Where to Keep Your Emergency Fund
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Where to Keep Your Emergency Fund
In the old days, people would talk about keeping their money under the mattress at home. But that was before deposit insurance and credit union share insurance were created to protect accounts at financial institutions. Now you can stash your cash there and earn interest or dividends on it, and keep it away from mice, too.
Things To Know
- Ideally, you want to store your emergency cushion in a liquid, easily accessible account that does not lose its value.
- Many institutions offer accounts for specially designated purposes, such as emergency funds.
Liquidity is ideal
Ideally, you want to store your emergency cushion in a liquid, easily accessible account that does not lose its value, so you know how much money you have available in the event of an emergency and you can withdraw money quickly. Savings accounts offer excellent liquidity. So do money market accounts. Though they hold their value, time deposits such as certificates and savings bonds are not very liquid, though you can take your money out prematurely; however, you will likely be penalized for early withdrawals and lose some of the earnings you’ve built up.
What is not ideal
Not all accounts are suitable for emergency funds. Retirement accounts, for example, should stay put so they can have growth potential over the course of decades. Taking money out prematurely can cost you a huge amount of growth and early withdrawal penalties and taxes over the long term. Tapping a revolving credit account, such as credit cards, can end up costing you much more in finance charges than you need to cover your emergency expense.
Some people choose stocks or other market-based investments for their emergency funds due to those investments’ potential to grow in value over time. While this can indeed happen, remember that the volatility of the market may put you at a disadvantage when it’s time to take your money out. You may end up with less than you put in.
Special accounts for an emergency fund
Many credit unions and banks now offer certificates or savings accounts for specially designated purposes, such as emergency funds. Having an account specially tailored for an emergency can be a psychological boost that motivates saving. If your institution does not offer one of these types of accounts, there are still many choices that you can use for this purpose anyway.
Starting in 2024, your boss might be able to help. Employers may now set up a "pension-linked emergency saving account" as part of an after-tax (that is, Roth) defined contribution plan. The contribution limit on your part would be up to $2,500, as would the overall balance maximum. The IRS will provide further details about these plans and their rules.