Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
Stuff happens. Often when you least expect it. A flu that gets the best of you. A clunking noise coming from your car—brakes? A busted water heater. You get the picture. It’s why most financial experts suggest building an emergency fund. It’s meant to protect you and your family from unexpected expenses that could lead to financial hardship if you’re not prepared. The best place to keep your emergency fund (think three to six months of living expenses) is separate from your regular checking and savings accounts so it can be earmarked for emergencies only.
A financial emergency can include job loss, medical bills, a car or home repair, a deep pay cut or any other financial setback. (Brand new sneakers, the latest smartphone when your current one is in tiptop shape, a weekend getaway… not so much.) If any of these unfortunate situations occur, your emergency fund can provide a welcome financial cushion and several months’ support while you get your finances back on track.
With thousands of dollars in play, you’ll want to make sure you keep your emergency fund parked in a safe spot and that you’re getting a return on your cash reserves. But since this cash needs to be readily accessible in case you need it, you have to choose where to keep your emergency fund wisely.
When deciding where to keep your emergency fund, consider these four different accounts that offer easy access and benefits:
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A high-yield savings account might be the best place to keep your emergency fund. Not only are your funds accessible in this type of bank account, but you’ll also earn interest on your deposits. To find the right high-yield savings account for your emergency fund, look for options with a competitive interest rate and no monthly fees or balance requirements.
Since certain banks offer “welcome bonuses” for new customers, you can also score an upfront benefit if you meet the terms and requirements.
When deciding where to invest your emergency fund, don’t forget about money market accounts. Money market accounts are similar to savings accounts in that they can offer higher yields. You can open a money market account online or at a local bank, then access your money through web-based account management or at an ATM.
Since money market accounts are easy to use and your funds can be withdrawn at any time, they can be a good option for your emergency savings. However, be mindful of money market fees that could chip away at your returns. As with any other account, it pays to shop around and compare fees and features before selecting where to keep your emergency fund.
Certificates of deposit, or CDs, offer a fixed rate of return for a specific length of time (e.g., 1.30% APY for 24 months). Since your rate of return is guaranteed, opening a CD could be a way to earn extra interest on your emergency fund.
Since CDs “tie up your money” where it’s somewhat out of reach, you may have to pay a penalty to close your CD account early to access your funds. To combat this, many people opt to “ladder” their CDs—a term that describes opening multiple CDs with different maturity dates so a certain amount of cash is available at all times.
A financial emergency can include job loss, medical bills, a car or home repair, a deep pay cut or any other financial setback.
While a Roth IRA may not seem like the ideal spot to invest your emergency fund, parking your cash there can make sense. By investing your funds conservatively, you may secure higher earnings than a traditional savings vehicle—without taking on too much risk.
A risk you’ll need to consider if you keep your emergency fund here? Your Roth IRA could lose value. Choosing conservative investments for your Roth IRA could help mitigate this risk, but it may not shield you from losses altogether.
Your emergency fund is there to protect you and your family from financial stress caused by unexpected expenses. While you’re not using it, though, your account needs a safe place to grow. Stashed in a high-yield savings account, certificate of deposit (CD), money market account or even a Roth IRA, your emergency fund can continue growing until the day you need it.
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