July 11, 2021
When the going gets tough, the tough reach for their emergency fund
An emergency fund is the backbone of my investment strategy. When stock markets take a huge beating, the thing that keeps me from getting scared out of stocks is a solid emergency fund with a minimum of 6 month’s living expenses. I write about this extensively in my eBook. In this article, I list the best places to keep your emergency fund and why I don’t mix my emergency fund with my investments.
These are the 4 best places to park your emergency fund:
- High-Yield Savings Account
- Money Market Savings
- Certificate of Deposit (CD)
- U.S. Treasury Bills (T-Bills)
NUMBER 1: HIGH-YIELD SAVINGS ACCOUNT
These days, many “high-yield” savings rates are paying over 3% annual percentage yield (APY). Sure, you might be able to get higher elsewhere. But remember, the purpose of an emergency fund is to be there when you need it most.
With rates having been subpar for the past 10+ years, 3% is a fantastic APY for parking your cash. So let’s dive right in.
Most savings are FDIC or NCUA-insured up to $250,000.00. FDIC insures deposits at banks. NCUA insures deposits at credit unions. You can check a bank or credit union’s insured status here:
FDIC: https://research.fdic.gov/bankfind/ NCUA: https://mapping.ncua.gov/ResearchCreditUnion.aspx
Look for high-yield savings with:
- Low or no minimum deposit requirements
- No fees
- Ability to create sub-accounts which are great for setting goals
- FDIC or NCUA insured
- Free checking account to easily access your money
Here are 3 resources I use regularly to research the best savings rates.
NUMBER 2: MONEY MARKET SAVINGS
Money market savings tend to pay a little higher interest rate than high-yield savings, but they usually require a higher minimum deposit. This is the main reason I prefer high-yield savings accounts over money market accounts, but there’s not much difference.
One advantage of money markets is that they allow check-writing and debit card withdrawals. However, you get the same benefit from your high-yield savings if it’s linked to a free checking account. You just have to take the simple step of transferring the money from your savings to checking.
That being said, either one will do a fine job storing your emergency fund.
NUMBER 3: CERTIFICATE OF DEPOSIT (CD)
In general, CDs pay about the same as a money market savings and also require a higher minimum deposit than a high-yield savings account. The only reason I rank CDs lower than money market savings is that they typically require a minimum holding period (maturity date) of 3 months. To qualify for the higher rates, you’ll usually have to agree to the longer maturity date.
However, if you’re interested in CDs with a higher APY, you can also check out brokered CDs, such as the ones sold by Fidelity and other brokerages.
Because this money will be used in an emergency, I prefer to keep CDs with a maturity date of 6 months or shorter.
NUMBER 4: U.S. TREASURY BILLS (T-BILLS)
U.S. Treasury Bills (T-bills) are backed by the full faith and credit of the United States, which has a 200+ year track record of paying back its debts. U.S. Treasuries are commonly referred to as the “risk-free rate” by prominent investors such as Warren Buffet. Of course, there’s always a risk that the U.S. government decides to stop paying its debts, but I consider this risk very low.
You can purchase T-bills with durations at low as 4 weeks and as high as 52 weeks. At the time of this writing, a 4-week T-bill is paying over 4.5% yield, and a 26-week T-bill is paying over 4.9% yield. Check out these videos here to learn more about T-bills.
- How to Buy T-bills on TreasuryDirect
- How to Buy New Issue T-bills on Fidelity
- How to Buy T-bills on the Secondary Market on Fidelity
You can also see the latest T-Bill auction results from TreasuryDirect.gov here.
WHAT ABOUT CRYPTO INTEREST ACCOUNTS?
I would be very cautious about using Bitcoin and other crypto interest accounts for my emergency fund. In these accounts, you are typically lending out your crypto to a 3rd party. If the lender can’t pay, you may risk losing your principal.
I would view these crypto interest accounts as high-risk investments and I wouldn’t use any of them for my emergency fund.
WHAT ABOUT A ROTH IRA?
I’ve seen articles recommending a Roth IRA as an emergency fund. I think that’s a bad idea, and here’s why.
As an investor, the primary purpose of my Roth is to maximize returns. If I start to comingle my investments with my emergency fund, I won’t be able to stay focused on investing. It will also be difficult to track my performance against the market since the emergency fund part of the portfolio would weigh down returns in good years.
That being said, if I’m in dire need of money and my Roth is my only option, then you bet I’ll take money out of it. However, I don’t want to get in the habit of viewing my Roth as an emergency fund for the reasons stated above.
WHERE DOES THE AUTHOR KEEP HIS EMERGENCY FUND?
I personally keep my emergency fund in a high-yield savings account, brokered CDs on Fidelity, and U.S. Treasury Bills on TreasuryDirect and Fidelity.
The high-yield savings account I use is through Alliant Credit Union. These are the things I like about Alliant:
- High Interest: Currently 2.95% APY (in February 2023) and gets updated regularly as rates change
- No fees: If you sign up for electronic statements
- Low minimum deposit requirements: Check with Alliant for their current requirements
- Sub-accounts: Alliant calls them supplemental accounts and they’re great tools when saving up for specific goals. I can give these sub-accounts nicknames like “Fun and Adventure” for my vacation fund or “Sweet Ride” for car maintenance and insurance.
- Free checking that pays interest and reimburses ATM fees: Having a checking account that pays interest is awesome! I don’t use the ATM that much anymore, but it’s nice to get reimbursed.
So there you have it. Let me know what you think. If you find this article helpful, please comment and share on social media. Thanks so much for reading and best of luck building your emergency fund!
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.
Want to learn the principles that help me to consistently beat the market? Check out my free eBook, 5 Things I Wish I Knew Before Buying My First Stock.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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Very interesting read, I need to put some of my money that I’m saving somewhere so I do t touch it!
Thanks, Lisa! You’re exactly right. I occasionally dip into my emergency fund for unforeseen expenses. But for the most part, it’s a no-touch zone.
My husband and I have talked about whether we should move our emergency fund into something a little more substantial. One that we were both thinking about was a Roth IRA but you make some good points.
Thanks for the comment!
I used to work in a bank, and have found that usually online banks offer much higher interest rates. Despite this, we still have not moved our money into a higher interest account due to wanting to keep everything in one place. Maybe for an emergency fund, this should change so we get the most return for our money. Thank you for the reminder to be smarter about our savings!
I agree it can be hard making banking changes, especially if it’s a joint account since it affects both you and your spouse. I currently have over $50k of emergency funds in my high-interest savings at 0.9%, so it’s an extra $450 a year. To me, it’s worth it. Thanks so much for your thoughtful comment!
I say that if you are 75 or older you should have all your money in online saving accounts. Forget the fickle market and all the fees from advisors.