Every Emergency Fund Account Should Have These 5 Features

From an unexpected trip to the doctor to a car accident, life's little emergencies can quickly drain your bank account and stress your credit card balances, which is why experts recommend keeping three-to-six-months' worth of spare cash in an account at all times. Unfortunately, the experts aren't as vocal about how to not spend your money. For those who have managed to fund an emergency account, it can take almost heroic restraint to leave it alone and manage it responsibly.

Just ask Taylor Tresatti, who recently stepped away from grad school with $1,000 in savings, only to find it quickly disappearing towards monthly credit card bills for dining, entertainment, and other optional expenses. Luckily, she says, stashing her cash in a money market account helped keep funds at arms' length and growing, letting her replenish her savings while enjoying ready access to cash for genuine emergencies.

Tempted to toss your savings under the mattress or leave it in a traditional checking account? Consider investing in financial vehicles that are better geared towards keeping your nest egg safe while preventing you from dropping it on a flat-screen TV or other nonessentials. The following guide can help you know what features to look for in an emergency fund account.

1. Low minimum balance requirement

Look for investment accounts with low opening and monthly minimum balance requirements to help you fast-track your emergency savings goals.

Traditional checking accounts can be started with as little as $1, but they make it all too easy to withdraw funds on a whim. However, many savings accounts will also let you do so cost-affordably with as little as $25 to $100, and earn interest on your money so that savings can compound and grow over time (including online saving accounts that pay higher interest yields). These savings accounts — that often limit you to six deposits and transfers a month, though ATM use often doesn't count toward this total — offer a cost-affordable way to protect and grow investments. They also provide ready access to cash within reasonable limits, so your emergency funds can be available when you need them.

High-yield savings accounts, which produce a higher annual percentage yield (APY) than traditional savings accounts, can help you earn even more interest over time. Some may require you to deposit a monthly minimum (e.g. $100), but several will pay interest on an opening balance of as little as $1. Note that withdrawal penalties may apply if you take out money more than six times a month, and money may be less rapidly accessible if you work with an online bank that doesn't have local ATMs or branches. (In which case, funds must be transferred to a traditional bank account before they can be withdrawn.) Again though, high-yield savings can help you maintain a high balance, and grow your savings, with a minimum up-front investment.

2. Safe and steady growth

For emergency fund accounts, you should strive to minimize risk while maximizing your return on investment. Solutions like high-yield savings accounts are federally insured up to $250,000. Likewise, other interest-earning solutions, such as money market accounts (which can offer even higher interest rates), also provide stable and steady opportunities for growing an emergency fund while offering ready access to money without the constant temptation to spend.

Starting a money market account may require you to invest more up-front (e.g. $1,500 minimum). However, superior APYs and access to checks, debit cards, and other emergency purchase tools make them helpful savings vehicles compared with stocks and equities, which may be less liquid and frequently change in value.

Certificates of deposit (CDs), financial solutions that offer competitive interest rates when you lock up your investments for periods of time, ranging from 30 days up to a year or more, also provide stable vehicles for financial growth. Many investors simultaneously buy tiers of these solutions, which pay back your deposit plus interest earned on their maturation, such as three-month, six-month, and 12-month CDs. Roth Individual Retirement Accounts (IRAs) and 401(k) investments can also provide significant tax benefits while building a stable investment portfolio. However, any funds withdrawn from your IRA or 401(k) prior to a certain age or time period may be subject to income tax and an additional tax penalty (for example, IRAs charge a 10% penalty for withdrawal before age 59½).

3. Low costs and reasonable fee structures

How much money will you pay in monthly fees to maintain your emergency savings account? Are you required to keep a monthly minimum in your account at the risk of possible penalties? Do you need to pay for checks, fund transfers, or use of other banks' ATMs? These are all good questions to ask your financial professional to ensure that your emergency savings and investment accounts are working for you instead of being steadily depleted by fees and charges.

What's more, that's before you take into account charges to any investment account that may regularly be applied by investment managers for their services, or per transaction. As a result, it's important to be aware your money is going, and stay attuned to fees and charges that may impact your nest egg.

4. Liquidity and easy access to cash

If you get sick or your car breaks down, you may need immediate access to money. As noted above though, investment vehicles such as savings — high-yield savings — and money market accounts can all help you keep cash within arm's reach without the risk of overspending. However, if you've got significant savings on-hand already, and would like to build a safety net while also growing your investments, a laddered investment in CDs may be the right strategy to consider instead. Choices here depend on individual financial needs, and the likelihood of encountering potential setbacks that you anticipate. For example, a young family with multiple children may have more needs than an individual adult. A multi-pronged approach using several different investment vehicles can often help you best cover all bases.

5. No access fees for emergency funds

When you need your money, you shouldn't have to pay to get it. So, try to pick emergency savings accounts that don't charge you for accessing your rainy-day funds. This includes paying both monthly charges and fees per individual transaction. Luckily, a range of investment options is available for everyday savers hoping to keep expenses to a minimum. And remember: While some savings accounts do come with monthly limits on deposits and withdrawals, it's often a blessing in disguise, providing yet more added incentive to save these funds for emergencies only.

Planning for the future

As you can see, no two emergency fund options, or investment vehicles, are created alike. But when you know which features to look for in banking accounts and make a point to put money somewhere safe, where it has the opportunity to compound and grow, you'll have no trouble coming up with extra cash in the event that unexpected disasters strike.

DID YOU KNOW? You can start building your emergency fund with an investment account from LINK by Prudential! All you need is $100.

Simply log into LINK by Prudential Opens in new window to create your profile, set and prioritize your goals, and choose from solutions that you can purchase online or over the phone. Get started today!

Professional speaker and trends expert Scott Steinberg is the bestselling author of Make Change Work for You, and CEO of BIZDEV: The International Association for Business Development and Strategic Partnerships. His website is www.AKeynoteSpeaker.com Opens in new window.

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