Where to keep your emergency fund? Should you keep it at home or invest it? In general, it’s smart to have some money available in case you face an unforeseen financial problem. The key here is that it should be readily available, but at the same time, you don’t want to keep it under the mattress or at home where inflation will just eat it away slowly. Here are a few safe places to keep your “rainy day” fund.
Five Places to Park Your Emergency Fund
1. Online Savings Account
If you’re a regular Moolanomy reader, you are likely aware that there are online savings accounts that offer north of 2% interest rate.
Some customers have turned to online banks to seek higher interest rates and to avoid fees associated with more traditional banks. If you are comfortable banking without physically interacting with a banker or teller, you might want to look at opening an online savings account for your emergency fund.
Online banks are typically able to offer better interest rates because they reduce costs associated with maintaining physical buildings and normal business operations. They also tend to have superior websites than traditional banks because practically all your interactions with the bank are done online.
There are certain negative aspects — you can’t go into a branch and you need internet access to perform financial transactions. However, since you can access your funds via an ATM, an online savings account is an excellent option for an emergency fund. When you look at online banking options, check out specific account options along with the interest yield. Also, of course, verify that the bank is FDIC-insured.
2. Money Market Account
A money market account (MMA) is a high-yielding savings account offered by an FDIC-insured institution. Make sure you don’t confuse a money market deposit or savings account with a money market mutual fund, sometimes just called a money market fund.
A money market fund is required by law to invest in safe assets like low-risk securities, but it is not FDIC-insured. We do not recommend using a money market fund for your emergency fund because of this lack of insurance.
With an MMA, you have easy access to cash, while receiving a relatively high interest rate. Your debit card connected to your MMA generally allows you to withdraw money at ATMs or charge purchases.
An MMA will very likely come with a minimum balance requirement and limitations on the number of checks you can write and withdrawals you can make each month. But since you will be using your MMA as an emergency fund, these conditions shouldn’t be a problem.
3. Credit Union
Credit unions have become increasingly popular in recent years. They are member-owned, not-for-profit financial organizations that offer many of the same services as banks. Since credit unions are not-for-profit, cooperative organizations, they are exempt from many of the state and federal taxes that traditional banks must pay. As a result, accounts at credit unions usually see much better interest rates. Each account is insured up to $250,000 by the National Credit Union Administration. Opening a credit union account as an emergency fund could be a very attractive option.
4. Prepaid Debit Card
This option may surprise you. The money you add to a prepaid debit card, while FDIC-insured, does not pay interest. But some cards now offer a high interest savings account linked to the prepaid card. The best offer I’ve seen is from the Mango prepaid MasterCard, which offers a whopping 6.0% APY savings account option. You are limited to no more than $5,000, but that’s perfect for an emergency fund. You do have to set up direct deposit to the card to qualify for the savings account, but that’s a great way to automate your savings.
5. Certificate of Deposit (CD)
A certificate of deposit (CD) is traditionally one of the safest places to store your cash and receive a small, though predictable rate of return. Some of the best high yield CDs might fit well in your overall investment strategy, but we don’t recommend using most CDs as an emergency fund because they do not allow you to easily withdraw your money.
A CD has a maturity date, and if you withdraw your funds early you typically have to pay a penalty in the form of an early-withdrawal fee. Your emergency fund should instead provide easy and instant access to cash.
There is one possible exception: there are some no-penalty CDs that allow you to take out your cash before the term of the CD expires without penalty.
Cash Hidden in Your House
If you are not comfortable with any of the options above, as a last resort, you could keep the money at home. Just remember that it will not be earning any interest and inflation will slowly make it worth less.
Then again, if it gives you some peace of mind to have cash immediately available, you should at least try to hide the money out of sight. Here are a few options:
- Put your cash in a ziplock bag, wrap it in aluminum foil and stash it among the frozen food.
- Clean out a used can of soup and store your rolled up bills in the can. Place the can behind and beneath other cans of food.
- Have a book in your library that no one cares to open, much less read? Cut out a space in the middle of that book using a box cutter. Stash your cash in the space and return the book to the library to gather dust.
- If you want to protect your cash against fires and natural disasters, store it in a fireproof safe bolted to the floor.
With all these options, be sure to tell a close friend or spouse about your secret hiding place in the unfortunate case that you die or somehow can’t reach the money. For further discussion about emergency fund, see Emergency Fund: Your Safety Net Against Financial Emergencies.