Where Should I Keep My Emergency Fund?

1. High-Yield Savings Account

One of the best options for housing your emergency fund is a high-yield savings account. Like standard savings accounts, you can open a high-yield savings account through many online and traditional banks. But unlike traditional savings accounts, high-yield savings accounts earn a higher rate of interest.

Pros:

• Higher yields: At the time of writing, money deposited in a typical savings account earned just 0.42% in interest, according to the Federal Deposit Insurance Corporation (FDIC). High-yield savings account rates can be much more competitive—currently up to about 5%.
• Easy deposits and transfers: Having easy access to your savings is crucial in an emergency, and a high-yield savings account is ideal for this. You'll be able to quickly withdraw funds when you need them.
• Safe and insured: High-yield savings accounts are a safe place to keep your money. Your funds are not exposed to the same risks that you would face if your fund was invested. And, like standard savings accounts, your deposits in a high-yield savings account at a bank are insured by the FDIC up to $250,000 per depositor, per financial institution.

Cons:

• Transfers and withdrawals may be limited: Some high-yield savings accounts limit how many transfers you can make in a month before you're charged a fee. While this can be a good incentive not to dip into your emergency savings, if you find yourself needing to use your emergency fund regularly, you could face fees.
• Minimum deposit requirements: Some high-yield savings accounts include minimum opening deposits and minimum balance requirements. But this can vary quite a bit, and some high-yield savings accounts have no minimum opening deposit required.
• May not outpace inflation: Even when high-yield savings accounts reach competitively high rates, it may still be the case that the rate of inflation is higher than the rate of return in your savings account. This can erode the spending power of your savings over time.

2. Money Market Account

A money market account is a type of savings account offered by banks and credit unions. Money market accounts tend to pay higher interest than standard savings accounts, and they also have some of the same benefits of a checking account: You can access funds from your money market account by writing checks, or with a debit card or money transfer.

Pros:

• Higher yields: Money market accounts can offer higher yields relative to standard savings accounts. At the time of writing, the average money market account earns 0.63% in interest, according to the FDIC. That's slightly higher than the 0.42% for traditional savings accounts.
• Easy access to funds: Like other types of savings accounts, you can easily transfer money out of your money market account to cover emergency expenses, or use the checks or debit card to directly withdraw funds.
• Safe and insured: The funds in your money market account are insured by the FDIC up to $250,000. Unlike a money market fund, a money market account is a type of bank account that earns interest; you won't have to worry about losing money due to market swings, because your money isn't invested.

Cons:

• Number of checks may be limited: While money market accounts share some features with checking accounts, they may put a cap on how often you can access your cash. For example, some money market accounts may limit you to no more than six withdrawals and transfers per month.
• May not outpace inflation: The limited returns you'll see on money deposited in a money market account may be lower than the rate of inflation.
• May have minimum deposit requirements: Money market accounts may require you to deposit an initial sum to open the account, which can be anywhere from $100 to thousands of dollars, depending on the financial institution. That said, not all money market accounts include a minimum deposit requirement.

3. Certificate of Deposit (CD)

A CD is a type of savings account also known as a "time deposit" because they offer you a given interest rate in exchange for leaving your money deposited for a certain amount of time. These reliable returns can make a CD a safe place to stash your emergency fund, but their limited liquidity can also be a drawback.

Pros:

• Accessible: You can get CDs from just about any online or traditional bank, credit union or brokerage. Depending on the financial institution, you can conveniently buy CDs online, on the phone or in person.
• Relatively high returns: CDs offer a higher rate of interest than a standard savings account in exchange for you essentially loaning money to the financial institution (or, in other words, agreeing to keep your money deposited for the duration of a fixed term).
• Safe and insured: When you save using a CD, you're not exposing your money to any market risk. The bank or credit union that issues you the CD pays you a guaranteed rate of return. And, like other deposit accounts, money you deposit in a CD at a bank is FDIC insured up to $250,000 per account holder, account type and bank.

Cons:

• Early withdrawal penalties: Perhaps the biggest drawback of putting your emergency fund in a CD is that taking your money out early means forfeiting a certain number of months' accumulated interest. One way to counteract this risk is to buy no-penalty CDs. Another is to ladder your maturity dates to create more liquidity, without sacrificing any interest.
• Not as convenient as bank accounts: CDs don't typically offer the ability to write a check or make a quick transfer to your checking account. As opposed to putting your emergency savings in a money market account or high-yield savings account, if you keep your emergency fund in CDs, accessing funds at the drop of a dime isn't as simple.
• May have minimum deposit requirements: Many CD accounts require you to deposit a certain amount of money to open a CD. Minimum deposit requirements can range from $500 to more than $1,000. On the other hand, some CD accounts have no minimum deposit requirement, so check with the individual bank or brokerage to be sure.
• Returns may not outpace inflation: As with other safe saving options, keep in mind that the interest rate you earn in a CD may not be high enough to keep up with the rate of inflation.

4. Treasury Bills

Another place to stash your emergency savings is Treasury bills (T-bills). T-bills are short-term debt obligations backed by the U.S. Treasury Department. Rather than paying out a steady rate of interest, T-bills have a different investment structure. Investors make money on treasury bills by buying them at a discounted price from the Treasury Department's TreasuryDirect.gov website, or from a broker or a bank.

Then, when they mature, you sell the T-bills at their face value. The amount you paid for them versus what you sold them for is your earnings.

Pros:

• Low-risk investment: The full face value of a T-bill is guaranteed by the U.S. government, making them a virtually risk-free investment.
• Short maturity terms: Compared to the terms of other securities, T-bills can have very short terms. The maturities available through TreasuryDirect are four, eight, 13, 17, 26, and 52 weeks.
• State and local tax-free earnings: The gains you earn from T-bills and other Treasury securities are exempt from state and local taxes. You will pay federal taxes on the gains, though.

Cons:

• Minimum purchase requirement: T-bills are sold in increments of $100. If you're building your emergency fund up over time and saving less than $100 each pay period, for example, you would need to wait until you had enough to buy a T-bill.
• Limited access to funds: T-bills are fairly liquid, insofar as they have maturities as short as four weeks. But you won't have the same easy access to your emergency fund as you would if you kept it in, say, a savings account. If you have an emergency bill, you would need to sell your T-bill before you could access the money to cover the expense.
• Returns are relatively low: Because T-bills are a safe short-term investing option, you can expect stable, low returns to match. That's the case for all low-risk investment options, but T-bills can have particularly mild rates of return—often, they return less than CDs or bonds, for example.

Keep Your Emergency Savings Safe

Your emergency fund is money you hope to never need to use, but it's there for you if you need it. That's why it's important to keep your money somewhere that you can easily access it. Avoid tying your money up in volatile investments, such as stocks. If you find yourself in an emergency, you could end up taking a loss to access your money. You're likely better off keeping your funds someplace where you can access them at the drop of the dime.