Where Should We Stash Our Emergency Fund?
So you’ve decided, as a couple, that you need to establish an emergency fund for life’s uncertainties. Or maybe you have an emergency fund, but you want to know what the best account to put it in is.
You are both on the right track. You’ll need to do a little research before you get an account, but I’ll help you with that.
Liquidity and Interest
Before you open an account, it’s important to think about the main goal you have for the bank account. For an emergency fund, you definitely want the funds in the account to be accessible at any time. The point of the emergency fund is that you can get the money quick when you’re in a bind!
Liquidity is very important because you never know when you’ll need the funds. You could need them later this evening.
Beyond liquidity, you want an account that is gaining at least some interest. You may have noticed that your average bank savings or checking account gives you next to no interest. That’s garbage. It’s okay to get a checking account with no interest, but for your emergency fund? That should be getting you some capital.
The Money Market Account
The answer for these goals stated above is a money market account. A money market account is like a savings account, but it typically pays a higher interest percentage than your average big bank savings account. Long story short, your money will be invested in a market that is much less volatile than the stock market.
Why use a money market account?
A money market account from a quality online bank will give you a decent interest rate to earn (as of writing this, the top interest rates are around 1.5%). Interest rates used to be much higher a while ago, but you’ll take what you can get. Especially with money that you just have sitting around for an emergency.
The next reason a money market account makes more sense than any other account, is that these accounts typically come with check writing privileges and/or a debit card. Remember what I said about liquidity? Well, that’s really important. With checks and a debit card, you can ALWAYS access the funds in your emergency stash. All you have to do is make sure you stay disciplined and only use these funds for true emergencies.
You’ll notice in your search for an online money market account that online savings accounts give you a slightly higher interest rate on average. Sounds better, right? Not so fast.
An online savings account does not typically come with check writing and/or debit card. That means these accounts don’t meet our main goal of liquidity. It could take days or weeks to get your money out of an account like this. You don't want that.
Look for an online bank that is trusted, has good reviews, and offers a money market account with a very competitive interest rate. Then start your emergency fund and feel better about the rainy days that inevitably will come!
Now that you know where to put your emergency fund money, your next step is to learn how much you should have in your emergency fund.