Emergency Savings: Where to Put Your Emergency Fund to Get the Most Growth

Where to put your emergency fund

Having an emergency fund (also called an emergency savings account) is important for everyone to have, whether you’re a college student, a recent graduate, a parent, a high school student or anyone in between. It’s simply in your best interest to have money set aside specifically for when life’s inevitable emergencies strike.

I discuss the why of emergency funds in this article, so in the one you’re reading now I want to spend more time discussing the how of emergency funds. As in, How do I build and emergency fund and where should I keep the money?

But before diving into the how, let’s just recap a few things:

  • An Emergency Fund is money that you save specifically to use if an emergency strikes. And by “emergency” we mean real emergencies, not silly stuff.
  • Most financial experts recommend that you save between 3 and 6 months’ worth of expenses in your emergency fund so that, if a worst-case scenario strikes and you, say, lose your job, you’ll be covered long enough to find a new one.
  • Just because you haven’t faced an emergency yet, or not in the last few years, doesn’t mean you’re immune from them. (In fact, it likely means you’re overdue!)

Okay, now that we’ve got the basics out of the way we can dive into the real meat of this piece: Where exactly should your emergency fund live?

Should I keep my emergency fund in my checking account?

Nope. Your emergency fund should be kept completely separate from your spending money. Why? Because if you keep your emergency fund in your checking account, you’re liable to spend it!

It’s just too easy to go over budget a little here, a little there, and then before you know it you’ve blown through $500 of your emergency fund without even realizing it. Accessing your emergency fund should be something that takes awareness to do. I got a flat on my way home from work and need to transfer $120 from my emergency fund to my checking account to cover the expense, not, I’m going shopping and, according to the balance on my checking account I have $5,000 to spend, even though in reality $2,500 of that is my emergency fund and I risk dipping into it. 

Should I invest my emergency fund?

Most definitely not. The whole idea behind an emergency fund is that you have a set amount of money there when you need it. If you were to put your emergency savings in an investment—whether stocks, bonds, a mix, or some other asset—you risk it not being there when you need it.

I can already hear some of you complaining. But the market has been doing so well! Keeping my emergency fund out of the market means that its not doing anything for me!

And to that I say: Look, I get it. When the market is booming (like it was for virtually all of 2017), it can be painful to have a money sitting it out. But your emergency fund isn’t meant to make you money. It’s meant to be there in case of an emergency so that, when an emergency strikes, you don’t need to dip into your retirement savings or other investments. It is meant to provide stability and peace of mind.

Let’s say, for the sake of arguing, that because the stock market had done so well during 2017 that you were tired of your emergency fund sitting out of the growth. So you invest it in the S&P in late January 2018, when the market was near its high. By the middle of January, your investments would have lost about 10% of their value.

Now, with regular investments, you’d be fine: You can ride out the lull and let your investments recoup their lost value. But what would happen if an emergency struck during that market pullback and you needed some cash right away? You’d have to sell your investments, locking in your losses. Buying high and selling low is a surefire way to retire poor, let me tell you.

So just listen to the countless experts out there who have chimed in on the subject: Keep your emergency fund separate from your investments. Let it do it’s job: To be there for you in case of an emergency!

So what should I do with your emergency savings?

Okay, so we’ve already established two rules for emergency funds:

  • The money must be kept separate from your checking account or general spending money, or else you risk dipping into it and using it for purchases other than emergencies, and
  • You absolutely shouldn’t invest your emergency fund, or else you risk losing money, which is something that you really don’t want to happen.

So where, then, should you put your emergency fund?

The answer to that question is: You’ve got some options. Some are smarter than others, and some are easier than others, but the important thing is that you do what is best for your own personal financial situation. Here are 3 places that you can put your emergency fund.

1. Keep it as cash

Some people decide that they want to keep their emergency fund on hand in the form of cash. If you ask those people “Why?” they’ll usually tell you something along the lines of:

  • I don’t trust the banks (especially common of older folks who grew up with the Great Depression and various Bank Runs)
  • What happens if I need the money NOW and can’t get to a bank?

But while this option is, by far, the one that offers you the quickest access to your cash in the event of an emergency, it definitely has drawbacks.

For one, you always have easy access to your cash, which means that it’s easy to dip into it even when you know you shouldn’t. Secondly, what happens if you have an emergency while you’re away from home? If the money is in a shoebox under your bed and isn’t in some way transferable to you, then there’s no way for it to help you, and that kind of defeats the purpose of an emergency fund, doesn’t it?

And then there’s the issue of inflation eating away at the value of your money. All of the other options on this list will allow you money to grow at least somewhat, hopefully enough to match with inflation or at least dull the pain that it causes. Keeping your emergency fund as cash will provide you with the absolute worst returns out of all of the other options below.

