I’m sure you’ve all heard that you need to have an emergency fund to help you be prepared for the unexpected events that life inevitably throws at you from time to time. I bet you’ve even heard different resources telling you how much you should stash away in an emergency fund.
Usually experts recommend having 3-6 months of expenses saved in an emergency fund. But what you may not have heard as much about is where to store your emergency fund once you’ve got one established.
Regular Savings Account
The default option most people choose for storing their emergency fund is in a regular savings account at the same bank where they already have their everyday checking account. Some people don’t even open a separate savings account for their emergency fund vs any other savings they might have.
This is a big mistake. If you don’t open a separate savings account for your emergency fund, you might end up spending it on something else you were saving up for that is not an emergency, like home renovations, or a vacation. This is not the purpose of an emergency fund.
You should also consider storing your emergency fund savings account at a separate bank to avoid the temptation of “borrowing” from it now and then. It can be seriously tempting to tap into that money if you see it staring at you every time you log in to your online banking. But again, if you are using your emergency fund for anything other than an emergency, you are using it improperly.
High Yield Savings Account
If you are in the process of moving your emergency fund to a different account to help you avoid temptation, you should think about moving it to a banking institution or credit union that offers a higher interest rate.
There’s nothing wrong with earning a little interest on the money that will be just sitting there anyway Earning interest on your emergency fund is a smart move to make.
Put Your Emergency Fund Under Your Bed
Another option for storing your emergency fund is to keep the money in cash under your bed, or somewhere else in your house. This is usually not the safest option as it could all be stolen by guests or intruders. Plus cash loses value over time.
The upside to keeping at least some of your emergency fund in cash is that you’ll be able to avoid having to go to the bank to make a withdrawal during a state of emergency only to find out that the banks aren’t releasing any funds.
Long Term Asset
There’s nothing wrong with investing your emergency fund and letting that money earn you some interest as long as you have it. But the investing needs to be done carefully. The biggest consideration to take into account when investing your emergency fund is how liquid the asset is that you are investing in.
If you decide to use your emergency fund to buy real estate and then you later have an emergency that needs to be paid within 48 hours, it’s going to be pretty difficult to get the cash back out of the real estate in only two days. Investing your emergency fund into any kind of long term asset is not a good idea.
Using your emergency fund to earn you more money in a liquid investment, like a money market account, is a great way to store your money safely and be able to get to it fairly easily if needed.
Another short term, or liquid, investment option is investing in several short-term CDs with different maturity dates, that way not all of your emergency fund is tied up in one CD with one maturity date.