I Have an Emergency Fund, Now Where Do I Keep It?

Congratulations on saving an emergency fund; you've taken a great leap forward toward financial stability. Now the question is, where should you keep your emergency savings? Many options are available — from the extremely low-tech and sketchy to sophisticated, tiered accounts — and it's up to you to determine the best place to keep your emergency savings.

Under the mattress

Tempting as it can be to stash hard cash away for a rainy day, this approach will make your mattress lumpy and uncomfortable. In addition, you won't earn interest on your money or grow it through investing, which will ensure that inflation will continually chip away at its value. Unless you have a compelling need for immediate access to cash (and can avoid the omnipresent temptation to spend), there's little reason to routinely keep more than a couple hundred dollars in currency in your home.

Bank accounts

Traditional and online-only bank accounts can provide ready access to your money. Many options come insured for up to $250,000 in deposits by the Federal Deposit Insurance Corporation (FDIC), making them a preferred choice for those with a minimal appetite for risk. However, these savings vehicles may come with a variety of fees (maintenance charges, checking expenses, etc.), monthly account minimums, and less-aggressive interest rates attached. While it's true that online accounts may offer higher rates and lower expense charges, and placing your money in a savings account ranks among the safest spots to store it overall, be advised: the amount of interest and growth you see from these solutions may be less than that produced by other savings vehicles.

High-yield savings accounts

High-yield savings accounts, which offer a higher annual percentage yield (APY) than traditional savings accounts, are available from both brick-and-mortar and online banks. These can be among the best places to put your emergency savings, and funds placed here might earn more interest over time. High-yield savings accounts often carry fewer minimum monthly balance requirements and monthly maintenance fees. Owners may be subject to withdrawal penalties if they exceed a set number of withdrawals per month, though. Likewise, you may also enjoy less convenience and rapid access to money, especially if working with an online bank without local ATM or branches, in which case you may need to transfer funds to a traditional bank account before it can be withdrawn.

Money market accounts

Money market accounts usually compare favorably with high-yield savings accounts with regard to APYs and monthly fees. But, unlike typical savings accounts, they may also provide access to checks, debit cards, and other ways to make unexpected purchases in a pinch, making them among the best places to keep your emergency fund. Bear in mind, though: You may be limited in the number of monthly withdrawals you can make (making any purchases best saved for emergencies only), and may be required to deposit a larger sum ($2,000 vs. $1) than with other savings vehicles to open the account. Noting this, you may need more savings in the bank before you can get started with one.

Certificates of Deposit (CDs)

Certificates of deposit are time-based accounts that can offer superior interest rates but require you to leave savings alone for set periods of time ranging from 30 days up to a year, or more. At the end of the term, you can withdraw your initial deposit, and any interest earned on the investment. The upsides of putting emergency fund savings in a CD might include superior APYs to savings and money market accounts and no maintenance or monthly fees. Should you attempt to remove money (if it is allowed) before the lock-in period ends and the CD matures, however, you may be subject to early withdrawal fees. As a result, many investors layer CDs and create investment ladders, investing in CDs of varying term length (the longer the term, the better the rate), to provide more ready access to capital while maximizing financial gains. For example, you might simultaneously keep funds in a three-month, six-month, and 12-month CD to improve liquidity and interest yields.

Investment accounts

Traditional investment accounts are often invested heavily in stocks or equities, which provide an opportunity for higher returns (as well as an opportunity for losing money). Also, you may pay significant fees to maintain them and significant taxes on capital gains and money earned. Likewise, funds removed from these accounts are not steadily compounding or being reinvested, and may disrupt the risk-reward balance of your portfolio. Keep in mind that maintenance and transaction fees may erode your return.

Roth Individual Retirement Account (IRA) and 401(k)s

Roth IRAs and 401(k) investments are tax-advantaged financial accounts designed to optimize long-term retirement savings. While each allows you to invest money in the market, potentially earning a superior rate of return to a CD or savings account, and can serve as a rainy-day savings pool, neither is a preferred emergency fund vehicle. That's because you may incur significant early withdrawal penalties (e.g. 10%) or pay income taxes on earnings removed if you withdraw before a certain age and/or investment period. Doing so also risks short-changing your retirement, since the money you take out no longer benefits from the power of compounding interest.

Take a multi-step approach

Can't decide where to keep your emergency fund? Consider using more than one option to safeguard against unexpected expenses. You can maximize returns while minimizing risk by allocating savings to multiple investment vehicles. For instance, you might place some cash in a money market account, some in a high-yield savings account, and some in a series of CDs of varying length. Using this approach, you're getting return on your money while also keeping plenty of spare cash nearby in the event an emergency strikes.

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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.

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