of emergencies.

What’s the best place to keep your emergency fund? While you can just open a new account at your local or online bank, there are other options to consider.

What Is an Emergency Fund?

An emergency fund is money set apart from other savings. It’s there to help you deal with the unexpected events of life. An emergency can be an unpredictable expense, or it can take the form of an unexpected loss of income, such as having to change jobs or not receiving a bonus you were counting on.

The word “emergency” evokes different images depending on who you are. But an emergency fund should be used only for true emergencies. It’s not a backup cash account or vacation fund.

If you get into a car accident, that can create an emergency need for funds. Or emergencies could be unexpected hospital visits, home repairs, losing your job or a death in the family. The bottom line? Emergencies aren’t selective. They happen to everyone.

Why Is It Important To Have an Emergency Fund?

Life is full of surprises, and being prepared for emergencies lets you stay in charge of your finances without affecting your budget.

Emergencies can often take a physical, mental and emotional toll, and suffering a financial impact on top of that can make the situation even more stressful. Having a designated fund for the unexpected can also prevent you from having to take out a high-interest loan to cover unforeseen expenses.

An emergency fund separate from a savings account allows for better decision making when you have an unplanned item you want to purchase—it removes some of the “Should I or shouldn’t I” shopping dilemmas. If you already have a working budget, a savings account and money set aside for emergencies, you’ll have peace of mind and the ability to indulge from time to time.

How Much Emergency Fund Should I Have?

If you’re wondering about a key question—How much emergency money do I need?—most experts recommend keeping an amount to cover three to six months of living expenses, particularly in case of a job loss.

Those living expenses don’t include dining out, entertainment, etc. What are your must-haves? Look at the basics, such as housing, auto, phone, insurance, groceries, credit card minimum payments and basic utilities.

Also, do you own a home or car that continues to need repairs? Do you engage in sports or recreation that could lead to injury? Do you have pets or kids who sometimes get into mischief? Then you may want to pad the account a bit.

A general emergency fund can cover many unexpected expenses. And when you dip into it, you simply rebuild.

Where Should I Keep My Emergency Fund?

It’s best to keep your emergency fund separate from your other bank accounts. You want your emergency fund to be accessible in case you need to access it quickly—but not so convenient that you’re tempted to dip into it unnecessarily. You want to have a “set it and forget it” mentality when it comes to this account.

Here are some of the best options for where to keep an emergency fund.

1. High-Yield Savings Account

Opening a high-yield savings account to start an emergency fund makes a lot of sense. Almost all high-yield accounts are found at online banks. However, you can’t go to a brick-and-mortar bank location to withdraw funds. You’ll need the use of another bank account for transferring money in and out of your high-yield savings account. This could create a delay in receiving funds when an emergency arises.

With that said, a high-yield savings account is still reasonably accessible and allows you to receive a higher interest rate than a traditional savings account. Leading high-yield accounts earn between more than 2.00% annual percentage yield (APY), depending on the size of your account and other factors.

A number of online banks offer high-yield savings accounts. It’s important to look at rates when you open an online savings account, and also to pay attention to any fees, other perks offered and rules concerning withdrawals.

2. Money Market Account

Money market accounts are similar to high-yield savings accounts. While both earn a higher APY than traditional bank accounts, they are different in other ways. Money market accounts sometimes come with a debit card and check-writing capabilities, making them more convenient, especially in a pinch.

Another difference, which could affect your decision on where to keep your money, is that money market accounts generally require a larger minimum deposit to open an account. Some banks have tiered interest rates based on account balances.

You can open a money market account at most local banks, as well as at online banks. You may find higher rates online. Online banks can offer better rates because they don’t have all the overhead costs that traditional banks face. Whichever you choose, be sure you understand how to access your funds in a hurry, if necessary.

As with savings accounts, federal law has limited the number of withdrawals or transfers you can make from a money market account to six per month. Even though this Regulation D requirement was modified in 2020, you’re likely to face a fee from your bank or credit union if you exceed this limit. However, if your money market account is being used only in case of emergency, this shouldn’t be an issue.

