Every personal finance expert probably agrees that you should set aside some money as an emergency fund. The amount you should have in your emergency fund is a subject of debate, but the typical rule of thumb is to keep somewhere around 3-6 months worth of expenses. You never know what the future might hold, so it makes sense to at least have some buffer to keep yourself afloat in case something happens.
Since we can all agree that we should at least have some money in an emergency fund, the next important question is where should we put that money?
I basically see five places your emergency fund could go:
- Checking Account
- Normal Savings Account
- Online High-Yield Savings Account
- Super High-Yield Savings Account (aka 5% Interest Savings Accounts)
- Investment Account
There are advantages and disadvantages to each and my guess is that most people will probably have their emergency fund in a combination of all of these accounts.
When I first started my emergency fund, I went with a mix of my checking account and an online high-yield savings account with Capital One 360. About a year ago, I made a switch, storing a small portion of my emergency fund with Ally Bank and keeping the majority of my emergency fund in super high-yield savings accounts earning 5% guaranteed interest.
You know how people are always talking about not keeping too much money in their emergency fund because of the low returns? I don’t worry about that anymore.
Honestly, it surprises me that more people don’t take a little bit of time to get the maximum yield on their emergency fund. The difference between 0.75% and 1% interest isn’t worth making a switch. But the difference between 1% and 5%? I think that’s definitely worth looking into.
Let’s take a deeper dive into each of these emergency fund savings options.
1. Checking Accounts
Your checking account is likely the inbox of your financial system and is naturally the first place you might keep your emergency fund. If you’re pretty good with your money, you probably leave yourself a little bit of a buffer in your checking account. When you think about it, that’s basically the beginning of your emergency fund.
I definitely wouldn’t recommend keeping a huge buffer in your checking account simply because every dollar you keep in there probably gets nothing in return. Banks should pay you for your money, so if they’re not paying you, you shouldn’t reward them by giving them more money. I personally aim for a buffer of about $500 in my checking account. You could totally do more or less as your buffer. Just make sure to keep whatever amount makes you comfortable.
In terms of which checking account to use, you basically just want to make sure that whatever checking account you use has no fees. There are so many free checking accounts these days that there’s pretty much no excuse for any checking account to charge you a monthly fee.
Another potential option is to go with an online-only checking account. My wife uses Ally Bank as her primary checking account. It’s totally free and they even pay a nominal amount of interest. I also have a secondary checking account with an online-only bank called Simple. Again, totally 100% free.
The one weakness with online-only banks is that it can be difficult to deposit cash. If you’re the type of person that never needs to deposit cash, then you could probably go exclusively with an online-only checking account. Since I sell about $1,000 or so worth of trash every year, I still need to be able to deposit at least some cash into my checking account. Hence why I still have my checking account with a traditional, big bad bank (that doesn’t charge me any monthly fees).
2. Normal Savings Accounts
These are the normal savings accounts that are typically offered by your regular brick and mortar banks.
My recommendation – don’t use these type of savings accounts. They offer ludicrously low-interest rates that are downright insulting. You might as well just keep your money in your checking account if you’re going to do this.
Instead, after your checking account buffer, the next bit of your emergency fund should be going into online, high-yield savings accounts like the ones I list in the next section.
3. Online High-Yield Savings Accounts
Online high-yield savings accounts got really popular in the mid-2000s. I remember when ING first launched its high yield savings account back when I was in high school and it offered something like 5% or more interest. Obviously, those days are done (or are they? keep reading!) but you’ll still get 100 times more interest from an online high-yield savings account compared to a traditional savings account. I’m guessing that most of you probably keep the bulk of your emergency fund in these type of savings accounts.
I personally recommend these banks (all of which have no fees):
Any of these banks will work, although I prefer Ally the most when it comes to emergency funds. Most importantly, they allow you to link up to 20 external bank accounts, which is very important if we want to take advantage of super high-yield savings accounts.
Capital One 360 is also a good choice that I’ve used in the past. It’s where I originally stored my emergency fund (all the way back when online banking was pretty new and it was still called ING Direct). The advantage with Capital One 360 is that it allows you to create multiple sub-accounts, which makes it much easier to sub-divide your cash savings.
Today, instead of keeping my emergency fund in Capital One 360, I use it mainly to hold money for my medium-term goals.
4. Super High Yield Savings Accounts (aka 5% Interest Savings Accounts)
There’s a lot of debate about how much you should keep in your emergency fund. Naturally, every dollar that sits in your emergency fund is a dollar that you can’t invest.
Personally, I don’t have any problem with people keeping a ton of money in their emergency fund. That’s because every single household can earn 5% guaranteed interest on a significant chunk of money in an FDIC insured savings account.
For most people, even a fraction of their money in a 5% interest savings account would be a major improvement. And if you could fund all of the 5% interest savings accounts, you’d have a massive emergency fund that would probably cover any situation.
