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Where to Keep Your Emergency Fund Money Right Now

By: David Bach  |  Last Updated: February 18, 2021
Financial Expert & 10x New York Times Bestseller
This content was originally published on Money.com
IN THIS ARTICLEHigh-yield savings accounts
Money-market funds
Certificate of Deposit accounts (CDs)
A mixed approach

For millions of Americans, the economic disruptions caused by the Covid-19 outbreak have highlighted the importance of emergency savings. There’s one problem, though: With interest rates near record lows, finding a great place to keep that money is harder than ever.

Of course, as jobs vanish, many of us are simply focused on how to meet next month’s bills. But statistics show that even those who do have a measure of financial security have been scrambling to stash away what they can.

Companies and consumers dumped a record $1 trillion in deposits into banks in the first quarter of 2020, according to an analysis of FDIC data by The Wall Street Journal. That was about four times the amount deposited during the last three months of 2019.

In terms of where to keep your emergency fund, there are no easy answers right now. Interest rates are what they are. You’re not going to find some hidden option with double-digit returns. And savers beware: Options that seem attractive at first might come with baggage, like expiring teaser rates, access delays or withdrawal penalties.

“Don’t be penny wise, pound foolish,” advises Harold Evensky, a financial planner with Evensky & Katz in Lubbock, Texas. “An extra percent return on an emergency fund is not worth the risk it will not be there when you need it. Focus on safety.”

That said, some options for your cash are better than others. We did a little legwork to find out what those are.

High-yield savings accounts

“High” is a relative term these days, but you can still find some savings accounts out there with appetizing yields, especially compared to the national average interest rate on savings accounts (0.05% as of February 2021, according to the FDIC). Many of these are from online banks, which are just as legitimate (and FDIC-insured) as their brick-and-mortar counterparts.

There’s Synchrony, which is currently offering a rate of 0.55%.* And Marcus by Goldman Sachs (the consumer arm of the storied investment bank) is offering 0.50% APY.

The advantage of a straight savings account is that you’re not locking up your money in a place that’s difficult to access – after all, the point of having an emergency account is to have accessible cash. Plus, these accounts are FDIC-insured, so you can be sure your money won’t vanish even in the event of economic catastrophe.

*Note that APYs listed are current as of the time of publication and may fluctuate.

Money-market funds

Yes, these are mutual funds, but don’t be scared off. These vehicles, which invest in cash or short-term debt, are designed to be highly stable.

Here, too, you can find some interesting rates. Ally is currently offering 0.50% APY, while Discover is offering 0.30% APY (0.35% APY for balances $100,000 and over).

Keep in mind that, as mutual funds, money markets are not FDIC-insured in the same way that savings accounts are. They could theoretically lose value, which is what happened in the wake of the Lehman Brothers bankruptcy back in 2008. But the U.S. Treasury has already developed a package of measures to backstop money markets as part of the government’s response to the Covid-19 crisis.

Certificate of Deposit accounts (CDs)

While standard savings accounts let you put money in or take it out at will, CDs work a little differently. You deposit a fixed sum for a fixed term and then enjoy relatively high interest rates.

Before the pandemic, rates on CDs were close to 2% or more. Now, they’re lower: Marcus by Goldman Sachs is offering 0.55% APY on 12-month CDs and Discover is offering 0.50% for the same term.

The potential danger of this strategy is that most CDs charge penalties for early withdrawal. So, if you need that money before the term is up, you’ll owe a fee. (Some offer no-penalty versions with lower interest rates). If the purpose of your cash fund is to have immediate, unfettered access for emergencies, then this type of account may not be the right fit for you.

One creative idea is to stagger your CDs. That way you have some cash at the ready, while another portion is locked up and generating higher returns for you. This is also known as a CD ladder.

A mixed approach

Of course, there is no law saying you have to choose only one avenue for your cash. Financial planner Joseph Stemmle of Richmond, Va. recommends a potent mixture of multiple options: “Building a three-tiered cash reserve is essential to getting your money to work harder,” he says.

“Tier 1 is one month of expenses in a checking or savings account at your primary bank, Tier 2 is one to three months of expenses in a high-yield savings account that is FDIC-insured with no minimums, and Tier 3 is three to six months of expenses in a CD, Treasuries or short-term bonds.”

Whichever route you choose for your savings, just remember that your first principle should be: Safety first. If you reach for an artificially high yield, but end up locking it up for an extended period or putting the sum at high risk, then you are defeating the purpose of having emergency savings in the first place. If and when you find yourself in a real financial crisis, that’s not a happy place to be.

Read next: David’s 11 money tips to start living rich today