Beyond this, what if the emergency is something that strikes your home? A fire, flood, tornado, or other storm that damages/destroys your house could also, of course, destroy the cash that you’ve stockpiled. And that would obviously be a bad thing. At least money in an FDIC-insured bank account will be accessible to you even if the the bank is destroyed.

Verdict: This is one option that I definitely wouldn’t recommend, and most financial experts also wouldn’t recommend. It’s always a good idea to have some cash on hand (say, a couple hundred dollars) in case a true immediate emergency strikes, but the majority of your emergency fund should not be kept as a hoard of cash in your mattress.

2. Keep it in a simple savings account

If you decide against keeping your emergency savings on hand as cash (and I really suggest that you don’t!) then a simple savings account is a more appropriate alternative.

What do I mean by a “simple” savings account? I mean the kind of account that you’re going to find offered by most of the big national and regional banks: The Peoples and the Wells Fargoes of the world. Most people will have a savings account at the same bank as their checking account, and for good reason: Typically, it means that you can transfer money between accounts almost instantaneously, and that’s a very valuable capability when you’re facing an emergency. Plus, you’ll be gaining at least a little bit of growth on your money in the form of interest.

Keep in mind, too, that savings accounts are FDIC-insured up to $250,000. That’s a lot to have in a savings account, I know, but if you do find yourself with a balance nearing the limit, you should split it out into two separate accounts.

Want to keep your emergency fund in a savings account linked to your primary checking account? That’s perfectly fine. But make sure that your emergency funds are in a separate account from your regular savings (say, your vacation fund or your new-laptop fund). Grow Magazine has got a great article about why you should have multiple separate savings accounts, but it all boils down to this: If all of your savings are together, it’s really easy to tap into funds earmarked for other goals, and that’s never good. And it’s especially bad when you’re talking about your emergency fund.

It’s also important to remember that though your savings account is better than cash in that it’s growing at least a little through savings, the average savings account in the US provides somewhere between 0.01% and 0.15% interest. That’s not going to make you rich; in fact, it isn’t even anywhere close to the average rate of inflation, which sits somewhere around 2–3%, though in some years it’s less and some years it’s more (like a whopping 13% in 1979!). For that reason, if you decide to keep your emergency savings in a simple savings account, you should make sure that you’re adding to it every so often to keep pace with inflation.

Verdict: This is a common option, and not a bad one. But inflation will undoubtedly eat into the value of your money, and that’s no good. If this is the option you decide to go with, just make sure you’re increasing your emergency savings periodically to keep up with inflation.

3. Put it in a high-yield savings account

Not satisfied with putting your emergency fund in a standard savings account and settling for 0.01% interest? I don’t blame you. If you want to give your money a little more growth potential without risking it through investments, a high-yield savings account might be just what you’re looking for.

What do I mean by high-yield? Really, all I mean is that it’s a savings account that pays out more interest than the average. These accounts come in a couple of different forms, all of which would be perfectly appropriate places for you to store your money:

  • Money Market Account: These are similar to savings accounts and are offered by some banks, typically with higher interest rates than the standard savings accounts that bank offers. The catch? The minimum balance to qualify will typically be higher than the minimum balance for your savings account. The minimum balance and interest rates offered would of course vary by the bank. Money Market Accounts are FDIC-insured up to $250,000 like traditional savings accounts. (Money Market Funds, it should be noted, are a completely different animal. As an investment vehicle, they carry inherent risk and are not FDIC-insured.)
  • High Balance Account: Similar to Money Market accounts, but typically with a much higher minimum balance. We’re talking tens or hundreds of thousands of dollars. If you’ve got the money, and want to park it aside for emergencies, these accounts can offer some of the highest yields, upwards of 1.5% to 2%. Minimum balances and interest rates, of course, depend on the bank.
  • An Online Savings Account: By this, I am referring to a bank that exists entirely online. (Think Ally Bank.) These banks typically offer interest rates much higher than standard savings accounts offered by national banks because a.) being online, their overhead costs are lower than banks with a physical presence, and b.) to entice savers who are weary of online banks. Again, rates and minimum balances depend on the bank in question.

If you decide to use one of these accounts for your emergency savings, you’ll likely earn much more interest than your standard savings account. I use Ally Bank personally, which currently (as of March 2018) is paying interest to the tune of 1.45%. This means that my emergency fund is at least keeping pace with current inflation, which is awesome.

But there are some drawbacks. Unlike a standard savings account linked to your checking account, transferring funds from online accounts to an outside bank can often take 3 to 5 business days. This means that it can be difficult to immediately access your funds in the event of a true emergency, which would not be good. (You can sometimes expedite the process by paying a fee, but who wants that?) Money Market accounts often come with checks or a debit card that allows for somewhat easier access.

