There’s Only One Place Your Emergency Fund Should Be. Here’s Why

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

You should have your emergency fund in a high-yield savings account. Keep reading to learn why you shouldn’t invest emergency savings. 

Having emergency savings in the bank is a cornerstone of personal finance. You should have three to six months of living expenses saved in an emergency fund. Doing so could be the ticket to staying out of credit card debt and avoiding a whole lot of financial stress if you’re faced with any unexpected expenses.

Since the average consumer unit spends $72,967 per year, according to the Bureau of Labor Statistics, having six months of living expenses saved could mean you need as much as $36,483.50 set aside in case of emergencies.

That’s a lot of money, so you may be tempted to try to invest it or do something strategic with it in order to maximize your return on investment. You should not do that. In fact, there is only one place where your emergency fund should be. Here’s what it is.

This is where your emergency fund needs to go

Your emergency fund should be in a high-yield savings account. It belongs there for a few reasons:

You can’t lose the money. If you pick an FDIC-insured savings account, your funds are safe, up to FDIC insurance limits. There’s no risk you will end up with less than you need when an emergency strikes.You can take the money out when you need it. You don’t have to agree to leave your funds invested for a certain period of time as you would if you chose a certificate of deposit (CD). You also don’t have to worry about whether you’ll end up taking your money out at a bad time, as you would if you put it into the stock market.You can still earn a reasonable rate of return. A high-yield savings account typically offers a better rate than a regular savings account or a checking account. So even though you usually won’t earn as much as you would if you put your money into the stock market, you can ensure you aren’t losing a lot of ground due to inflation.You won’t be as tempted to spend the money. If you kept your emergency fund in a checking account, it might be too easy to spend. By keeping it in a dedicated savings account, you’ll know you should keep your hands off it unless or until an emergency situation strikes.

If you’ve worked hard to save money for emergencies, you don’t want the funds to be lost or inaccessible when the time comes. Putting them in savings is the best way to avoid that issue.

Emergency money is not money to be invested

Although it may seem disappointing to miss out on the higher returns you could get if you invested in the stock market or even in a CD, the reality is that’s not the purpose of your emergency fund.

When you save money for emergencies, you’re investing in your peace of mind. You’re taking steps to ensure you can avoid costly debt or other financial issues. That’s more important than getting the highest possible return on these particular dollars. Your emergency fund can help keep your overall financial situation stable so you can afford to invest money in other ways, so let it serve its purpose by putting it into savings.

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 11x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More