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An emergency fund can help you cover life’s curveballs when an unexpected financial situation comes your way. You may be wondering where to keep your emergency fund until you actually need it.

You could stuff your emergency savings under the mattress or in a piggy bank, but a bank account can be a smarter way to save. The best account for emergency fund savings is one that offers you convenient access to your money, a competitive rate on deposits, and minimal fees.

Weighing some of the different banking options can help you decide where to put emergency funds. Read on to learn more about:

•   Where you can keep an emergency fund

•   How much to keep in an emergency fund

•   The pros of having an emergency fund

•   How to start an emergency fund

Where to Keep Emergency Funds

Now, where to keep an emergency fund? There are different places you could keep your rainy-day money. When making a decision, it’s important to consider what works best for your lifestyle. And you’ll also want the security of knowing your money is safe, so it can be best to bank at a financial institution that is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration).

With that in mind, here are five possibilities you might consider when looking for the best account for emergency funds.

1. Traditional Checking or Savings Accounts

You might consider keeping emergency savings in a traditional checking account or savings account at a brick-and-mortar bank. On the pro side, that could make it easier to access your money in an emergency. However, you may not get the best rate for your money. Also, checking accounts often don’t earn you any interest, and their accessibility can make it tempting to dip into the funds for something that isn’t a true emergency.

Traditional banks are not known for offering the highest annual percentage yields, or APYs, on savings accounts either. You’re also more likely to pay a monthly maintenance fee for a traditional savings account than one at an online bank.

2. High-Yield Savings

High-yield savings accounts offer above-average rates on balances. For example, you might find a savings account with an APY that’s five, 10, or even 20 times higher than the national average.

It’s more common to find high-yield savings accounts at online banks vs. traditional banks. That’s because online banks tend to have lower overhead costs so they’re able to pass on savings to their customers. You’re also less likely to pay a monthly fee for a high-yield savings account.

Of course, you won’t have branch banking access with an online savings account. You may, however, be able to access your account via an ATM card or debit card, or by transferring funds to a linked account.

3. Bonds

A bond is a type of debt instrument. When you buy a bond, you’re agreeing to let the bond issuer use your money for a set time period. In return, the issuer agrees to pay interest back to you.

Bonds can be attractive since you can earn decent interest rates on savings. However, they’re not great for accessibility since you have to wait for the bond to mature to get your money back.

You could cash out a bond early but that might mean forfeiting some of the interest you could earn. So you may want to consider bonds for money that you’d like to invest, versus money that you might need to tap into for emergencies.

4. Certificate of Deposit (CD) Accounts

A certificate of deposit or CD is a time deposit account. When you put money into a CD, the bank agrees to pay interest on your balance over a set time period. Once the CD matures, you can either withdraw your initial deposit and the interest or roll it all over to a new CD.

CDs can be a reliable way to save, since interest rates are guaranteed. However, your money is locked in for the entire maturity term. If you need to break into a CD early, your bank may charge an early withdrawal penalty. That could cost you some or all of the interest earned.

If you’re interested in using CDs for emergency savings, you might consider a CD ladder. Laddering CDs means opening multiple CDs with different maturity terms. That way, you always have a CD maturity date on the horizon. CD laddering could also help you to capitalize on rising interest rates since you can roll expiring CDs into a new account with a higher APY.

5. Money Market Accounts

Money market accounts combine features of savings accounts with checking accounts. For example, you can earn interest on balances and you might also get a debit card or paper checks that you can use to access your money.

A money market account can offer flexibility since they’re easier to access than bonds or CDs. And you might find money market accounts at online banks that offer rates comparable to what you could get with a high-yield savings account or CD. However, read the fine print: There may be minimum account opening and balance requirements as well as monthly fees to be paid.

If you’re considering a money market account for your emergency fund, consider the fees. An online money market account might be preferable for minimizing what you pay in fees while getting a competitive rate. Remember, the best account for an emergency fund will be the one that suits your specific needs.

How Much Should You Keep in Your Emergency Fund?

A common rule of thumb for emergency savings is to aim for a minimum of three months’ worth of expenses and many financial experts bump this up to six months. How much money you should keep in your emergency fund should be a number that you’re comfortable with, based on your financial situation.

For example, instead of aiming for three to six months’ worth of expenses, you might choose to save $2,000 for every person in your household. If you have a family of four, that means you’d need an $8,000 emergency fund.

Whether that’s sufficient can depend on what expenses you have, what other financial resources you have, and how quickly you believe you could replace lost income if you end up out of work. Some people may be fine with having a $1,000 mini emergency fund while others are more comfortable setting aside nine to 12 months’ worth of expenses for emergencies.

