Where should you keep your emergency fund?

We’ve all heard stories (or experienced them ourselves)—an unexpected financial emergency pops up and you have to use a credit card or take out a loan to pay for it. That’s what an emergency fund is for—a savings account you grow, strictly for “just in case moments,” so you can cover it with cash and minimize financial stress in an already challenging moment. 

Safe and accessible

You want all your money safe, but emergency funds require specific measures to keep them stable yet readily available for quick withdrawal if needed. 

• Safe, meaning you should not put them in aggressive investments or somewhere risky where you could lose some or all of your money when you need it most. 

• Accessible, meaning you can easily get to the money when you need it, without any restrictions or extra fees. 

8 emergency fund account options

There are a variety of accounts to consider when starting your emergency fund. The best one will depend on your family’s particular needs.

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Regular savings account at your bank or credit union

A regular savings account allows you to keep your emergency fund separate from your checking account, but still accessible. It’s safe and easy, but it may not be the best option for growing your money over time because regular savings accounts typically have low interest rates. 

Keeping some cash at home

Having extra cash in a safe place can be helpful in case of power outages or tech issues, but you probably shouldn’t keep too much because it can be lost, stolen, or damaged. It also won’t earn any interest. 

High-yield savings account

Some financial institutions offer high-yield savings accounts. Rates vary, but they’re often noticeably higher than regular savings accounts. This allows your money to grow while still keeping it safe and accessible. Most high-yield savings accounts come through online banks, so you may have to open an account with an additional bank. 

Money market account

Money market accounts are like a mix of checking and savings accounts. They often earn slightly higher interest rates than regular savings accounts, and they sometimes come with a debit card and the ability to write checks. But you may need more cash to start, as some require higher minimum balances to open. 

Certificates of deposit (CDs)

CDs typically offer higher interest rates than savings accounts, and sometimes even more than high-yield savings accounts. The interest rate is guaranteed for a set time, but you have to pay a fee to take your money out before this period ends. Since we never know when an emergency might happen, CDs may not be ideal as a primary emergency fund, but can be a good option as a second emergency fund, so you don’t have to worry about accessibility issues. For example, you might save a few months of income in your savings account, but plan a larger emergency fund in a CD that earns more interest. 

Money market mutual fund

You can purchase money market mutual funds through investment companies. Like any other mutual fund, a bunch of investors pool money for a money manager to oversee. In a money market mutual fund, that money is invested in short-term investments, like U.S. Treasury Bills, commercial paper, and CDs. 

Money market mutual funds can be a solid option if you already have a brokerage account with an investment firm. They often provide interest rates similar to high-yield savings accounts and CDs, and are easily accessible, with the ability to retrieve your money quickly. Some also offer check-writing. 

I-bonds

These are U.S. Treasury savings bonds specifically designed to protect your money from inflation. The U.S. government guarantees them, they earn interest for up to 30 years, and that interest is exempt from state and local taxes. Interest rates for I-bonds change every six months and are a combination of fixed rates and variable rates based on inflation. 

However, you must hold an I-bond for at least one year before you can access your money. The limited accessibility makes it a better option for only a portion of your emergency fund. 

Learn more about the different types of bonds.

Health savings account (HSA) for medical emergencies

While HSAs wouldn’t make sense as your sole emergency fund, they can be an excellent option for saving on and paying for medical emergencies. HSAs are available if you have a high-deductible health plan, allowing you to save money tax-free. HSAs are considered “triple-tax advantaged” because your contributions are tax-deductible, your money grows tax-free, and you can withdraw money tax-free for qualified medical expenses. 

Emergency fund pitfalls to avoid

• Mixing your emergency fund with your checking account. Keep them separate to avoid spending the money you intended to set aside. 

• Investing your emergency fund money in stocks or long-term investments. They can lose value and be hard to access when you need them most. 

• Mixing your emergency fund and retirement accounts. You don’t want to take money out of your retirement account to pay for emergencies, nor do you want to tie up your emergency fund for the long haul. These accounts have different goals, so keep them separate. 

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Building your emergency cushion

Experts typically recommend building an emergency fund that can cover 3-6 months of expenses, but those funds don’t have to all be in one place. For example, you may decide to keep most of it in a high-yield savings account for the accessibility and high interest, some of it in a CD that offers even higher interest, and some cash at home. Set a goal, automate your savings, and regularly evaluate your progress. 

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