The Emergency Fund Split That Keeps Money Safe, Available and Earning

Emergency funds are a key part of a solid financial plan. But if you leave too much of your money in a low-yield checking or savings account, you’re missing out on potential high interest and investment returns.

If you want to keep more cash on hand than what’s recommended to cover emergencies, the solution may be allocating money into categories based on what you need right now, what you will need soon and what you will need later. Distinguishing timeframes for each bucket can add layers of financial protection while generating higher returns on your idle cash.

Why one emergency fund may need three jobs

Cash reserves aren’t just for covering your monthly expenses. An emergency fund of cash can account for surprises like medical bills, home repairs or job loss. Financial advisors tend to recommend having enough cash readily available to cover three to six months of expenses in these funds. You may also want to keep cash accessible for short-term goals.

Having enough funds to cover immediate costs and any surprises will go a long way in securing your financial future, but you also need quick access to your funds. If it takes more than a week to tap into your emergency savings account, you might have to get a loan or sell stocks at a loss, which defeats the purpose of having an emergency fund.

While a checking account lets you access money without worrying about making too many withdrawals and potentially incurring fees, you also get a low interest rate with these accounts. But certificates of deposit (CDs), which offer higher yields, come with early withdrawal penalties if you pull your money out before a certain term length. A large high-yield savings account (HYSA) is a good option to store emergency funds, since it generates a higher yield than what you’ll see on traditional checking and savings accounts, and it’s highly liquid.

The 'available now' and 'available soon' buckets

You may also want to keep your money in cash and cash alternatives if you’re saving for short-term goals, like a vacation or new car. That’s why splitting your cash fund into buckets can make sense.

The “available now” bucket can include money in your checking account that you use for day-to-day expenses and an emergency fund in a HYSA that would cover three to six months’ worth of expenses should the unexpected happen. The “available soon” cash is for money that you'll still want to be able to access in the short-term, like in six months to a year. You could keep this in a HYSA, CD (as long as it will mature before you need the cash) or a similar account. You should look for an Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA)-insured savings account with no monthly fee and no minimum balance requirements. Fast transfers, easy online access and no teaser-rate traps are also good perks.

The 'earning more, but still safe' bucket

This final bucket consists of money that you will not need for one to three years, and that you don’t want to invest in the stock market and risk selling at a low.

The money in this category could go into short-term CDs and Treasury bills. These financial products let you secure an interest rate until the account’s maturity. You can select CDs and T-bills based on their maturity dates and create a CD ladder to make different portions of these funds accessible at different times. Most CDs have early withdrawal penalties, and penalty-free CDs have lower APYs.

CDs and T-bills have fixed rates, while HYSAs have variable rates that can change if the Federal Reserve decides to reduce interest rates. Not everyone needs to put money into CDs and T-bills. For many people, a HYSA is sufficient.

The exact amount of money you can keep in each bucket will depend on your specific situation. And remember, keeping too much cash on the sidelines could mean missing out on higher potential returns and not reaching your financial goals.