One key recommendation from the world of personal finance is to have an emergency fund that you can draw on if something unexpected happens. That emergency fund is a lifeline, saving you from slipping into debt when your car breaks down, your child breaks their arm, or your roof develops leaks. A robust emergency fund can even carry you through multiple months should you lose your job unexpectedly.
There’s a lot we can say about how much to have in your emergency fund, how to calculate that amount, how to determine what you’re comfortable with, etc.
But for today’s post, I want to address another common question:
Where should I keep my emergency fund?
There are two main ways to address this question:
- You’ll first want to decide the type of account (Savings account? Checking account? Brokerage? Shoebox of cash under your mattress?)
- And then you’ll want to decide the specific institution. (Which bank? Which brokerage? What brand of shoe for that shoebox?)
I’ll be sharing here my answers and reasoning for both of these questions.
Personal finance is personal, so although I’ll be sharing what works for our family, don’t feel obligated to do exactly what I’m doing. But since I find it helpful to see the decisions others make, I’m hoping that sharing my own choices might be helpful for others as well.
(Disclaimer: We bank in the US, so the information I’m sharing here is specific to the US banking system.)
On a very basic level, you want your emergency fund to be usable in case of an emergency. That means that it shouldn’t be locked up so tightly that you can’t get to it. And it shouldn’t be in such a risky or volatile account that you can’t count on having “enough” in there when you need it (however you decide to define “enough.”)
However, you also want to keep in mind that inflation is a very real factor, especially these days. If you just park your emergency fund in a bank account somewhere, it’s not going to be keeping up with inflation. The purchasing power of the money will be decreasing over time, which is clearly not ideal.
So essentially, the best place to keep an emergency fund is somewhere accessible and secure, earning as high an interest rate as is possible given those requirements.
Here are the pros and cons of some of your options.
Your regular bank’s savings or checking account
Not only is the interest rate here likely pretty abysmal, but by keeping your emergency fund in your regular account, it’s going to take a lot of willpower and careful accounting to make sure you don’t accidentally spend part of it. Not recommended.
Certificate of Deposit (CD)
Historically, interest rates on CD accounts have been higher than for regular savings accounts, although that is not necessarily the case anymore. But CDs also lock away your money for the term length of the CD, whether that be 3 months, 6 months, a year, or multiple years. There is often a penalty for withdrawing your money early.
That makes CDs not the best option for your emergency savings. (There is a workaround called a CD ladder, but it’s honestly a lot of hassle to set up and only marginally improves the inaccessibility problem.)
Some people choose to keep their emergency fund invested in the stock market, typically because it feels like a waste to not have the money just sitting in an account and not working hard for you.
I understand the desire, but I think it’s important to keep in mind that the point of an emergency fund is to be prepared for the tough times in life. Some of those tough times might happen while the markets are up, which means your invested emergency fund will stretch farther. That’s great.
But one of the key reasons to have an emergency fund in the first place is so that you can stay afloat even if you lose your job. And job losses are most common when the market is down substantially. That means that an invested emergency fund may drop substantially just when you need it most. That’s not so great.
Box under the mattress
Tempting, but no. Fire. Theft. Inflation. All sorts of reasons this is a bad idea.
You can do better than a safe deposit box as well.
High-Yield Savings Account
This type of bank account is likely the best balance between accessibility, stability, and (a little bit of) interest. You’ll likely get a much better interest rate in a high-yield savings account than you do in your regular savings account. It may or may not keep pace with inflation, but the money will be accessible and will (likely) be FDIC insured.
It’s clear to me that a High-Yield Savings Account (HYSA) is the best option for where to keep an emergency fund.
But how do you choose which bank’s HYSA to use?
Where we keep our emergency fund
Our family actually holds our emergency fund across multiple HYSAs so that we can maximize the interest. We’ve also been able to earn bank bonuses for many of these accounts, which means a free $100 or $50 added to the emergency fund just for opening it and jumping through a few quick hoops.
(Disclaimer: All of the rates, bonuses, and other information provided below are current at the time of writing but are subject to change.)
Digital Credit Union
We keep the first $1000 of our emergency fund in a Digital Credit Union account because it earns an impressive 6.17% APY. That’s $5 per month in interest earned just in this account alone, which somewhat helps mitigate our emergency fund against the effects of inflation.
The 6.17% interest is in a DCU savings account, but if you use a referral link to open a free DCU checking account, the bank currently offers a $100 bonus with very easy to accomplish requirements. This is subject to change, but currently, all you have to do is fund the account and make 5 debit card purchases in a month. (I bought 5 tiny Amazon gift cards for myself.)
Because of the high interest rate, I recommend a DCU savings account with or without the $100 checking account bonus. But if you’d like to go for the bonus, send me a message so that I can send you a referral email.
This is a new account for us, but we’re moving $2000 of our emergency fund into a “savings pod” through the Current app so that it can earn 4.0% APY. Current is a finance app, rather than a bank, but banking services are provided by Choice Financial Group, Member FDIC.
The Current app allows you to keep your money in “savings pods” of up to $2000. One savings pod is available in their free plan, while multiple savings pods are available with a monthly fee of $4.95. Since the 4.0% APY applies the first $6000 in Current savings pods, mathematically it makes sense to pay the monthly fee. I’ll likely be upgrading soon once I have a bit more comfort with the app.
I keep the rest of our emergency fund at M1 Finance earning 1.0% APY. M1 Finance is an investment platform, but also offers a high-yield checking account called M1 Spend. This account is part of M1 Premium, which it has a yearly fee, but M1 Finance offers the first year free. Until our free year is up, I’ll be using this account for the rest of our emergency fund and for our other major savings goals.
M1 Finance also has a robust referral program. In their current referral program, if you use my link to open an M1 Invest account and deposit $100, they will give both of us an extra $50. Opening the Invest account then unlocks the free year of their premium membership, which includes the M1 Spend account with 1.0% APY.
Honorable mention – Ally Bank
Before I found DCU, Current, and M1 Spend, I kept our emergency fund in a HYSA with Ally Bank. Ally currently offers 0.50% APY, which is still better than you’ll find in most regular savings accounts.
Ally also has a feature called “buckets” where you can partition your money out into different sub-categories. So if you want a single account to house your emergency fund and other sinking funds, Ally is great for that.
Honorable mention – Dollop
Wherever you choose to keep your emergency fund, I also recommend you sign up for Dollop Savings, which is a free program designed to help Americans build up their emergency funds.
With Dollop, you earn points just for keeping money in a savings account. You can earn up to $5 per month if you keep $1000 or more in a savings account. Might not sound like much, but if you pair it with the interest you’re earning in an account like the DCU account above, it adds up!
I realize the last part of this article got a bit technical. But the point is that you can optimize your emergency fund even when you keep it liquid in a bank account. It doesn’t have to be earning just the pennies you’d get if you left it in your regular bank account.
PS. If you’re interested in earning any of the bonuses mentioned above but aren’t quite sure of the details, get in touch. I’m happy to walk you through it.
This post may contain an affiliate link or a referral link. For more information, please see my disclosure here.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.