This Is the Only Place I’ll Keep My Emergency Fund

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A good emergency fund is one you can access at a moment’s notice. It also isn’t at the mercy of inflation. Here’s how to meet both needs. 

One of the best things you can do for your personal finances is set up an emergency fund. Opinions on how much you need to set aside vary, though most experts agree on at least three to six months’ worth of vital expenses.

Even on the low end, however, three months’ worth of money is going to get into the thousands of dollars. So what do you do with all that cash?

Never invest your emergency fund

When you have a pile of money just sitting there, it seems a shame not to do something productive with it. Unfortunately, investing your emergency fund is a bad idea. You may need that money in a hurry one day, and stocks or bonds are far from liquid.

That leaves the bank as an option.

Your checking account is out, since checking accounts have infamously abysmal interest rates. (The current national average APY on a checking account is 0.07%. Ouch.)

You could go with a short-term CD; they tend to have good interest rates (many of our favorites are offering 5% or more at the moment). However, CDs have a similar problem as stocks and bonds: They tie up your money. An emergency fund needs to be accessible at all times or it isn’t as useful.

Right now, a high-yield savings account could be a good option. Although the average savings account rate is currently 0.43% nationally, a lot of the best online banks have APYs in the 4% to 5% range. This can at least make sure your savings isn’t obliterated by inflation.

For a long time, my emergency savings lived in my high-yield savings account. But then I realized that account had a big flaw: accessibility. Some emergencies require cash in hand — but many savings accounts don’t come with ATM access or the option to write a check.

That’s when I made the change to a money market account.

The magic of a money market account

A good money market account seamlessly marries the utility of a quality checking account with the beefy APY of a high-yield savings account. In other words, your money stays accessible while still earning a competitive rate.

And I really do mean it about the rates. Our favorite money market accounts are offering APYs directly comparable to the best high-yield savings accounts, with rates in the same 4% to 5% range.

At the same time, you’ll get a proper debit card, so you can make ATM withdrawals and debit card purchases. The best money market accounts even include paper checks in case you need to go old-school during your emergency.

Look for low minimums, no fees

Like anything, not all money market accounts are good money market accounts. Avoid anything with ridiculously high monthly service fees (unless the bank offers a reasonable way to get the fees waived).

You also need to watch out for account minimums. Some may require you to deposit a certain amount of money to open the account or to keep the account open.

The really sneaky ones will have different APYs depending on your balance. Make sure you qualify for the best rate by checking their balance requirements.

Finally, keep an eye out for introductory rates. Some banks offer a higher APY for an introductory period — typically the first year — then your rate will drop, sometimes significantly. If you don’t mind moving your money later, this could be a good deal, but make sure you know when the rate will change so you can move on.

Having an emergency fund is, in my opinion, absolutely vital. And choosing the right place to keep that fund is almost as important. I made the move to a money market account, and I don’t think I could keep my emergency fund anywhere else.

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