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Where to Keep Your Emergency Fund to Protect It From Inflation

You’ve got your emergency fund all saved up, but now where should you keep it?

Justin Cupler

Contributing Writer at Tally

November 29, 2022

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

Inflation can quickly reduce the purchasing power of your money, including your emergency savings. That’s why building an emergency fund large enough to cover three to six months’ worth of living expenses should be a key personal finance goal. Having an emergency fund ensures you can cover your bills and monthly expenses in the event of an emergency, like unexpected job loss, home repairs or car repairs.

But once you build your savings, what happens if inflation hits? Below, we look at all the options of where to keep your emergency fund to ensure it’s safe and growing so it counters inflation and remains accessible. Read on to learn more.

Where to keep your emergency fund

You can choose a wide range of places to keep your emergency fund. These range from extremely secure and easy to access with lower interest rates to high risk with the potential for a high return. Which is best for keeping your emergency fund safe and growing in the face of inflation? We cover the top five places to keep your emergency fund.

1. High-yield savings account (HYSA)

HYSAs are one of the best options when figuring out where to keep your emergency fund because they offer a high annual percentage yield (APY) and easy access to your funds.

As of October 2022, both Discover and Ally Bank offer 2.35% APYs on their online savings accounts. Plus, these are truly set-and-forget accounts. You deposit your emergency fund and watch as its balance grows. HYSAs, like others on this list, have adjustable interest rates that tend to mimic the federal funds rate. As the Fed raises interest rates, the annual percentage yield on an HYSA will increase, helping to counter inflation. 

And as long as you have a checking account at the same bank as your HYSA, transferring funds between the accounts is quick and easy. So, if you need $1,000 from your emergency fund today, you have peace of mind knowing you can transfer it online to your checking account and get immediate access to it in a financial emergency.

Keep in mind that federal law limits you to six transactions per month from a savings account without a penalty. After the sixth transaction in a month, you may incur an excessive transaction fee. Also, these accounts generally have no debit card or check-writing ability.

2. Money market account

Money market accounts are savings accounts that sometimes include a debit card and check-writing abilities, making your money more accessible if unexpected expenses come up.

Another upside to storing your emergency fund in a money market account is it generally has a higher interest rate compared to a traditional bank account. Most banks will have tiered interest rates depending on your minimum balance. On average, these percentages are as follows:

  • $2,500: 0.17%

  • $10,000: 0.20%

  • $25,000: 0.24%

  • $50,000: 0.28%

That said, if you go to an online bank, they often offer even higher APYs. For example, Ally Bank offers 2.35%, and Discover offers 2.25% to 2.30%. Like CDs, banks will adjust money market rates with the federal funds rate, helping protect your savings from inflation. 

Keep in mind, though, a money market account has the same monthly six-transaction limit before you incur an excessive transaction fee. Plus, there’s usually a minimum deposit requirement.

3. Certificate of Deposit (CD)

A CD is another option when wondering where to keep an emergency fund. There are a range of CDs available at financial institutions, and each one has a different maturity period, which is the amount of time you’re required to leave the cash in the CD without incurring an early withdrawal penalty. The longer the maturity term, the higher the guaranteed APY typically is.

CD maturity terms can range from as short as a month to five or more years. After the term ends, you receive your principal balance and the earned interest. Then, you’re free to spend the cash or reinvest in another CD to compound the interest.

You might also consider building a CD ladder with your funds. A CD ladder is when you invest in several CDs with varying terms to maximize interest while maintaining liquidity and accessibility. 

CD rates tend to be higher at online banks because they lack the overhead of brick-and-mortar establishments. At an online bank, the average APY on various CDs as of October 2022 are as follows:

  • Three months: 1.2%

  • Six months: 2%

  • One year: 3.6%

  • Three years: 3.5%

  • Five years: 3.5%

Banks will adjust CD rates with the federal funds rate — the rate at which banks lend each other money overnight — which the Fed raises to help stave off inflation. So, as the purchasing power falls due to inflation, the interest you earn increases to offset this. 

The big downside to a CD is if an emergency strikes before the maturity term ends, you will likely pay a penalty to withdraw from it. This fee varies by bank, but it can be either a fixed cost or a percentage of the interest you earned.

4. Series I savings bonds

A Series I savings bond is like many other bonds, but it has a longer maturity period. Generally, it has a 30-year final maturity period, which combines a 20-year original maturity period and a 10-year extended maturity period. For your commitment, these bonds reward you with high interest rates. As of November 2022, the Series I bond rate is 6.89%, and the rate adjusts every May 1 and November 1 for inflation. 

The big downside to a bond is its accessibility. You must wait at least 12 months before you can cash in a bond. And if you cash it in before five years, you lose the preceding three months’ worth of interest. For example, if you cash in a bond at 24 months, you can keep only 21 months’ worth of interest. 

You can buy an electronic I bond for as little as $25 and up to any amount down to the penny. Paper I bonds are available in five denominations: $50, $100, $200, $500 and $1,000.


5. Roth individual retirement account (IRA)

A Roth IRA is typically something you use for long-term investing. However, because it lacks the tax benefits of a 401(k) and traditional IRA, it’s possible to use one to store a portion of your emergency fund. 

The limited short-term tax benefits mean you can withdraw your contributions without early withdrawal penalties. Keep in mind, though, if you make an early withdrawal of your IRA earnings, you may be subject to income tax and penalties.

The biggest benefit to an IRA is it will generally offer high returns. On average, you’ll see a 7% to 10% rate of return on a Roth IRA. On the flip side, these accounts aren’t FDIC insured and returns are based on the stock market, so there’s also the potential to lose a portion or all of your initial investment.

Putting your emergency fund in a Roth IRA also means there is a relatively long process you must go through to withdraw it. You often have to wait several days or longer for a withdrawal request to go through and to receive the transfer or paper check.

Another issue is that an IRA is tied to the stock market. Generally, when inflation hits and the Federal Reserve raises interest rates, businesses tend to borrow less. This often results in more volatility, making an IRA one of the least desirable options unless you invest only in bonds. 

Make your emergency fund work for you behind the scenes

If you're wondering where to keep an emergency fund to protect you from inflation, it’s crucial to ensure it’s deposited in an interest-bearing account so it grows during the time it's less liquid. This can be an HYSA, money market account, CD, Roth IRA or even Series I bonds. Weigh the pros and cons of each and find the account that works best for you and your financial goals.

Are credit card payments standing in the way of you building a sufficient emergency fund? Check out the Tally† credit card repayment app. Our app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.