I’ve written about these accounts previously in more in-depth posts. These posts can be found below:
- Where To Get 5% Interest Savings Accounts
- Netspend Account: Get 5% Interest On Your Savings
- Insight Card: Get Even More 5% Interest Savings
The interest you stand to earn is significant when compared to a normal high-yield savings account. Just take a look at how much more interest you’d earn if you had $30,000 earning 5% guaranteed interest:
And remember, this is guaranteed interest that’s beating inflation by about 2% every year! That’s huge to be able to get that type of guaranteed return on an emergency fund.
If you’re someone who’s into travel hacking or otherwise optimizing your finances, then you should really take the time to understand how these 5% interest savings accounts work. Just like with travel hacking, it can probably seem intimidating at first. But once you set these accounts up, they basically run themselves. Most people will only need to look at their accounts once per year or never if they want.
Consider opening up your 5% accounts in this order:
- Insight (First Card = can save up to $5,000)
- Insight (Second Card =can save up to $5,000)
- Netspend (can save up to $1,000)
- Ace Elite (can save up to $1,000)
- Western Union (can save up to $1,000)
- H-E-B (can save up to $1,000)
- Brinks (can save up to $1,000)
If you max out all of these accounts, you’ll be looking at $50,000 earning 5% guaranteed interest in an FDIC insured bank account. The difference between 5% interest and 1% interest makes it well worth it.
The other nice thing about these accounts is that you can get $20 to start your Netspend account just by using my referral link. Once you deposit $40 into your Netspend account, you snag yourself a $20 bonus and I get myself a $20 bonus. From there, you can then refer your spouse to Netspend with your own referral code. That way, you’ll snag another additional $20 referral bonus and your spouse will snag a $20 referral bonus. Altogether, that’s $60 in referral bonuses you can make with pretty minimal work. And you still end up with a savings account earning 5% guaranteed interest.
For more information, be sure to read my in-depth posts about these savings accounts.
5. Investment Accounts
There are some people out there who argue that you should consider investing your emergency fund in a pretty low-risk allocation such as a 50% stock/bond mix. An allocation like this is estimated to return about 5% or so over the long term.
Personally, I don’t think that anyone should invest their emergency fund like this. Why would you take on any stock market risk in your emergency fund when you can already get a 5% guaranteed return on your emergency fund in a super high-yield savings account? It makes no sense.
My guess is that most people who recommend investing your emergency fund either don’t know that 5% interest savings accounts exist or feel that they’re somehow a trick. I’d think investing your emergency fund is more work than just opening up a super high-yield savings account. And if you’re going to get around 5% interest by investing your emergency fund, it’d be foolish to take on the risk of loss when there are already ways to get 5% interest risk-free.
My Emergency Fund System
I’m on a bit of a mission to get people to realize that their emergency fund can actually return significant money in an FDIC-insured savings accounts. Most people don’t need to worry about having too much cash in their emergency fund because they should be earning 5% interest on most, if not all of their emergency fund.
I personally have my emergency fund in three places:
- Super High-Yield Savings Account with Netspend and Insight
- Online High-Yield Savings Account with Ally Bank
- Checking Account with my regular brick and mortar bank
The bulk of it is kept in my super high-yield savings accounts, where I earn 5% guaranteed interest. I set up these accounts once and then I’ve never had to touch them again other than to withdraw the interest I earn each quarter.
I haven’t been able to max out all of my super high-yield savings accounts just yet, but once I do, they’ll give me $1,000 of interest every year (right now I’m getting about $350 per year from my emergency fund based on how much I’ve put away). Couple that with my spouse’s super high-yield savings accounts and we’re looking at $2,000 in interest earned every year. To put that in perspective, we’d need $200,000 saved in a standard online savings account to earn that kind of interest!
The other nice benefit with these super high yield savings accounts is that they make me less tempted to use the money for non-emergencies. It basically puts a little bit of a barrier between myself and my money, so I’m only going to pull that money out when I really need it.
I then keep about $1,000 or so in my Ally Bank account, where I earn 1% interest. I like to have this here as a bit of a buffer in case I need the money really fast and don’t have time to get the money out of my 5% interest accounts.
The remainder of my emergency fund is a $500 buffer I keep in my regular checking account.
Finally, I also keep a chunk of money set aside to use towards bank account bonuses. It’s not exactly passive and does require some work, but once you get the hang of it, it’s an easy way to earn more on your cash without any risk. I wrote the Ultimate Guide to Bank Account Bonuses, which walks you through everything you need to know. Some of the easier bank account bonuses include Chime, SoFi Money, WeBull, and M1 Finance. These posts walk you through how to earn those bonuses.
My emergency fund system has worked out pretty well so far and I’m happy that it’s earning a good rate of return. The 5% interest is even more impressive since it’s risk-free. With that kind of return, I’m not too concerned about the negatives of holding too much money in cash. I basically get the best of both worlds. Peace of mind in having enough cash and a rate of return that’s more than nominal.
Readers, where do you put your emergency fund? Let me know in the comments!