3. Certificate of Deposit

Certificates of deposit (CDs) are another possibility for your emergency fund. They are different from other options on this list because they require you to keep your money in the account for a specific period of time in exchange for receiving a guaranteed rate of return.

A CD’s “term” can be as short as a month or as long as five or more years. Once it ends, you can access your initial funds and any interest you earned. CDs typically earn a higher interest rate than other bank accounts.

Earning a higher APY is great, but there is some risk with having your emergency fund tied up in a CD. What if you face an emergency before your CD has fully matured? You can still withdraw money from a CD during this time, but in most cases, you’ll have to pay an early withdrawal penalty. Some banks charge a flat fee, while others may charge a percentage of the interest earned on your CD.

Paying a fee isn’t ideal and can defeat the purpose of choosing an account that earns higher interest. In a way, it’s like gambling on whether you’ll face any emergencies during that time period. There are a few no-penalty CDs, but you’ll need to read the fine print to be sure that the no-penalty feature isn’t tied to a specific circ*mstance like losing your job.

One way around this is to create what’s called a CD ladder. This involves rolling over several CDs of varying term lengths. Doing this allows you to earn at a higher rate while leaving some of your emergency fund accessible. You could have one CD with a three-month term, another with 12 months, another with 18 months, and so on.

Individuals can open a CD account at almost any bank. There also are online banks that offer CDs with more favorable rates or better term options. Some CDs have minimum deposit requirements, while others don’t.

4. Traditional Bank Account

If the idea of keeping your money in an online account or tied up for an extended time doesn’t sound ideal, you can always keep your emergency fund in a traditional checking or savings account with a brick-and-mortar bank. You won’t earn as much interest, but you have the peace of mind that comes from knowing you can access your funds almost immediately at any time.

One risk with this strategy is that keeping your emergency fund in a traditional bank account could lead to your withdrawing money when it’s not truly an emergency.

To combat this, you could open an account at a different bank from your other checking and savings accounts. This can at least add a degree of difficulty that may help keep you from pulling funds out when you’re not facing a real emergency.

5. Roth Individual Retirement Account

There is a case to be made for putting money into an investment account instead of keeping a more conventional emergency fund. Even bank accounts that earn high-yield interest won’t keep up with rising inflation. Investing your money in a Roth IRAwould probably earn more money in the long run.

There is a risk to keeping your emergency fund in a Roth IRA because it could lose value. Choosing more conservative investment options can help lessen the risk of loss.

You can withdraw your contributions from your Roth IRA at any time with no penalty. There may be tax implications and early withdrawal penalties for withdrawing earnings.

How To Build an Emergency Fund?

Building an emergency fund is part of creating a functional budget. It becomes its own line item that you put money toward. Unless you receive an unexpected bonus, extra large commission or inheritance, you’ll likely have to build your account gradually over time. The good news is that this “expense” doesn’t last forever. Once you’ve hit your goal, you’re all set. That is—until an emergency strikes.

As for how to build an emergency fund, it’s pretty simple:

1. Set a total dollar-amount goal for your fund.
2. Determine how much you’re able to set aside each month.
3. Transfer your monthly contribution to the emergency fund on a set date each month. Treat it like any other monthly expense. You can even put your emergency fund on autopilot by setting up automatic transfers from your checking account or asking your employer to send a portion of every paycheck to the account.

Once you reach your goal, you can then reallocate your monthly contribution to other expenses or deposit it into your savings account. And if the day comes when you need to use your fund, you simply rebuild it by following the same steps.

How To Use Your Emergency Fund

If and when an emergency strikes, you can transfer money from your emergency fund to your checking account—or withdraw it at a branch—then spend it the same way you typically make purchases and payments.

But depending on the type of emergency, you might not be able to transfer funds or visit a bank branch. If you find yourself in a situation that requires immediate payment, use a credit card, then pay off the balance with your emergency fund as soon as possible to avoid interest fees.

Bottom Line

An emergency fund can help you gain more control over your finances, contribute to your financial freedom and provide peace of mind. The best time to start building an account is when you’re not in the middle of an emergency, and you can adjust your goal as needed.

Frequently Asked Questions (FAQs)