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Where to Keep Your Emergency Fund

We should all have some emergency money set aside. But “under the mattress” isn’t a good place to keep your funds. Here’s where to stash your emergency fund.

March 7, 2022

Standard financial advice dictates that we should all have an emergency fund. 

Use This fund for unexpected expenses, like a major car repair or an unforeseen event, such as a job loss. 

Emergency funds are important and can help people avoid many of the most common financial problems.

But where should you keep this money? This article explains where to keep emergency fund savings. 

Emergency fund basics

An emergency fund is money set aside to cover emergency expenses. They’re frequently used for car repairs, medical bills and necessary expenses in the case of a loss of income. 

Many financial experts recommend having three to six months of expenses set aside for your emergency fund. 

So if your household expenses are $4,000 per month, you should have $12,000 to $24,000 in your emergency fund. 

Of course, this isn’t attainable for many — nearly 70% of Americans have less than $1,000 stashed in their bank accounts. 

But here’s the good news: any emergency savings set aside is better than nothing. So even if you can only set aside a few hundred dollars, that’s a great place to start.

Once you figure out how much you need to save, it’s time to decide where to keep emergency fund savings. 

Where to keep emergency fund: 5 top options

You want to keep emergency savings liquid, which means easily accessible. In the case of an emergency, you want to be able to access your funds right away — or at least within a few days. 

For this reason, you don’t want to invest all of your emergency fund, as you could be forced to sell at a loss. 

In most cases, the smartest place to keep emergency savings is in a simple savings account. But there are different types of savings accounts, each with pros and cons. Here’s an overview of some top options for keeping emergency funds.

High-yield savings account

A high-yield savings account is a savings account offered by certain online banks. It functions similarly to a standard savings account but pays considerably more in interest. 

 Advantages: 

  • You can transfer money to and from your existing checking account

  • Pays interest

  • It’s “out of sight, out of mind,” making it easier to save this money for true emergencies

Disadvantages: 

  • Requires opening a new account

Traditional savings account

A traditional savings account is a basic savings account available from any bank or credit union. You likely already have one of these savings accounts connected to your checking account. 

Advantages: 

  • Tied to your existing checking account

  • Simple

Disadvantages: 

  • Pays very little interest (if any)

  • It can be easier to spend the money on non-emergency expenses since it’s so easily accessible

Money market account

A money market account is like a hybrid checking and savings account. It pays more interest than a standard checking account, but you can still write checks and make payments from it. 

 Advantages: 

  • Can be used as a hybrid savings/checking account

  • Pays some interest

Disadvantages: 

  • Pays less interest than a high-yield savings account 

  • Requires opening a separate account

Certificate of Deposit (CD)

A certificate of deposit (CD) is a financial product where you deposit money for a set period, in exchange for a higher-than-average interest rate. For instance, you could get a 6-month CD which would lock your money up for six months but would pay you more interest than you’d get in a standard bank account. 

Advantages: 

  • Pays higher interest rates than many options

  • Available in a range of lengths (3-months, 6-months, 12-months, etc.)

Disadvantages: 

  • Money is more difficult to access

  • There may be fees for early withdrawals

Cash

Having some actual cash on hand can prove useful in times of true emergencies. While it’s not ideal to keep all of your emergency funds in cash, it may be wise to have at least a few hundred dollars on hand somewhere safe. 

In certain situations — such as a natural disaster — power systems may be temporarily offline. In this case, debit and credit cards may not work temporarily. To be able to stock up on necessities in a true emergency, you’ll want to have some cash on hand. 

Consider putting together a financial “go bag” for emergencies and including some actual cash in your bag. 

 Advantages: 

  • Beneficial in natural disasters and significant emergencies

  • Cash is accepted everywhere

Disadvantages: 

  • Pays no interest

  • Risk of loss or damage to the cash

Advanced strategies for where to keep emergency fund savings

For most, keeping emergency money in a high-yield savings account will be the right fit.

This simple approach will still earn you interest and will keep your money easily accessible. But some people may choose a more advanced emergency savings category in addition to one of the above solutions. 

Brokerage account 

You could keep your funds in a standard brokerage account and invest your money. This way, your money can grow over time. But, there’s always the risk of losing money or being forced to sell when the market is down. To mitigate this risk, you could opt for more conservative investments, like bonds. 

Roth IRA 

Roth IRAs are a type of retirement account with substantial tax benefits. The unique thing about the Roth is that you can withdraw your contributions at any time, without penalty. The profits from your investments may be subject to tax and penalties if you withdraw early — but the original amounts you contributed can be withdrawn at any time. 

You could theoretically invest in a Roth IRA, and if an emergency strikes, you could sell some investments and withdraw up to the amount you have contributed. If you don’t have any major emergencies, you can simply leave the funds invested. Again, this is a more risky strategy. 

If you’re interested in an advanced strategy on top of a traditional emergency fund, consult with a financial planner to ensure it’s the right fit. 

One of the biggest reasons to have an emergency fund is to avoid going into debt should an emergency strike. 

If you have existing debt, paying it off should be a priority. Tally† may be able to help. Tally is a credit card payoff app offering a lower-interest line of credit, that helps qualifying applicants get out of credit card debt faster. 

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