Yes, You Need OneCOVID really be out here proving we all need emergency funds. In case of, you know, pandemics.
How Do You Start?Most of us don’t have thousands laying around. Luckily, you don’t need big $$$ to start an emergency fund.
Start Small and DiversifyTired of starting an emergency fund only to drain it again? There IS a better way.
So you’re finally building up an emergency. *wipes a tear* We’re so proud of you.
If you’re asking yourself “where should I keep my emergency fund,” your gut reaction may be to throw it into a regular savings account at your bank. While this might be the best option for some, it’s a good idea to look at your different options. You want to save money, sure. But wouldn’t you also like to earn money on that savings? (Idk why your answer would be no…)
You might think that opening a Roth IRA or something similar is the best option, but that basically puts your money out of reach for decades — which isn’t the point of an emergency fund. An emergency fund is supposed to be at least semi-accessible, but not so accessible that you end up draining it whenever you decide you need a new pair of sneakers.
Instead, here’s a little run down of your best options and their pros and cons so you can decide what’s best for you.
Where Should I Keep My Emergency Fund?
A Money Market Account
A money market account is a lot like a savings account. You deposit money, earn interest on your balance and are limited to a certain number of withdrawals each month.
Pros of a Money Market Account
Yields: Money market accounts typically offer higher yields than regular savings accounts. Simply put, they give you more money. And if you find a money market account at a credit union, that yield is likely to be even higher.
Limits: Been trying to build an emergency fund for a while? Then you probably know how hard it is to keep your hands off it. A money market account usually limits your withdrawals and the number of checks you can write each month. If you need to dip into the account on occasion, you can take out only what you need at that time. That way, even if you do have to tap into your savings, you are forced to be smarter about your withdrawals because you know they’re limited.
Cons of a Money Market Account
Minimum deposit: Most money market accounts require you to have a relatively high minimum deposit to start, which can be hard if you’re just starting to build your savings. Some also require a minimum balance, but that can also be a good thing — all the more reason to leave the account untouched.
A High-Yield Savings Account
Next on our “where should I keep my emergency fund” list is a high-yield savings account. As their name suggests, they too offer a higher yield than your average savings account, much like a money market account.
Pros of a High-Yield Savings Account
Yield: Like money market accounts, high-yield savings accounts offer higher APY than traditional savings accounts, especially at credit unions. Sometimes the interest is even higher than a money market account.
Fees: High-yield savings accounts often have fewer fees than regular savings or checking accounts (again, especially at credit unions).
Minimum deposit: If you’re truly just starting your emergency fund-building journey, you may not have a lot of $$$ to deposit. A high-yield savings account often has a far lower minimum deposit than a money market account — sometimes as low as $1.
Cons of a High-Yield Savings Account
Access: High-yield savings accounts don’t always offer debit cards or checkbooks, meaning that in order to take out money, you may have to transfer money to another account and then make a withdrawal, which can be inconvenient if you need money quickly and transfers take a while to go through.
The cap: Rates for high-interest checking accounts are often capped, meaning that the higher interest rate is paid only up to a specific amount of money on deposit. Most accounts are capped at $25,000, but the caps can go as low as $1,000. When a deposit exceeds the cap? You start earning interest at a much lower rate — as low as 0.1%. However, many high-interest checking accounts pay a better rate than money market accounts, so as long as you’re not depositing large sums of money, you should be fine.
Certificates of Deposit (CDs)
Of all the savings options, this is probably the one most people are unfamiliar with. They’re a little different from money market and high-yield accounts in that you have to leave the savings alone for a certain period of time (though not multiple decades, like with an IRA).
Pros of a CD
Yield: Of all three of the accounts mentioned here, a CD has the potential to earn you the highest APY, some as high as 2.20%.
Fees: CDs typically have no monthly or maintenance fees.
Safety: Because of that high APY, opening a CD account is one of the closest things to investing in stocks or IRAs that you can find — just less volatile. While you absolutely should start investing, opening a CD in addition to investing is a good way to diversify and ensure you have at least one account that grows predictably.
Cons of a CD
Penalties: A drawback of CDs is that you can be penalized for withdrawing money before it “matures.” This could be a flat fee or a percentage of the interest rate you earned. This can be a major bummer if you leave the CD untouched for a while and then have to withdraw money just before it’s matured. If you’d like to force yourself not to touch your savings, a CD is a good way to go, but you might need to have an alternate, more accessible savings account (or a second CD with a shorter term) for quick access.
Short Answer: Diversify
“Where should I keep my emergency fund” isn’t really the question you should be asking.
Because in the end, it’s better to have all three, plus a Roth or Traditional IRA. Diversifying your savings is just as important as diversifying your investments.
Now, we know that most of us don’t have thousands of dollars laying around that we can split up into multiple accounts. So your best bet is to start where you can and build up an emergency fund that is accessible and has a low minimum deposit like a high-yield savings account.
As you build your savings, you could open a money market account. And later on, you could open a CD once you know you have enough saved up in an accessible account so that you can leave your CD untouched and avoid penalties.
When in doubt, get professional help! Many credit unions offer financial guidance and educational materials to help you decide which path is best for you. And unlike banks, credit unions don’t exist to profit off you — they exist to help you and your community life financially healthy lives.