Where Should You Stash Your Emergency Fund?

Three cheers for you! You knuckled under and made some hard choices to build up a pile of money for unexpected events, like car repairs, medical bills, a job loss or other emergencies.

Most experts, including us, recommend having enough in your emergency fund to cover three to six months of living expenses. That can be quite a lot of money, so the next question is: where should you stash those funds?

Keep Your Emergency Savings Safe

Your emergency fund should be kept separate from your day-to-day checking account and other accounts you use to save up for things like vacations, holiday spending or the down payment on a home. This helps avoid the temptation to dip into your emergency fund for other needs and wants, or to “borrow” from the fund or use it for nonessential purchases.

Here are three solid options that provide ready access to the cash when you need it, but also ensure your money is safe and secure.

1. Savings Account: A traditional savings account is a safe option, as long as you’re dealing with a financial institution that insures these deposits. You won’t earn a lot of interest with a traditional savings account, but your money will be safe and easy to access.
   
2. Money Market Account: A money market account earns higher interest than a traditional savings account and gives you access to funds through checks, debit cards, and online transfers when you need emergency cash fast. And, like savings accounts, money market accounts are typically insured for up to $250,000 per depositor, so you can count on your money being safe.
   
3. Share Certificate Options: When you put money in a share certificate or certificate of deposit, you’re saving those funds for a set period, generally ranging from a few months to a few years. You’ll get a fixed rate of interest and can withdraw your money at the end of the term when the certificate matures. You’ll typically earn higher interest rates than a savings account or money market account, and your rates are locked in for the entire term. However, you’ll typically pay a penalty and forfeit interest if you withdraw money before the maturity date. So, if you’re interested in using this type of account for your emergency fund, be sure to look for no-penalty certificates or create what’s called “a certificate ladder,” in which you open multiple certificates with different maturity dates. This helps you maximize interest while avoiding penalties.

Where NOT to Keep Your Emergency Fund

We’ve already covered why your checking account is not a great place for your emergency fund – it’s just too easy to dip into it to cover regular expenses, or mix-up day-to-day funds with emergency funds. But here are a couple of other less-than-ideal options that might seem smart at first glance, but generally aren’t good choices for stashing your emergency fund.

At Home: Having some available cash at home in the event of an emergency (like an earthquake) is a good idea, because in the event of a natural disaster you may not be able to get to an ATM and banking systems could be down temporarily. But that’s different and separate from your emergency fund, which will likely total considerably more money. Your emergency fund needs to be safe and secure, so don’t hide it under your mattress or in the cookie jar, where it could be stolen or damaged in a fire or flood.

Stocks and Bonds: We’re huge fans of investing in a balanced portfolio of stocks and bonds (including through mutual funds) for long-term financial goals such as retirement savings, but these are not a good choice for funds you might need at a moment’s notice. That’s because the value of investments typically fluctuate over time, and you don’t want to have to sell at a loss, simply because you need the money at a time when prices are down.

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