Where should you save your emergency fund? Do you have a fully functional emergency fund plan in place?
You must start saving for one now. It is never too late to start saving whether you are 16 or 61.
An emergency fund is money saved for use in emergency situations.
In other words, it is money kept in your savings or checking account in case of unplanned urgent expenses. It is also called the rainy day fund.
Life is unpredictable in itself. We come across difficulties every now then.
It is always a smart move you give priority to emergency fund as part of your saving goals. It is wise you do this first before you go on knocking down other financial goals.
A healthy emergency fund reserve will go a long way to help you when things go wrong unexpectedly.
Where to save your emergency fund
A good reserve starts with where you save your money.
The place you choose to save your emergency fund matters a lot.
It will make the whole idea of saving a breeze and guarantee more money in your pocket over time.
1. High yielding savings account
So, where do you save your emergency fund? How much benefit and flexibility do you enjoy with the method?
Saving your emergency fund in a high yielding savings account won’t make you rich. But it still is one of the best places to save your money in.
High yielding savings accounts offer a higher annual percentage yield (APY) for your deposits. Unlike the traditional bank accounts or the checking accounts.
Their high APY enables you to earn more money over time and you also stand to benefit from the compounding of your savings and interest earned over time.
The higher interest rates you earn will be enough to keep up with the inflation.
Here are other benefits of a high yielding savings account.
It carries less fees
A high yielding savings account carries less fees. This is in comparison to normal checking accounts.
It requires low minimum balance
With it, you benefit from low minimum balance requirement.
No maintenance fee
You will also not get charged maintenance fees or any other fee.
It is easy to open one
High yielding account is easy to open. It can be done in your traditional bank near you.
You can open one with a variety of online banks available today.
All you will need is a document to verify your identity and you will be set.
Unlike traditional banks, online banks offer higher levels of convenience.
You will enjoy a higher annual percentage rate (APY) on your deposits.
Some of the banks offer as high as 3% APY on your emergency fund deposits. You will never find such rates in the traditional brick-and-mortar banks.
Their fees are very low if any. And, you get to enjoy very low minimum deposits. Where else would you find banks that allow you to save your pocket change?
Some banks offer you a chance to start saving for as low as $1 dollar!
Above all, you enjoy the convenience that comes with banking online. You can automate your processes and get your emergency fund after a few mouse clicks.
2. Money market accounts
Money market account is among the best places to build your emergency fund reserves.
They are almost similar to the high yielding savings account in terms of their benefits. It offers almost the same average APY and has low or zero monthly fees. It not only offers a higher interest rate for your money but also has the lowest risk.
The cool part is it comes with a debit card and checkbook. How convenient?
You can open a money market account for your emergency fund at your bank and online. Make sure to shop around for accounts that best suit you and your long term goals.
This should include:
Low minimum deposit requirement
Always go for the minimum deposit requirement you can afford. If you get a money market account that offers zero minimum deposit, you should go for that.
High annual percentage rate
A higher APY means your money will earn higher interest. The higher rate will cover your cash against inflation and leave you with more money.
Minimum balance requirement
Most money market account have minimum deposit requirement in place. You don’t have to worry about it. The money is being deposited to your account. It is part of your emergency fund reserve.
No hidden fees
A good money market account should have zero fee and no hidden costs. Make sure it is clearly stated before opening an account.
Offers other bonuses
Some money market accounts come with pecks to attract depositors. It comes in form of welcome bonus and many others.
Some even offer a chance for you to win a fully paid trip abroad.
As a rule of thumb make sure to shop around for the best deal.
What sets money market account apart is they require a higher minimum deposit to open one. This money is still part of your emergency fund savings.
An emergency fund should be an integral part of your personal finance goals. It comes handy in case of a rainy day.
Do your math. If you can afford one, go for it.
3. Certificate of deposit
Certificate of deposit (CDs) work a little differently than a high-yield savings and money market account. They are fixed time accounts.
When you put your emergency fund into a CD, you commit your money there for a specified period of time.
The time ranges from 30 days up to 10 years depending on how long you choose to commit your money. During this period, you are not required to make withdrawals. When it matures, you can withdraw your money and interest earned.
It is one of the best options, if you have the tendencies to dip into your savings every now and then.
Certificate of deposit is among the best and unique option to grow your emergency fund.
You earn a higher annual percentage rate, APY
With a high yielding savings account, the average APY rate in the market is 2.5%. But with a CD account, you get a 3% APY on average which is better. Therefore, on average, a CD account earns you 20% more.
Most CDs require no maintenance or monthly charges
You get all your money.
They are fixed time deposit accounts
This limits chances of you eating into your savings anyhow. You cannot withdraw until maturity.
They have a fixed rate
When you put your money into a CDs account, you know how much you are going to earn for the specified period of time. When you commit longer times, you earn a higher rate.
CDs make it hard for you to access your money when you need them most. However, you attract a penalty in case you make an early withdrawal.
But then, there is a way to deal with this problem. When opening a CD for your emergency fund, create what we call a CD ladder. A CD ladder simply means you put your emergency fund into CDs with varying maturity times.
For example, I have multiple CDs with different maturity dates, i.e. 12 months, 24 months, 30 months and 36 months.
(1) My CDs have rolling maturity dates. So it is easier to withdraw my emergency fund at 4 different times without triggering a penalty.
(2) I still enjoy the benefit of a higher APY rate offered by the CDs accounts. The longer the time, the more money I earn.
4. The Roth individual retirement account (IRA)
Roth IRA is a tax-free savings vehicle designed for retirement savings.
You can, however, use it to save for your emergency fund. (Read IRS guidelines)
With a Roth IRA,
You earn a higher interest rate
Money you save under the IRA is invested in the money market. You, therefore, stand a chance to earn way more than you will with a CD. Or, high-interest savings account in that case.
And, given the cash is invested in the money markets, your earnings are uncertain. In case of instability in the markets where your money is kept in; your earnings will be affected.
You can access your contribution any time
You can withdraw your contributions at any time without attracting a penalty.
This is the main reason most people prefer to have their emergency fund and retirement fund under an IRA.
However, withdrawals on accrued interest attract a 10 percent fee penalty.
Also, be careful not to dip your hands deeper into your retirement money. You will not only retire with less money but also lose the compounding power of the interest earned.
It is tax-free
With Roth IRA, a qualified withdrawal attracts no tax at all. It is free.
This offer is however limited to age.
It is completely free for 59.5 years old buddies. If you are not there yet, your withdrawals will have to factor in income tax.
5. Use a tiered approach
If you find all the methods to save your emergency fund discussed insofar to be beneficial. You might consider using more than one option. There is nothing wrong with that.
Depending on the size of your emergency fund, you can use more than one approach to save for your emergency fund.
You can keep part of it in an easy to access account for higher flexibility. And the remaining in a not easily accessible account, to benefit from the higher rate of returns.
You are free to build up your emergency fund savings in either of the options or more. It all depends on your financial needs and your short term and long term financial goals.
If you opt for higher yields, CD accounts and the Roth IRA will be your best option. However, you will not be able to withdraw your savings until they mature.
The CDs guarantees your earnings. You will know how much you will earn at a specified period in time. Therefore it takes the guesswork out of your savings plan.
As for the Roth IRA, you will enjoy higher yields as well in addition to your savings not attracting any taxes. It is a tax-free account geared towards retirement. You can use it to save for your emergency fund.
Money markets and high yielding savings account offer higher flexibility.
You will be able to withdraw your money at any time without attracting any penalty. At the same time, you will still enjoy higher returns for your emergency fund savings.
So, where would you build your emergency fund reserves? The method and place you choose matters a lot.