Where Are the Best Places to Keep Your Emergency Fund? There are many different opinions on where to keep your emergency fund. Some people say that the best place for it is in a savings account, while others say you should invest it in stocks or bonds. But which option is right for you? Here are a few things to consider.
Why should I have an emergency fund?
Emergency funds are crucial for your financial well-being as they help protect you should something unexpected pop up like a visit to the emergency room or a burst pipe in your home. Experts recommend having anywhere from six months to one year’s worth of expenses saved in an emergency fund, depending on your employment situation.
Should I build an emergency fund or pay off debt first?
Deciding whether your priority should be saving money or paying off debt is a tough choice since both are important. Some people try to find a middle ground where they divert money to both goals at once. An excellent way to do this is by consolidating your debt into a single loan and committing to putting 10% of every paycheck into a savings account. There are pros and cons of debt consolidation, so first consider your unique situation and level of income, but overall, the fewer bills you need to pay, the better.
The most popular places to keep an emergency fund
High-yield savings or money market accounts
Storing your emergency fund in a high-yield saving or money market account that is linked to your checking account is the easiest way to build your emergency fund since you can set up regular transfers to and from each account. However, the interest rates aren’t great at the moment, so you shouldn’t expect to earn much back in interest. That said, if it’s important to you that your emergency fund be accessible, then a savings or money market account is your best bet.
Certificates of Deposit (CDs)
Certificates of Deposit, or CDs, are like savings accounts, except they’re for a set amount of money and are more difficult to access before maturation. The pro is that they typically earn higher interest rates than savings accounts. If you need to withdraw from your CD before maturation, however, there may be penalty fees, or you may need to forfeit any accrued interest, but it’s still an option, nonetheless, should you need to take it. CDs can be a great place to store part of your emergency fund while another part is in a savings account. If you’re comfortable only having immediate access to a portion of your fund, this could be a good choice.
Stocks or mutual funds
Investing your emergency fund in stocks or mutual funds creates more risk and can subject you to capital gains tax if you need to withdraw funds. Still, if you’re reasonably sure you’ll be okay without immediate access, then investing in the stock market is a great way to potentially grow your savings. Depending on your risk level, you can diversify your emergency fund into a mix of high-risk/high-yield individual stocks or better hedge your bets with a selection of mutual funds that spread your money across multiple stocks instead.
Ultimately, the best place to store your emergency fund is in a savings account since savings accounts have FDIC insurance and can be directly tied to your checking account for quick access. But keep this guide handy when deciding which type of account works best for you so you’ll know the pros and cons of the most popular options.
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Where Are the Best Places to Keep Your Emergency Fund?
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