If there’s one thing most financial experts agree on, it’s that you need an emergency fund. But how much you should save and where you should keep it are more subjective.
While some personal finance experts, like radio show host and author Dave Ramsey, suggest saving six months’ worth of expenses, others like New York Times bestselling author Suze Orman have increased their recommendations to at least 12 months of expenses. And though the amount you need largely depends on your individual circumstances, the best places to stash your emergency fund are a bit clearer.
You should be able to access your emergency fund quickly if something unexpected pops up like a job loss, home repair or another hefty expense. An emergency fund helps you plan ahead for life’s detours so you can address an emergency without turning to high-interest credit cards or expensive payday loans. But while you want it on hand, you don’t want to keep your stash under your mattress -- in today’s rising rate environment, that’s leaving money on the table.
Here are some of the best places for storing your emergency fund that offer direct access when you need it, but also help you earn a solid return on your money.
The best places to keep your emergency fund
Experts recommend keeping your emergency fund in an account that’s liquid, easily accessible and completely separate from your main financial accounts, like your everyday checking account. You want to keep it out of sight and out of mind until you need it. “If you’re someone who might not have as much discipline, but you’re trying to build that savings muscle, I recommend putting it out of reach, but still within reach in case of an emergency,” said Krystal Todd, a certified public accountant and the creator of The Cash Compass on YouTube and Instagram.
Additionally, you’ll want a secure location that is federally insured for up to $250,000 per person, per institution and per account type, by either the Federal Deposit Insurance Corporation (for banks) or the National Credit Union Administration (for credit unions).
You also don’t want to tie up an emergency fund with access restrictions or taxable events that are triggered when withdrawing your money. Long-term investment accounts, like retirement funds, can make it difficult or costly -- in terms of fees, taxes or penalties -- to access your money when needed. “It shouldn’t be invested,” said Jeremy Schneider, founder of the Personal Finance Club. “If it’s invested, it’s not your emergency fund.”
Consider these five accounts for storing your emergency fund.
Traditional savings account
Most, if not all, financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be very convenient. However, these accounts often pay very little interest on your savings. The average annual percentage yield for a savings account is only 0.39%, according to the FDIC. While your primary goal for an emergency fund should be accessibility and not interest growth, you can earn an even better return on your money by opting for a savings account with a higher yield.
High-yield savings account
High-yield savings accounts are interest-earning savings accounts often offered by online banks or online-only branches of larger banks. Without the overhead costs associated with brick-and-mortar branches, these banks can pass savings on to you in the form of higher APYs. The best APYs available on high-yield savings accounts are just under 5.00%.
High-yield savings account APYs are variable and can change based on market conditions. However, in this current climate of rising rates on deposit accounts, keeping your emergency savings in an account that will earn competitive interest only helps your bottom line.
Certificate of deposit
A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time with a predetermined APY. Competitive one-year CDs, for example, can earn as much as 5.00% APY, which is higher than the average high-yield savings account.
While a CD can be a great place to store extra savings, it shouldn’t serve as the primary savings options for your emergency fund. That’s because if you need to withdraw your funds before the CD term ends, you’ll pay a penalty (typically equal to a portion of the interest earned). Some more flexible CD types, like no-penalty CDs, could be better options. These CDs may earn a lower APY, but don’t charge penalties for withdrawing your money before the term ends.
Money market account
A money market account is similar to a high-yield savings account. It offers a higher interest rate than your traditional savings account, but has some added flexibility, such as the option to use a debit card or write checks. If having easy access to your emergency fund means you’ll be tempted to use it for nonemergencies, though, an MMA might not be the best option for you.
Series I savings bond
Series I bonds are connected to the inflation rate. This savings option was all over the news in 2022 due to its record 9.62% interest rate, but the rate has since dropped to 6.89% -- still competitive. The interest rates for I bonds change twice a year, in May and November, so you can still lock in this rate for the next six months if you open one before May 1.
Savings bonds are considered one of the safest investments, but they may not be the best place to store your entire emergency fund. You need to hold them for at least a year, and if you redeem them before five years, you’ll lose out on the previous three months of interest. However, you can use a Series I savings bond for a portion of your emergency savings to take advantage of competitive rates and security backed by the federal government.
The bottom line
Whether you’re just developing a strategy to build your savings or have enough saved to float a year’s worth of expenses, selecting the best account to house your money is a crucial decision. Keep your money close enough to access in an emergency, but far enough away to resist the temptation to dip into it.
Work on building an emergency savings fund through consistent habits and earning the best rate of return on the money you’ve put aside. Avoiding penalties when accessing your money is also essential. Spreading your emergency fund across several account types to maximize your money’s growth potential may add more complexity to your financial plan, but could help you grow your savings even more.
Whether you’re following expert tips on how much to set aside or coming up with the number that makes you feel secure, savings for emergencies should be a focal point of your financial plan.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.