3 Reasons a Checking Account Is a Terrible Place for Your Emergency Fund

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Give your money the space to grow. 

Do you have an emergency fund? Sadly, many people don’t. I lived paycheck to paycheck and without significant savings for my entire adult life until pretty recently, which meant I frequently had to go into debt to address unplanned car repairs, medical bills, and other surprise expenses. It’s not a comfortable way to live, but thanks to getting my finances in order and boosting my income in 2022, I’ve been able to put aside money for emergencies. It’s much easier to sleep at night if you know you can tackle a $1,250 bill from the auto mechanic without putting it on a credit card and hoping for the best.

That said, it’s not quite enough to just have cash savings (ideally enough to cover three months’ worth of your essential costs — although some financial experts are now recommending that you keep eight to 12 months of expenses). You also need a good place to keep that money where you can easily reach it if you lose your job or have an unplanned bill you can’t cover from your regular paychecks. You might think it’s easiest to just keep the money in your checking account, but that’s not a great idea. Here’s why.

1. It’ll be too easy to spend

The money in your checking account is for exactly one purpose: to be spent! Chances are, when you sit down to pay bills, you’re entering your bank account information into an online pay system, or using your debit card. You may still use the rare check on occasion as well. Since you have so many ways to directly access the money in your checking, you will have to actively work NOT to spend your emergency fund. And believe me, if you’re just learning how to effectively manage your money, you want to make everything as easy as possible for yourself — especially saving money.

2. It complicates your recordkeeping

The phrase “balance your checkbook” may be a bit of anachronism these days, as the divide between check writers and those who use plastic or electronic payments for nearly everything comes down to age. When I do my financial recordkeeping, I am not “balancing my checkbook,” I am looking at my checking account online, and keeping track of the balance and the bills paid out of it in a spiral notebook (I’m a little old-school). You might use a spreadsheet or a budgeting app to do the same.

This way, I always know how much money should be in my checking, and I can leave myself a little cushion against overdrafting my account. If I had to constantly keep track of my emergency fund’s total in that account and have to subtract it out (to avoid spending it), it would be a hassle.

3. It won’t earn interest

With the record-breaking inflation we’ve all been living with for the last year or so, it’s been a terrible time to keep too much money in your checking. One of the small silver linings of higher inflation and the Fed raising interest rates has been the higher APYs we’ve seen on some types of deposit bank accounts. If you keep your emergency fund in one of these accounts, you’ll earn interest on it, and that will compound over time, leaving you with more money. Your checking account most likely doesn’t earn any interest at all.

Where should you keep your emergency fund?

Remember those other bank accounts we talked about above? Yes, that’s where you want to keep your emergency fund. Here’s two to consider. Both of these account types are FDIC insured, too, meaning up to $250,000 kept in one will be reimbursed if your bank fails.

A high-yield savings account

It’s likely that your first bank account ever was a savings account opened for you by a parent or adult guardian. High-yield savings accounts are a lot like that account, but with some really excellent additional features. The best high-yield savings accounts (or HYSAs) are paying 3% or more in interest these days. Many of them are offered by online-only banks that offer convenience and great mobile apps, and sometimes don’t charge any fees at all. The one possible downside to HYSAs is that they may not offer easy access to your money. See if the bank you’re considering offers a debit or ATM card with a savings account, as that would be ideal.

A money market account

Money market accounts (MMAs) are like a cross between a checking and savings account. You’ll earn interest like you would on a HYSA, and you’ll have the ability to easily access your money via a debit card, ATM card, or checks. MMAs also sometimes have a minimum balance requirement to earn the highest percentage of interest, so that could serve as an incentive to keep your emergency fund flush with cash so it’s ready when you need it.

If you’re seeking a home for your emergency fund, prioritize finding the right interest-earning account for it, separate from your checking. This way, your money is safe and can grow over time.

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