Verdict: These accounts have the benefit of paying you a lot more interest compared to the national average for savings accounts, but it can sometimes be difficult to immediately access your funds in the event of an emergency. If you decide to go this route, I’d recommend that you keep at least a portion of your emergency savings in a savings account linked to your checking account (like $1,000) so that you have it in case of a true emergency. That way, you’ll be covered while the rest of your funds transfer.

A Note About Savings Withdrawals: It is also important to note that your bank can charge a fee if you withdraw from your savings account more than 6 times in any given month. This has to do with rules put in place during the last recession, to ensure that banks always have enough cash on hand. This is good for the health of the financial sector, which is good for the economy, but it does mean that if you find yourself facing multiple emergencies in one month, you could face a penalty. Which of course is no fun.

4. Build a CD ladder

Want to earn more interest than what you’d get from your typical savings account, but don’t want to go the route of opening a high-yield account? Building a CD ladder is another possibility when it comes to keeping your emergency savings growing and safe.

CDs, or Certificates of Deposit, are often seen as one of the safest ways of growing your money, because they are guaranteed by the bank, just like money you put in a savings account. In fact, they’re a lot like savings accounts, but they’re also different in important ways.

Like savings accounts, CDs are held by a bank and earn interest. Unlike savings accounts, these interest rates tend to be higher. Also unlike savings accounts: You can’t access your money whenever you need it. Typically, when you put money into a CD, you are locking it away for a set amount of time (often 3 months, 6 months, 1 year, 2 years, 3 years, 5 years, 10 years). The longer it takes for the CD to mature, typically the higher interest you will receive. If you do need to withdraw funds from CDs before they have fully matured, you’ll typically forfeit some of the growth or even pay penalties in some cases.

So why would you place your emergency fund in a CD if you might not be able to access the funds when you need them? Good question! You shouldn’t! But you could place the emergency fund in multiple CDs, which mature at different times. This is called a CD Ladder, and it’s something that some people choose to do for their emergency funds or other savings.

In practice, it would look something like this:

  • You would first split your emergency fund into 3 or 4 equal parts. So if you’ve got an $8,000 emergency fund, you might split it into 4 piles of $2,000.
  • You would then invest $2,000 in a 3-month CD, $2,000 in a 6-month CD, $2,000 in a 12-month CD, and $2,000 in an 18-month CD.
  • When the 3-month CD matures, you would reinvest it in an 18-month CD.
  • Each time a subsequent CD matures, you would convert it into a new 18-month CD.

This option could net you the highest returns on your emergency savings: There are 1-year CDs that offer interest rates of more than 2.5%. But there are obvious risks. For starters, if an emergency strikes in between the time when your CD matures (and let’s be honest here, how likely is it that an emergency would line up perfectly with your CD maturity rate?) then you risk needing to pay a penalty to access the funds. And of course there’s always the possibility that you need all  of your emergency savings at once. In that event, a CD ladder would not be in your best interest.

Verdict: A CD ladder might work for you, but it’s something that I personally am staying away from. It’s just too much work for me! If you do decide to pursue a CD ladder strategy for your emergency savings, then you should definitely keep at least a portion of your fund in a standard savings account so that you have access to it in the event that you need the money before your CDs mature.

The Bottom Line on Emergency Funds

Ultimately, where you decide to keep your emergency fund is going to depend on your own personal financial situation. If you don’t trust banks and never will, you’ll probably opt for cash; if you want to make sure you always have access to your funds immediately, you’ll probably opt for a savings account linked to your primary checking; if you want to maximize your money’s growth, you’ll probably opt for a high-yield savings account or CD ladder.

That being said, there’s nothing wrong with diversifying your emergency fund allocation like you would your investments. I personally have my emergency fund split three ways:

  • $200 cash in a lock-box at home, so that I have quick cash if I ever need it
  • $1,000 in a savings account linked to my primary checking account so that I can transfer funds relatively easily in the event of an emergency, and which can hold me over for the 3 days it would take to transfer funds from my online savings account (see below)
  • The remainder in a high-yield online savings account where it’s earning about 1.5% interest

The most important thing to remember is that your emergency fund is for emergencies, and that means that the money should a.) not be at risk by being invested, b.) be relatively easily accessible in the event of an emergency, and c.) be separate from your checking account or other savings. Otherwise, you  do you and you should be fine.

But seriously, please don’t keep your emergency fund as cash!

About Tim Stobierski

Tim Stobierski is the founding editor of Student Debt Warriors. A freelance writer and editor with a passion for teaching people about all things personal finance, his goal is to help parents and students tackle their student loan problems so that they can live happier, healthier lives. Tim's writing has appeared in a number of publications, including The Huffington Post, The Hartford Courant, Grow Magazine, and others. His first book of poetry, "Chronicles of a Bee Whisperer," was published in 2012 by River Otter Press.

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