Keeping your emergency fund in the wrong place can be a costly mistake. Misplacing money meant for an emergency or misspending some of it on other expenses can make a sudden crisis even more of a nightmare.
Starting an emergency fund is only half the battle. You need to ensure it’s kept in a place where it’s going to be accessible, growing and protected.
A high-yield savings account checks all of those boxes and may be one of the best places to keep your rainy-day fund.
Here are five reasons why a high-yield savings account is one of the best places to keep your rainy-day fund.
1. Easy access to your money
Nobody has a crystal ball to tell them when situational events or events totally out of our control are going to happen, says Amar Shah, CFA, certified financial planner and founder of Client First Capital in San Diego.
“And the essence of an emergency fund is for it to be there when these events happen. It’s kind of like self-insuring yourself,” Shah says.
With an auto or homeowners insurance claim, you may have to wait to receive a check. An emergency savings account kept in a high-yield savings account, on the other hand, gives you quick access to your money. To ensure a seamless experience in an emergency, research the maximum amount that can be withdrawn from a savings account. Also, do a practice transfer or withdrawal of a small amount of money so that you know how this process works in a non-emergency situation.
2. To earn a competitive interest rate
At a job, you get paid to work. In a high-yield savings account, you’re paid to save. Online banks tend to pay the most competitive yields for these accounts. The money in your emergency fund grows through compound interest.
Currently, you can still earn around 1.3 percent annual percentage yield (APY) at an online bank. On $10,000, you’d earn around $130 after a year. That assumes that the APY would stay the same for a year. But realistically the APY will likely change at least a few times during that span.
“It’s $130 that you didn’t have before,” says Patti Hughes, certified financial planner, principal of Lake Life Wealth Advisory Group in Chicago. “So why not take advantage of it? So that’s the way I always look at it.”
That amount saved, $10,000, might seem like a lot of money. But divide it by six, the number of months of expenses that’s usually recommended for an emergency fund, and that’s about $1,667 per month.
3. So your emergency fund is separate
Having lots of money in one checking account can give you a false sense of security. You might see a large balance and think you’re fine. But you might not realize that a large percentage of the money is set aside to pay taxes or some other expense that’s due soon. It’s also easy to accidentally spend emergency dollars on non-emergency items.
Having your emergency fund in a high-yield savings account makes this a non-issue. It’s easy to log in to online banking, or in some cases an app, and see your emergency fund balance. This way there’s no need to subtract out everyday expenses and bills to determine your emergency savings account balance.
4. To ensure your money stays safe
Keep your emergency fund in a safe place. The standard deposit insurance coverage limit is $250,000 per depositor, per Federal Deposit Insurance Corp. (FDIC) bank, per ownership category. As long as you’re within FDIC limits and guidelines, your money is protected if your bank fails.
This insurance is a major perk to keeping your emergency fund in an FDIC-insured bank for safe keeping.
Consider adding a verbal password — if available — to your account, set up account alerts that notify you if money is withdrawn and check your statement or online banking regularly. Taking an active approach to make sure your money is safe will pay off whenever these funds are needed.
5. So your money can easily be located
During these stay-at-home times, it might seem like a good idea to keep your emergency fund around the house or under your mattress. What if you forget where you stashed the money or if it’s stolen?
Locating your money at an online bank is as easy as logging into the website or bank app, if the bank has one.
High-yield savings accounts aren’t earning what they were a year ago, or even four months ago. But by putting your emergency fund in a high-yield savings account, earning compound interest and preparing yourself financially, it may lead to future good financial decisions.
“The conscious effort doing better is worth it,” Shah says. “Because what you’re doing is building habits. And habits lead to better financial decisions long term.”
(Featured image by Jose Luis Pelaez Inc/Getty Images)