The Benefits of Having an Emergency Fund

The importance of emergency savings can’t be underestimated. When an unexpected situation or expense comes along, your emergency fund can act as a safety net and help you pay bills without resorting to high-interest methods.

In this way, an emergency fund may be able to reduce stress and give you a sense of financial security.

When you have money in emergency savings, it becomes easier to:

•   Avoid high-interest credit card debt. Rather than using your credit cards, you can draw from your emergency savings to cover extra expenses. You can then pay yourself back by depositing money into savings, without having to pay the high interest a credit card might charge.

•   Get through financial challenges. An emergency fund can pay for a smaller expense, like a new tire, but it can also cover bigger obstacles. For example, if you lose your job unexpectedly, having emergency savings to fall back on can ease anxiety over paying bills while looking for a new job.

•   Avoid impulse decisions. Having emergency savings gives you some breathing room so you can make financial decisions with less pressure. That’s a good thing if it allows you to avoid a potentially negative outcome, like rushing into an expensive loan without reading the fine print.

Keep in mind that your emergency savings isn’t meant for any kind of spending. It’s designed for emergencies only.

So what is a financial emergency? Generally, it’s any situation that you weren’t expecting that affects you financially. Examples of financial emergencies can include:

•   A job loss or extended layoff

•   Natural disasters that displace you from your home

•   A car accident or breakdown that requires major repairs

•   Illness or injury that leaves you unable to work

•   An important appliance (whether that’s a washer or a laptop) that breaks down

•   Unexpected loss of a loved one

Those are all examples of when to use your emergency fund. Buying new clothes, funding a last-minute, or upgrading your furniture because there’s a sale happening, on the other hand, are “wants” and not true emergencies.

Starting an Emergency Fund

If you’re ready to start an emergency fund, the first step is finding the money in your budget to save. The amount of money you get started with doesn’t have to be much; the most important thing is to commit to saving for emergencies on a consistent basis.

For example, say you can only save $25 per pay period and you get paid biweekly. That’s $650 you could save in one year if you’re saving regularly. If you’re not satisfied with that amount, you could review your budget to look for more money to save.

Here are a few additional tips for starting an emergency fund:

•   Consider opening a separate bank account to hold your emergency savings and linking it to your main checking account. Money in your checking account often gets spent despite the best intentions.

•   Look for a savings account that offers a competitive APY with no monthly fees.

•   Set up automatic transfers from checking to savings each pay period to make saving effortless.

•   Use “found” or extra money, such as tax refunds or year-end work bonuses, to grow your savings versus going shopping with the whole bundle.

Comparing different banks can help you find the best place to keep your emergency fund savings. And remember that while saving money might seem difficult at times, it can pay dividends if you’re able to stick with the habit.

The Takeaway

Having an emergency fund can help you sleep easier at night if you know that you’re covered should an unexpected expense crop up. If you’re looking for the best emergency fund savings account option, you can start with your current bank then compare it to other banks. Look for a combination of high APY and low (or no) fees to make the most of your money.

For instance, you might consider opening an online bank account with SoFi. With our Checking and Savings account, you can spend and save in one convenient place, plus you’ll earn a competitive APY on balances while paying no account fees, which can help your cash grow faster. One other terrific benefit: Qualifying accounts can get paycheck access up to two days early.

Better banking is here with up to 4.30% APY on SoFi Checking and Savings.

FAQ

What type of account is the safest for emergency funds?

A bank account at an FDIC-member bank is the safest option for holding your emergency fund. FDIC insurance protects your deposits in the rare event that your bank fails. Accounts that can be FDIC-insured include savings accounts, money market accounts, checking accounts, and CD accounts. NCUA serves a similar function insuring credit union accounts. Both offer $250,000 coverage per depositor, per account type, per insured institution.

Should I open a separate bank account for my emergency fund?

Opening a separate bank account for an emergency fund can be a good idea if you’re worried that you might be tempted to spend savings that are mingled with other funds. Having a separate savings account that’s linked to your checking account can allow for easy transfers. You’ll also continue earning interest until you need the money.

Should emergency funds be kept in cash?

Keeping an emergency fund in cash can be problematic as it increases the risk of the money being lost or stolen. You’re also not earning any interest by keeping emergency funds in savings. What’s more, certain emergency expenses might need to be paid using a check or debit card, which would still require you to deposit your cash into a bank account at some point.

Photo credit: iStock/dobok

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