Where to Keep Your Emergency Fund
We've talked about how to automate your savings, what your money roadmap should look like (what to do and in what order), and — several times over the years! — we've talked about emergency funds.
But it's been far too long, so let's discuss… readers, where do you keep your emergency fund right now? Do you move it around if you see a markedly better rate?
To frame the discussion, as well as refresh you if you're unfamiliar — the suggestion I always see is to keep three to nine months of living expenses (mortgage, rent, loans, food, basic living needs), easily accessible in case you’re laid off, fired, quit, or are otherwise unable to work — or if you have some other huge unexpected expense, like if your car breaks down or you get in an accident and have bills to pay.
{related: how to calculate your e-fund}
Where to Keep Your Emergency Fund
Experts are divided, but I've always thought these were the best options for where to keep your emergency fund (with my personal preference being heavily weighted towards the first two):
High Yield Savings Accounts (HYSA)
Online-only, high-yield savings accounts are most often mentioned here. (The one I use is Ally, but there are several others!) The big pro here is that the money is really fluid — you can get it in a day or two, it's not locked down at all. The con is that a) it will take a day or two to get your money, and b) the interest rate is also fluid, and in recent years they've swung between 1.5% and 5%.
Certificates of Deposits (CDs)
Another oft-mentioned option: certificates of deposit. The pros and cons here are almost exactly opposite the online-only savings accounts — the big con is that you agree to a set term (anywhere from 12 months to 5 years) to keep your money locked away… so if you decide you want to buy a house midway through the term, you'll be paying a penalty fee if you try to take your money out.
(If this is a concern, you should be looking exclusively at penalty-free CDs.)
The big pro, though, is that your interest rate is locked in. (At least, usually it is — make sure when you're investing that the interest rate is locked in and is not “callable.“)
Some people ladder CDs so that they come due at different times — so, for example, some money is locked away for 6 months at X%, more money is locked away for 12 months for X+1%, and even more money is locked away for 24 months for X+2%.
In my many years of investing, though, only recently have CDs become attractive to me — the rates were barely better than what you could get from a HYSA, and a far cry from what you could get in the stock market. So if I didn't need the money for at least 5 years, I was much more likely to take a chance and put it in the stock market.
Money Market Funds
Money market funds haven't been a smart choice for years because they've been earning very small interest rates — but that is changing in a big way, with some money market funds (such as Vanguard's default one) earning a relatively good rate compared to HYSAs.
The pro to keeping your money market funds is that the money is available immediately should you want to invest, unlike if you keep it at another vehicle and then have to move the money over to invest it. The con is that, in my experience at least, its harder to figure out what the current rate is for your money market fund, and that rate is subject to change.
Another important difference between money market funds and the other two options (HYSA and CDs) is that a MMF is an investment product, and thus not FDIC-insured. (Vanguard notes that they “may be eligible for $500,000 coverage under SIPC when held in a brokerage account,” though.)
Money Market Savings Accounts
These are offered by banks and thus FDIC insured. In years past they might offer a slightly more competitive rate than a HYSA — especially if you keep a certain minimum in the account. I only have one of these at the moment (at Ally) and it's giving me the exact same rate as my high-yield savings accounts at the same bank.
Treasury Bonds
A year or two ago you might have heard a lot of advice to put your emergency fund cash into treasury bonds, back when the i-bond rate was something like 10%. The rate changes every six months, though, and the current rate isn't that much better than HYSAs.
The pro is that treasury bonds are very safe, money can stay there for 30 years; you'll get the benefit when the rates are good (but also suffer when rates are bad).
The down side is that you are locked into the investment for a certain period of time, and if you take it out before a certain amount of time has passed then you'll lose the benefit of any great rates. Other down sides, in my view: the money is hard to monitor because it doesn't always sync well with online budgeting apps. You're also limited to $10,000 per year.
Cash
Some people do keep some cash on hand in case of a true emergency. The pro is that the money is there for you immediately. But the big cons are that you're not earning any interest on the money, and if the money is stolen or lost there is no recompense.
Where I'm Keeping My Emergency Fund Right Now
At the moment I'm keeping our emergency fund in laddered CDs, all with short ranges like 6-18 months. The rates weren't that much better than the regular rate I was getting at my high-yield savings account, but I liked that the rates were locked for a certain period of time.
(I also have some money in i-bonds that I sort of consider to be part of our emergency fund in that I know the money is parked there. Interest rates were a lot better a year or so ago, though, but the composite interest at this point isn't too offensive, so we keep the money there.)
All of our CDs are through Ally. (This is not a sponsored post, I just use them for my all of my HYSA needs.) I've played around with investing money through Vanguard and Schwab, but the rates weren't great and when the CD would end a lot of times the money would get dumped into a settlement fund earning less than 1% interest, which meant I had to monitor them closely… so now all of my CDs are just through Ally. I like that I can say exactly where I want the money to go. Ally also offers a rate boost if you reinvest the money, so I often reinvest part of the money in a new CD.
Readers had a great tip recently about Vanguard's Treasury Money Market Fund (VUSXX), which currently has a 5.12% yield; other vendors may have similar money market funds. For Vanguard, note that it requires a $3,000 minimum, though!
Readers, how about you — where are you keeping your emergency fund money this year?
Stock photo via Deposit Photos / Boyrcr420.
CapitalOne360 HYSA (which is currently at 4.25%. Every few years they drop the interest rate and have a new savings account product with a higher rate and I just move the money around) is my true emergency fund, then I have some in VUSXX, though I think of that as less of an emergency fund and more of a “park money here that I’m saving for a major expense coming up soonish (home improvement, large trip, etc.) and don’t want in the stock market”
Wealthfront HYSA at 5.0% but I got it at 5.5% for a while from referrals.
We have $5-10k in a checking account; $10k in a CapitalOne HYSA and $30k in short term (<12 month) CDs at Ally. The checking account pays our monthly bills, the HYSA is intended to cover something like a home repair and the CD money would cover our expenses for about a year if we adjusted our lifestyle.