An emergency fund is a key part of a sound financial plan because it provides a cushion of money to cover unexpected expenses or emergencies. Without an emergency fund, unexpected events, such as job loss, medical bills, or car repairs, could quickly put you in financial distress. In this post, we will share our top picks for the best places to keep your emergency funds.
Why do you need an emergency fund?
An emergency fund is a savings account that has been set aside in preparation for unforeseen events or emergencies. It’s a handy stash of cash, usually enough to cover three to six months of expenses in a need.
An emergency fund can be a very useful tool for managing your finances and providing a safety net in case of unexpected events. Having this rainy-day fund can help you avoid going into debt if an unexpected expense arises, and can provide peace of mind knowing that you have a financial cushion to fall back on.
In general, having an emergency fund is good practice for financial planning and it is good habit to start saving for one if you haven’t yet.
Where are the best places to keep your emergency fund?
There are several types of bank accounts we recommend you keep your emergency fund. They include the following:
High-Yield Reward Checking Accounts
High-yield reward checking accounts are a type of interest-bearing checking account that typically offer a higher interest rate than traditional checking accounts. These accounts are designed to encourage customers to use their account for everyday transactions and make direct deposit. They usually offer a high annual percentage yield (APY) on the account balance, but have certain requirements that must be met in order to earn that rate.
To earn the high interest rate, customers are typically required to meet certain criteria such as:
- Making a certain number of debit card transactions per month
- Setting up a direct deposit
- Receiving electronic statements
Some financial institutions offer High-yield reward checking account in addition to the traditional checking account options. It is good idea to check the requirement and compare the APY rates offered by different banks to determine if this type of account is right for you.
It’s important to note that these accounts are not for everyone, as some banks have high minimum deposit, or high minimum balance requirement. The rates and qualifications for rewards checking account can change frequently and without notice, so you should keep an eye on the rate and if you don’t meet the requirement, the account will usually drop to a much lower rate.
Read more: Here are our top picks for high-yield reward checking accounts.
High-Yield Savings Accounts
Like a high-yield checking account, a high-yield savings account is a type of savings account that typically offers a higher interest rate than a traditional savings account. The interest rate on a high-yield savings account is often higher than that of a traditional savings account, and as such, these accounts can be a good way to grow your savings faster.
To open a high-yield savings account, you generally need to make an initial deposit, and then maintain a minimum balance, which varies between banks. These accounts typically offer FDIC insurance, which protects your deposit up to certain limit, just like a traditional savings account.
High-yield savings accounts may have different access or withdrawal limits compare to traditional savings account, and some may not have check writing or debit card features. They also may offer tiered rates which means, the interest rate will change based on the amount of money you keep in the account.
Some high-yield savings accounts are offered by online-only banks and some are offered by brick-and-mortar banks. It is good idea to compare the rates, fees and features of different high-yield savings accounts to determine which one is the best fit for you. Generally speaking, online banking providers will offer better rates than traditional banks.
It’s important to note that the interest rates for high-yield savings accounts can fluctuate depending on the economic conditions and the competition of the market, so it’s a good idea to keep track of the interest rate and compare it to the rate of other account from time to time.
Read more: Here are our top picks for high-yield savings accounts.
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Money Market Accounts
A money market account is a type of savings account that lets you write checks and usually has a higher interest rate than a regular savings account. Banks and credit unions offer these accounts, which are thought to be a low-risk way to invest money. They are like savings accounts in that the FDIC backs them and they are used to save money, but they have some different features and rules.
When compared to traditional savings accounts, money market accounts usually have higher minimum deposit and minimum balance requirements. They may also only be able to use checks or debit cards a certain number of times per month.
One of the main differences between a money market account and a savings account is that money in a money market account is invested in short-term, highly liquid investments like Treasury bills, certificates of deposit (CDs), and commercial paper. This means that the interest rate on the account won’t change as much as it would in a regular savings account. Because of this, the interest rate on money market accounts is usually a little bit higher than the rate on savings accounts.
Money market accounts are usually a good choice for people who want to earn more interest on their savings and also want to be able to access their money by writing checks or using a debit card. They are good for short-term savings goals and for people who want to invest in something with low risk.
Read more: Here are our top picks for money market accounts.
Certificate Of Deposit (CD) Accounts
A certificate of deposit (CD) is a type of savings account that banks and credit unions offer. The interest rate on a CD is usually higher than on a regular savings account. CDs are a low-risk investment option and are backed by the FDIC.
When you open a CD account, you agree to put a certain amount of money in it for a set amount of time, which can be anywhere from a few months to several years. In exchange, the bank agrees to pay you a fixed rate of interest for the whole term. The interest rate on a CD is usually higher than the rate on a regular savings account, and the longer the term of the CD, the higher the interest rate will usually be.
The most important thing about CD accounts is that you agree to keep the money there for a certain amount of time. If you take the money out before the term is up, you usually have to pay a penalty, which could mean losing some or all of the interest you earned. CDs aren’t good for emergency funds or money you might need in the short term, but they are a good way to save for the long term.
One benefit of CD accounts is that they may have a higher rate of return than a savings account. They can also be used as a low-risk investment that gives a predictable return over a certain time period. Before you decide to invest in a CD, it’s a good idea to compare the rates, terms, and penalties of CDs from different institutions and carefully think about your goals.
Read more: Here are our top picks for CD accounts.
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How much to save in your emergency fund
How much you should save in an emergency fund depends on how much money you have and how you spend it. A good rule of thumb is to have enough money to live for three to six months. This means saving enough money to pay for your rent or mortgage, utilities, food, transportation, and insurance for three to six months in case something unexpected happens, like losing your job or getting sick.
How much you should save will depend on how much money you have and how comfortable you want to be. If you have a high income, a stable job, and other savings or investments as a safety net, you may be able to save less than someone with a lower income or less job security. If you have more bills to pay or a higher cost of living, you may need to save more.
It’s a good idea to look at your budget carefully and figure out how much you spend each month on necessities. Once you have that number, multiply it by three to six months to figure out how much you should try to save in an emergency fund. It’s important to note that this is a target and it is good practice to start saving for an emergency fund as soon as possible, even if it’s a small amount that you can build on over time.
Bottom Line
It’s important to have a fund for emergencies so you don’t have to use credit cards or loans to pay for unexpected costs. This will keep you from going into debt and give you peace of mind, since you’ll know you have money to fall back on if something comes up.
READ MORE: SEE THE BEST BANK BONUSES HERE AND THE BEST INVESTING BONUSES HERE.
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