If the cartoons taught us one thing, it was to avoid putting our emergency money beneath our mattresses (think Spongebob). When stashing away cash for an emergency, you want it to be in a safe place. You want your money to be around when you need it most.
An emergency fund is vital. The more close calls we have, the more we realize this. After a job loss, medical emergencies, market crashes, and natural disasters, an emergency fund helps you feel financially protected.
Figuring out how much you should have in savings is a good start, but you need to know where to store it. Although this may seem like a minute detail, it can significantly impact how you handle a crisis; having the money saved doesn’t always mean your job is done.
What Makes a Good Place to Keep An Emergency Fund?
Specific attributes make one spot better than another for keeping your emergency fund. In the same way you have a list of must-haves when apartment hunting, you should have one for deciding where to put your emergency fund.
Prioritizing several features will ensure that your emergency fund can do its job and be there for you in times of crisis. When you’re stressed, panicked, and anxious, the last thing you’ll want to worry about is money.
One of the most obvious must-haves of the place you decide to store your emergency savings is accessibility. You want to make sure that you can always use the money you have saved because emergencies demand speedy responses. Some financial systems make it difficult to access cash and transfer funds, so you’ll want to avoid those.
When deciding where to keep your emergency fund, something else to consider is the growth potential. Putting $100 beneath your mattress for emergencies will ensure you have $100 several months later, which is great, but what if you could have more? There are places you can put your money that guarantees it will gain interest.
A third and probably most important factor to consider is security. There’s no point in having an emergency fund if it’s not there when you need it most. You can easily step into risky territory while managing your finances, but we suggest you stay away from the gambling tables when it comes to your emergency fund. Save the YOLO mentality for your other money stashes.
When exploring the market for your emergency savings’ perfect home, we urge you to consider accessibility, the potential for growth, and security. With that in mind, let’s explore your options and how they stack up to one another.
Places You Can Keep Your Emergency Fund
Under Your Mattress
We’re starting with under the mattress because we have to talk about it. On the checklist, this stash spot maybe covers one of the must-haves, two if we’re being super generous. A secret location in your home seems pretty accessible and perhaps even secure, but trust us, there are better options.
We’re not always home in the case of an emergency, and accessing your emergency fund anywhere and at any time of day is important. You might be on vacation when you catch a disease or have an infection that keeps you confined to a foreign hospital for weeks or even months. Your under-mattress emergency fund won’t be of any help under those circumstances.
Also, we can’t ignore significant risks like burglary, or worse, a fire. Your money can easily be taken or destroyed if something goes wrong at home, leaving you no safety net. Home should make you feel safe, but it’s not where your emergency fund should live.
High-yield Savings Account
A high-yield savings account is a great place to start building an emergency fund, especially if you want to reach your savings goal faster. A high-yield savings account is a savings account that allows you to earn more than ten times the amount of interest that you could with a traditional savings account.
Almost all high-yield accounts are offered at online banks. Not having physical brick-and-mortar locations often allows banks to offer such high interest. So yes, the upside is that your money will grow, and the downside is that it might not be as accessible. When an emergency arises, funds can be delayed because you’ll need to use another bank account to transfer money in and out of your high-yield savings account.
Overall, a high-yield savings account is still reasonably accessible and allows you to receive a higher interest rate than a traditional savings account. Savings accounts are also FDIC or NCUA insured, so your money will be safe even if a bank shuts down. Explore the different rates, fees, perks, and withdrawal policies when considering an online savings account.
High-yield Checking Account
A high-yield checking account is similar to a high-yield savings account but with more accessibility. A high-yield checking account is a checking account that allows you to earn interest on your account if you maintain a certain balance.
Like any other checking account, a high-yield checking account will come with a debit card attached, making it so that you can make purchases, write checks, or withdraw money at an ATM. The accessibility that a debit card offers makes this a great place to keep your emergency savings. Security isn’t an issue because your money will also be FDIC or NCUA insured.
The most significant con for a high-yield checking account is that you’re typically required to maintain a high account balance and make a certain number of transactions per month. The last thing you want to worry about during an emergency is whether or not you’re leaving enough money in your account not to get penalized.
Overall, a high-yield checking account is super accessible, secure, and has excellent growth potential. High-yield checking accounts make for a great place to keep your emergency fund if you can maintain a healthy balance and responsibly meet your quota of transactions.
Traditional Bank Account
If you’re hesitant to keep your money in an online account, you can always turn to the traditional checking or savings account with a brick-and-mortar bank.
The con of keeping your emergency fund in a traditional bank account is that you won’t earn as much interest, but the pro is having the peace of mind that comes from knowing you can access your funds anytime. Like home, sometimes physical locations make us feel more secure and protected. If you don’t mind giving up some growth potential for some peace, then a traditional bank account might be the right move for you.
When choosing where to keep your money, you should always keep in mind: who has the most benefits and who will keep me on track to reach my goals?
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals when you retire. Basically, Roth IRAs are designed to help you invest your money for retirement. Why are we talking about retirement funds when this was supposed to be about your emergency fund? A Roth IRA can double as an emergency savings account because you can withdraw contributed sums at any time without taxes or penalties.
Putting money into an investment account (like a Roth IRA) instead of a conventional checking or savings can be beneficial. Even bank accounts that earn high-yield interest won’t keep up with rising inflation, so investing your money in a Roth IRA could earn more in the long run.
The risk to keeping your emergency fund in a Roth IRA is its potential to lose value. You’ll want to look at your investment options and go for safer ones if you’re not a high-risk investor.
You can withdraw your contributions from your Roth IRA at any time with no penalty. There may be tax implications and early withdrawal penalties for withdrawing earnings, so check the rules regarding how much you can withdraw tax-free and penalty-free.
Overall, the major pro to keeping your emergency savings in a Roth IRA is the potential for high growth, especially in times of inflation. The cons of investing in Roth IRAs are loss potential and penalizations for an emergency withdrawal.
What Kind of Emergency Prepper Are You?
Emergencies can reveal a lot about your relationship with money.
Do you trust financial institutions enough to let them hold your money? Do you trust yourself enough to keep your emergency money in the same account as your everyday spending? Were you raised with a high-risk, high-reward mentality and comfortable keeping your emergency fund in investments?
Depending on your financial situation and mindset, you will treat your emergency fund differently. It’s always best to consider these three questions when making your final decision:
- In a crisis, will I be able to access my emergency fund?
- Is my emergency fund growing or stagnant when it's not in use?
- Will the financial market or life circumstances impact the security of my emergency fund?
Once you’ve considered accessibility, the potential for growth, and security, you can make the right decision for your money.