An emergency fund is an important part of a financial plan. Those savings can cover unexpected expenses, like a car repair or medical bill, or pay for your basic needs if you lose your job.
But if those same funds are hard to come by, it defeats the purpose of building an emergency fund. Money should not be delayed after transfer delay, market hours or early withdrawal penalty.
What ‘accessibility’ means in an emergency
An emergency fund should be very accessible as you usually don’t have it for a few days before you have cash on hand when an emergency arises. You don’t have to go into debt or sell investments to cover unexpected expenses if you have an adequate balance in your emergency fund.
A high-yield savings account (HYSA) at the Federal Deposit Insurance Corporation (FDIC) or a financial institution insured by the National Credit Union Administration (NCUA) should offer stable income and an attractive annual percentage yield (APY). A money market deposit account is another good option. Although certificates of deposit (CDs) often allow you to lock in higher rates than savings accounts, they are less affordable because of their penalty fees.
A Federal Reserve survey found that only 63% of adults would pay for a $400 emergency with cash or cash equivalents. The survey shows the importance of being prepared for a financial emergency so you don’t have to take out a loan, rack up credit card debt or sell investments to cover unexpected expenses.
Where not to keep your emergency bag
Brokerage accounts make sense for buying assets like stocks and exchange-traded funds (ETFs) to grow your money over time, but the short-term volatility of these assets makes these accounts poor choices for an emergency fund.
CDs offer guaranteed rates, but they are liquid unless you pay a penalty charge that can exceed the amount of interest you have accrued. Retirement savings accounts come with many accounts of the same risk, and you may incur penalty payments for withdrawing your money early.
Cash and payment apps can be useful for small amounts but are not suitable for large emergencies. There are also security concerns, while you will have FDIC insurance at a trusted financial institution protecting your money.
Where can you save your money?
You don’t need to commit to one account. Spreading your money across accounts based on how quickly you’ll need the money results in a tiered system that makes it easy to figure out the role of each account.
A checking account can help with quick expenses, and keeping a small buffer can prevent overdraft fees. A high-yield savings account can be used to save three to six months of living expenses. CD ladders can make sense for short-term savings that you don’t need immediate access to.
