You know that having an emergency fund is important, that building up savings is a wise thing to do for your financial health. However, you have also probably noticed that savings accounts generally do not provide very high yields. While your emergency fund isn’t necessarily meant to produce big time yields, it is nice if you can get a little higher return from your savings. Two of the cash products that can help you accomplish this include CDs and money market accounts.
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When you put money into a certificate of deposit (CD), you are essentially promising the bank or credit union that they can use your money for a set period of time. In return for making this commitment with your money, a financial institution will offer a yield that is usually higher than what you could get with a savings account. Your money, if you open a CD at a FDIC or NCUA insured bank or credit union, is safe — up to $250,000.
However, most financial institutions have rather onerous penalties if you withdraw your money ahead of the maturity date. If you put money in a CD, you need to make sure that it won’t be a problem to have the money tied up for however long you have the CD.
You can create a CD ladder that allows you access the money regularly, rolling over the money into new CDs as the old ones expire. This will also let you take advantage of rising interest rates, while ensuring regular access to your money. Short-term CD ladders, which change out every three months, can be used as part of an emergency fund plan.
Another way to possibly get a higher yield on your savings is to put it in a money market account. These accounts follow money market rates (which are low right now), and have the potential of offering higher returns than your regular bank account. Like other deposit accounts, money market accounts are FDIC insured, so your money is safe.
Money market accounts are attractive because they offer immediate access to your money. You can usually make between three and six withdrawals a month from your money market account, so it can help you with your emergency fund needs. If you are looking for a way to instantly access your emergency fund in a true emergency situation, a money market fund can provide you with what you are looking for.
It is important to note, though, that many money market accounts have minimum deposits. This means that you have to keep a certain amount of money in the account, or be charged a penalty. As long as you do not go below the minimum account balance, though, there usually is not a problem. It is important not to confuse money market accounts with money market funds, which are a little different and which are not guaranteed by the FDIC or NCUA.
Even though CDs and money market accounts can provide you with higher yields than a traditional savings account (and sometimes better returns than a high-yield savings account), you have to realize that the return on any cash product is always going to be low. You may not even keep pace with inflation. So, while these vehicles can provide a good option for better returns on your emergency fund, you probably shouldn’t be staking your retirement on them.