Where Should You Keep Your Emergency Savings Fund?

Having an emergency savings fund is a key component of your financial security. But when it comes to building up your funds, there’s a lot of debate about the best place to save money.

A recent analysis and advice piece by Betterment challenges the traditional opinion that savings accounts are the best places to put funds. Instead, it suggests longer term savings options instead.

You’re probably wondering, “So where should I put my money for emergencies?” Here’s a rundown of different ideas to consider, from short term savings options and traditional bank accounts to savings investments.

Where should I put my money?

Checking accounts

The easiest place to keep your emergency savings is with the rest of your money. By having it attached to a debit account, you can access it whenever and wherever.

However, there are some major disadvantages to this method. Blending your funds could get confusing and messy very quickly. And if you’re prone to overspending, you could be tempted to use emergency funds to cover superfluous expenses.

Also, basic checking accounts typically don’t earn much interest. Some checking accounts even charge you for account usage.

In other words, when it comes to checking accounts, you may be paying the bank to hold your emergency funds. Instead, it should be the other way around.

Savings accounts

According to a survey released last year from GoBankingRates, 78 percent of Americans have an open savings account. 19 percent of them also have more than $5,000 in their savings account.

Savings accounts are naturally quite popular for holding personal funds.

“When I was in my 20s with no kids, I kept extra cash in a checking account so it was always accessible,” says Julie Starnes Raine of Investing to Thrive. “Now that I have more demands on my money (there’s always something, whether a major repair to my home or college tuition bills), I need more of a separation of accounts.”

A savings account is the most convenient way to designate funds for one particular purpose. However, finding a high-interest savings account can be difficult. Especially with rates currently under one percent.

Local credit unions often have higher interest rates for savings accounts than big banks. So do online savings accounts.

Either option may prove to be the best place to save money. Especially if you plan on saving a smaller amount for a longer period of time. While your account will continue accumulating a tiny bit of interest, you’ll also have the ability to transfer money if necessary.

Money market and certificates of deposit accounts

If you’re more focused on building your wealth and less concerned about access, short term savings options may be the best place to save money.

Although there are quite a few to choose from, money market and CD accounts are the most popular.

Money market accounts are short term savings options that are perfect if you have more than $1,000 set aside for emergencies already. That’s the minimum threshold for most banks before you can open a money market account. Then you have access to the higher interest rate.

Rachel Hernandez, a real estate investor and author of Adventures in Mobile Homes, discourages people from being too concerned about going under the account threshold if you need to.

“Some banks, like credit unions, will allow you to keep the funds in a money market fund and not penalize if you go below a certain threshold,” Hernandez explains.

“If you simply go under a certain amount, then the account simply becomes a savings account,” adds Hernandez. “To get it back to a money market account with the interest, you simply have to put in the minimal amount.”

Certificates of deposit, or CDs, are another smart option. They have high interest rates similar to money market accounts.

However, with CDs, you will be penalized if you take money out of your account before the account matures. This can totally negate the interest you made by putting it in the account in the first place.

In other words, CDs and money market accounts are great if you have a paycheck that can cover smaller emergencies. Or, if you only had a few bills you’d need to cover if you lost your job.

Investment accounts

Traditional banking accounts are often considered the best place to save money because you can access your funds quickly. Even money market accounts give holders bank cards or even checks to use to access their money.

However, Betterment’s assessment suggests that those with emergency funds should be more concerned with money growth and savings investments.

For instance, Betterment states that inflation may actually eat away at your savings when it is making little to no interest. Especially when it comes to lower interest bank accounts that house emergency savings funds for decades.

Instead, Betterment suggests investing emergency savings towards long-term goals in moderate risk portfolios where there is a 40 percent investment in stocks.

To offset higher investment risk, Betterment also advises putting 30 percent more into your savings than you think you need. For example, if your emergency goal is $10,000, save and invest $13,000 instead.

Tara Falcone, founder of ReisUP, suggests putting returns from your savings investments into a retirement account, like an IRA, to further help long-term goals.

“Since Roth IRA contributions are made post-tax, you’re able to withdraw them penalty-free,” Falcone says. “You just can’t touch the earnings unless you’re over 59-and-a-half, and have had the account open for at least five years.”

IRAs can also be withdrawn for medical emergency expenses. or to pay for school with money available in a short period of time.

Where’s the best place to save money?

Whatever works for your emergency savings

When determining where to put your emergency savings, you first should think through what would qualify as an emergency. Is it unexpected car repair? Long-term job loss? Medical bills?

Next, consider your financial priorities. Are you looking for growth in your wealth or financial security? These questions will help you sort through your emergency savings options.

Or, perhaps you’re interested in taking Betterment’s advice and blending it with traditional short term savings options.

For example, for immediate emergencies, save a small chunk in a money market or savings account while placing the rest in a savings investment account.

The bottom line is that the best place to save money is where you feel comfortable keeping it and accessing it when the time comes.

Whether you invest for the long-term or start small with eyes on the short-term, make sure your funds work for you.

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