Where To Put Your Emergency Fund

Wondering where you should put the money in your emergency fund? As you might probably be aware by now, having cash on hand is always a good idea. In fact, given the current economic recession we’re facing where millions have lost their jobs, some might say that cash is king.

For a lot of people, extra cash is hard to come by, but what if you find yourself with extra money, what do you do with it? Where should you keep it?

You might say, “in a bank, duh.” But the answer is not so simple. For starters, the Federal Reserve has committed to keeping short-term interest rates near zero until at least 2022. What does this mean? In short, if you keep your money in a traditional bank account, you’ll probably earn nothing on it. 

Why you shouldn’t keep your money in your traditional bank account

Why? If you’re a saver, banks that offer top interest rates (pay you to keep money with them) tend to pay less when the central bank makes an interest rate cut and more when it increases rates.

So does this mean you should just invest any extra cash you have? Not really. Usually, it’s not ideal to invest cash that you will use over the next three to six months in case of an emergency. Therefore, you want to have this cash nearby, somewhere you can access it easily. So where should you keep your emergency funds?

What you need to know

Just last year, online high-yield savings accounts offered very attractive interest rates of 2% or higher. However, now, most online savings banks aren’t even offering half of that. In fact, the online savings bank I use dropped rates from 2% to now just 0.8%.

Many of these online savings banks are offering the lowest rates they’ve ever offered. For example, Barclays and Marcus by Goldman Sachs cut savings rates to 0.8%, while Synchrony Bank’s new rate is 0.75%, the lowest all three banks have ever offered. 

Online savings banks still offer better rates

Yet, despite offering such low rates now, online banks still offer better rates than the 0.06% national savings rate average you get from brick and mortar banks (your traditional banks).

Given that the economy is still in coronavirus-induced turmoil, the Federal Reserve will most likely keep interest rates close to zero for a long time. What does this mean for you? It basically means that if you’re looking to keep your emergency savings in nearby accounts, you probably won’t find better rates besides online savings accounts for the time being.

What you should do if you want to save

While online savings banks might not offer high interest rates like before, you can still find a number that will pay you 1%. Yes, this will probably not make you rich, they will help you earn something, and they’re especially useful in a shaky economy. Basically, if you had to leave your $1,000 with a brick and mortar bank now, you get $0.60 after a year. If you use an online savings account, you’d get $10. Not much, but certainly more than $0.60!

Remember that when thinking about how much you should have in your emergency savings, set aside a little bit more than you think. You still don’t know how deep this recession will be or how long it will last.

If you don’t need your money for a few months of a year

If you don’t need your cash for a certain amount of time, you may want to consider a certificate of deposit (CD). A CD is a bank account with a fixed interest rate that’s generally higher than that of regular savings accounts, and a fixed date of withdrawal, known as the maturity date. With an online savings account, you can deposit and withdraw funds as you please. But with a CD, you agree to leave your money in the bank for a set amount of time. The reward for this? Higher interest rates than an online savings. CDs typically don’t have monthly fees, but most have an early withdrawal penalty.

How long do you have to hold a certificate of deposit for? The length varies. It can be as short as a few days or as long as a decade, but the standard range of options is between three months and five years.

Now that you know what to do with your emergency fund, what are you waiting for? Go and open an online savings account asap!