An emergency fund can give you peace of mind when you face unexpected expenses, such as a broken appliance, a medical bill, or a car problem. Your emergency fund can help you pay for these without going into debt, but where should you keep your emergency cash? — Worldculturepost
You might be tempted to stash it under your bed, but you have smarter options. If you want to know the best places to store your emergency cash, here are four options to consider.
High-Yield Savings Accounts
High-yield savings accounts are different from regular savings accounts in several ways. First, they offer a higher interest rate or APY on your deposits, as the name implies. This means your money grows faster over time.
Another difference is that high-yield savings accounts may have lower fees than regular savings accounts. For example, you may not have to pay a minimum balance or a monthly service fee.
Where can you find high-yield savings accounts? You can find them at traditional banks, but you may have more choices if you look at online banks. The benefits of opening a high-yield savings account with an online bank are:
- Higher APY on savings than a traditional bank
- Lower or no fees
- Small minimum deposits (some online banks let you start saving with $0)
There may be some drawbacks to choosing a high-yield savings account for your emergency cash, especially if you go with an online bank. The main one may be the convenience. If your emergency cash is at an online bank and the bank has no branches or ATMs near you, you may have to transfer money from your savings to an account at a traditional bank, then withdraw it. That could be inconvenient if you need the money fast.
Money Market Accounts
Money market accounts are similar to high-yield savings accounts in terms of the interest rate and the fees. There are some differences that may make them more or less appealing as one of the best places to store your emergency cash.
Unlike regular savings accounts, money market accounts may come with a debit card, a checkbook, or both, depending on your bank. This can make a money market account very handy if you need to buy something or write a check for an unexpected expense.
A possible downside is that money market accounts may require a higher minimum deposit to open. For instance, instead of starting your emergency fund with $1, you may need $100 or more to open an account. That could make a money market account inaccessible, at least until you have saved up enough money.
Certificates of Deposit (CDs)
Certificates of deposit or CDs are time deposits that have different features than a high-yield savings or money market account. A CD requires you to lock in your savings for a fixed period of time. This can vary from 30 days to 10 years, depending on the CD term you select. When that term expires, your CD matures and you can withdraw your original deposit, plus the interest accrued.
The benefits of using a CD for an emergency fund are that you may be able to earn a higher APY than you would with a savings or money market account, and CDs usually have no monthly or maintenance fees. A downside, however, is the early withdrawal penalty that can be charged if you take money out of a CD before its maturity date. This penalty can be a flat fee or a fraction of the interest earned.
One way to avoid the fee is to create a CD ladder, using multiple CDs of different term lengths. For example, you might have a three-month CD, a six-month CD, a 12-month CD, and an 18-month CD. The benefit of laddering CDs is twofold. First, your CDs have staggered maturity dates so it may be easier to access money if needed without incurring a penalty. You can also enjoy higher APYs since the longer your CD term, the better the rate.
Roth Individual Retirement Account (IRA)
A Roth IRA is a tax-favored vehicle designed for retirement savings but it could also serve as an emergency fund in a pinch. The appeal of a Roth is that your money is invested in the market, meaning you can achieve a much higher rate of return than you would with a savings account or even a CD. And qualified withdrawals from a Roth IRA are always 100 percent tax-free.
Using a Roth IRA for emergency savings may not be the best option, however. Depending on how long you've had your account and your age when making an emergency withdrawal, you may have to pay income taxes on the earnings you take out, along with a 10 percent early withdrawal penalty. You're also reducing your retirement savings since the money you withdraw no longer benefits from the power of compounding interest.
Consider a Diversified Approach
If you're unsure about where to keep your emergency fund, consider using more than one option. Allocate some of your emergency cash to a high-yield savings account, some to a money market, some to a CD and some to your Roth IRA. That way, you'll have multiple options for handling an emergency when life throws you a curve ball.