The 4 Best (and Worst) Places to Store Your Emergency Fund

An emergency fund can provide much-needed help in the event of financial difficulties. However, where you put your money for a rainy day can be just as important as how much you save.

If you’re not sure where to keep your emergency fund, here are some of the best places to consider. We also present some options that might be tempting but should be avoided, at least for this particular financial goal.

The best places to store your emergency savings have a few things in common: low risk, liquidity, and penalty-free withdrawals. That’s why these features are so important.

The purpose of an emergency fund is not to build wealth. Rather, it’s about managing potential risks to your financial well-being.

It may seem inefficient to put your money in an account that doesn’t maximize your returns. More important, however, is avoiding potential investment losses that could jeopardize your ability to weather any financial storms that arise.

Liquidity refers to how quickly you can convert funds into cash. Because financial emergencies are rarely predictable, it’s best to keep your money for rainy days in an account that gives you quick and easy access to your money when you need it.

Some accounts will incur penalties if you withdraw your funds before your account agreement allows it. These prepayment penalties can wipe out any interest you’ve earned and even drain your principal balance.

Whether you’re just starting to set up your emergency savings plan or have already saved some money, here are some accounts that are best for storing that money.

As the name suggests, high-yield savings accounts offer higher interest rates than traditional savings accounts. In some cases, you can earn up to 5% APY (or more) on your balance.

High-yield savings accounts are particularly advantageous because they are very liquid – your money is just a quick transfer away. Additionally, there is no possibility of you losing your capital due to investment losses. And HYSAs typically have no minimum deposit requirements.

However, some of the best high-yield savings accounts come from financial institutions that don’t offer checking accounts. If you choose such an account, it may take a few days to transfer your money.

Check out our picks for the 10 best high-yield savings accounts available today>>

Money market accounts act as a hybrid between checking accounts and savings accounts. They often offer interest rates comparable to a high-yield savings account and may also offer a debit card and/or paper checks to make accessing your money easier.

However, some money market accounts may charge a monthly fee unless you maintain a minimum balance. Additionally, interest rates may be tiered depending on your balance, which may limit your earning potential. In general, these accounts are best suited for those with larger balances and the ability to meet all monthly fee waiver requirements.

Check out our picks for the 10 best money market accounts available today>>

A Certificate of Deposit (CD) is a type of account that requires you to keep your money on deposit for the entire term. During this time, your interest rate is guaranteed. The CD term can range from a few months to several years.

The downside is that most CDs charge penalties if you withdraw your money before the account matures. So if you find yourself in financial distress, you could miss out on interest and even some of your principal if you have to withdraw money early.

The exception is penalty-free CDs, which give you more leeway in accessing your money without paying a fee. However, no-penalty CDs typically offer much lower interest rates compared to standard CDs, high-yield savings accounts, and money market accounts.

Alternatively, you might consider a short-term CD of less than a year. While there’s still a risk that you’ll have to withdraw money before maturity, the penalties tend to be lower for shorter-term CDs.

Check out our selection of the best CD accounts and plans on the market>>

Many brokerage firms offer cash management accounts (CMAs) where you can store uninvested funds.

Although different from traditional bank accounts, CMAs may offer some of the same features as a checking or savings account, such as: B. a debit card, mobile deposit and ATM access. They may also offer higher interest rates and better deposit protection than a traditional bank account.

However, keep in mind that some CMAs offer less flexible access to your money than others and that transferring money from one to your bank account may take a few days.

The following accounts may work well for other financial goals, but are typically less effective when it comes to your emergency fund. Here’s why.

As with short-term CDs, long-term CDs require you to lock up your money for a specific period of time, which could be several years in the future.

While long-term CDs sometimes offer higher returns, it’s more likely that you’ll eventually need your money over a period of several years rather than just a few months. In addition, prepayment penalties tend to increase as the term increases.

Savings bonds are a type of debt security issued by the US government and are therefore considered extremely low-risk. Depending on the type of bond you choose, you can invest between $25 and $10,000.

However, you cannot redeem a savings bond until you have held it for at least a year. If you do this before the five-year period expires, you will lose three months’ worth of interest. It may also take a few days for the process to complete.

The stock market may be one of the best places to invest your money to build wealth over time, but you can expect stock prices to be incredibly volatile in the short term.

If you experience financial hardship during a downtime, you will have less money to meet your needs than if you had kept the money in a safer investment.

Additionally, it may take a few days for the money to be paid out after selling an investment and then another few days for the money to be transferred to your bank account. You also need to consider possible taxes on any winnings.

Depending on the type of retirement account you have, it may be possible to withdraw money without incurring a penalty.

For example, some 401(k) plans offer loans in which the interest you pay is credited back to your account. Additionally, Roth individual retirement accounts (IRAs) allow you to withdraw your contributions tax-free and penalty-free.

Still, you may be penalized with a 401(k) loan if you don’t pay it back on time or if you lose your job before repayment is complete. Additionally, borrowing from your retirement savings may mean having to save more money in the future to make up for lost profits.

Because there are so many different financial accounts, it can be difficult to know where to invest your emergency fund to maximize your savings efforts.

While some account types are well suited to other financial goals, it’s important to choose one that covers the three basics of low risk, liquidity and penalty-free withdrawals. Take the time to research and compare different options to ensure you find the best solution for your needs.