Your Emergency Fund Is in the Wrong Place If You Can’t Access It Quickly
An emergency fund is an important part of a financial plan. Those cash reserves can cover surprise costs, such as a car repair or medical bill, or cover your basic needs if you lose your job.
But if those same funds are difficult to access, it defeats the purpose of building an emergency fund. The money shouldn’t be stuck behind a transfer delay, market hours or an early withdrawal penalty.
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What ‘accessible’ means in an emergency
An emergency fund should be highly accessible as you often don’t have more than a few days before you need to have the funds in hand when a surprise arises. You should not have to incur debt or sell investments to cover a surprise expense if you have a sufficient balance in your emergency fund.
A high-yield savings account (HYSA) at a Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA)-insured financial institution should offer solid liquidity and an attractive annual percentage yield (APY). A money market deposit account is another good option. While certificates of deposit (CDs) typically let you lock in rates higher than savings accounts, they aren’t as accessible due to their penalty fees.
A Federal Reserve survey found that only 63% of adults would cover a $400 emergency using cash or its equivalent. The survey demonstrates the importance of being ready for a financial emergency so you don’t have to take out a loan, rack up credit card debt or sell investments to cover a surprise cost.
Where People Are Earning With High-Yield Savings Accounts
Where to not keep your emergency fund
Brokerage accounts make sense for buying assets such as stocks and exchange-traded funds (ETFs) to grow your money over time, but the short-term volatility of these assets makes these accounts poor choices for an emergency fund.
CDs offer guaranteed rates, but aren’t as liquid unless you pay a penalty fee that could exceed the amount of interest you have accumulated. Retirement savings accounts come with many of the same risks brokerage accounts, plus you could trigger penalty fees from pulling your money out early.
Physical cash and payment apps can be useful for small amounts but aren’t as suitable for larger emergencies. There are also security concerns, while you'll have FDIC insurance at a reliable financial institution that protects your money.
Where to keep your money
You don’t have to commit to a single account. Spreading your cash across accounts based on how soon you will need funds results in a tiered system that makes it easier to establish the role of each account.
A checking account can help with immediate expenses, and keeping a small buffer can prevent overdraft fees. A high-yield savings account can be used to store three to six months of living expenses. CD ladders can make sense for short-term savings that you don’t need access to immediately.