An emergency fund usually consists of 3-12 months of runway that you need in the case an unexpected life event happens. Since it’s a large sum of cash, the optimal strategy would be to get some type of return while it’s parked. Here are some of the best and worst places to park your emergency funds.
Disclaimer: I’m not a financial advisor. This post is for informational purposes only. Always do your own research and seek a certified financial planner if you have questions.
Worst Places to Store Emergency Funds
1. Physical Cash
The worst place to park your emergency fund is keeping physical stacks of cash in your house or a safe. An emergency fund is used when there’s an unexpected life event, which can range from a house fire or losing your job.
If there’s a house fire or robbery, your emergency fund is gone. Not to mention the stacks of cash are not earning any interest while sitting in a safe.
I recommend depositing the money in a bank and keeping electronic records.
2. The Financial Markets
The stock market fluctuates every day, so it’s not a stable place to store an emergency fund. When you invest, most people look at long-term results and not short-term gains.
For example, if you work in banking and the market crashes when you need to use the emergency fund, you’re out of luck. It would be unwise to withdraw money from the market since the valuation was slashed in half.
I recommend keeping your emergency fund out of the financial markets.
Best Places to Store Emergency Funds
1. High-Yield Savings Accounts
High-yield savings accounts are different from traditional savings accounts because they are usually offered online only.
By being online only, the bank saves on overhead and maintenance cost, which they can pass onto the customer. Traditional brick and mortar banks offer less than 1% APY on savings accounts, and good online high-yield savings accounts offer at least 2% APY.
There are a handful of high-yield savings accounts out there, and the most popular ones are:
Marcus (by Goldman Sachs) = 2.25% APY
Ally = 2.20% APY
Discover = 2.10% APY
Rates as of 3/31/2019
No minimum balance requirements
2. Certificate of Deposits (CD)
A CD account typically earns higher interest than a high-yield savings account. The main difference is that a CD has a contract that states how long the money needs to be in the account to earn the interest rate.
As long as the term is active, you can’t withdraw the money without a penalty.
There are short (3 months) and long-term (12+ months) CD accounts. If you pick a short-term one, be sure the APY is competitive. Otherwise, go with a high-yield savings account if you want liquidity.
Pros of a CD account:
Higher interest rates
“Protects you from yourself” - forces you to save since you can’t touch the money until the term is up
Cons of a CD account:
Fees to pull before maturity
It’s a good idea to have a stash of money for a rainy day. Save smarter and put the funds in a high-yield savings account if you want liquidity, or a CD account if you have funds to spare.
Before you park your money, check that the bank is FDIC insured in case any turn of events happen.
I recommend diversifying the funds, so I’ll place 75% in a high-yield savings account, and the remaining 25% in a CD.
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