Where should I put my emergency fund?

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Man emptying out a piggy bank
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Nobody likes to have an emergency drop in uninvited and wreak havoc on their financial life. That’s where having an emergency fund in place comes in handy!

In this article, we’re going to take a look at how much of an emergency fund you should have and where you should store the money.

Here are 4 places to consider putting your emergency fund

The average interest rate on savings accounts nationwide is only 0.10%, according to the FDIC. That’s tiny! But here’s the thing: It’s routinely possible to earn 20 or even 25 times more interest on your money without much effort.

Money expert Clark Howard says the key is to look outside of traditional financial institutions for a place to stash your cash.

“It’s a moving target…with people being able to get better rates on savings than what the banks offer. But this much is certain: You’re going to see continuing innovation in this area,” Clark says. “The banks have left themselves wide open by having these ridiculously low savings rates and that’s going to lead to innovation and attention-grabbing [interest rates] by others.”

Table of contents

What is an emergency fund?

You never know when a financial emergency is going to visit your doorstep. Maybe it’s a leaky roof, a catastrophic engine failure in your vehicle or a huge unexpected medical bill.

The point is, it’s impossible to predict what will happen. But you know you’ve got to be prepared for it anyway.

That’s the purpose of an emergency fund. It’s money you store in a safe place that can be accessed quickly when something goes wrong in life. That way, you don’t have to charge up a credit card and risk paying interest for something you can’t afford.

And let’s face it, something always does go wrong in life! That’s why Clark recommends you have between three to six months of living expenses stored in your emergency fund.

“It’s not what somebody makes, it’s what it costs them to live each month,” Clark says. “Because I don’t want somebody to be overwhelmed by that. I want them to gradually build up the money for living expenses.”

So three months of living expenses is the initial goal. Clark says that if you’re comfortable with your finances when you hit three, then you go to six.

OK, so now that you know how much money you should aim to have in your emergency fund, let’s address the question of where to store the money…

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Online banks

When you’re considering where to put your emergency fund, we’ve already established that you don’t want to look at the nation’s big banks. The interest rates they pay are pitiful. But there’s another kind of bank you should consider — an online bank.

Pretty much across the board, online banks pay a higher rate for online savings versus the traditional big banks. It’s not uncommon to earn an average of 2.10% APY on your money with most online banks.

Here are a few online banks you may want to consider:

Some online banks even have no-penalty CD options. You get a slightly higher interest rate than the typical online savings account and you’re free to withdraw the money anytime after seven days without penalty.

It’s the best of both worlds. You get liquidity and a higher interest rate.

Credit unions

Credit unions are a long-time Clark Howard favorite as a place to store your cash. In fact, he used to recommend them exclusively as the alternative to big banks. “It used to be a two-horse race between banks and credit unions,” Clark notes.

Why does the consumer champ like credit unions so much? For two big reasons:

  1. They typically pay higher interest rates on savings vs. the traditional big banks
  2. They typically offer free checking, too

Go to YourMoneyFurther.com or MyCreditUnion.gov to find a credit union near you which you’re eligible to join. The first site is sponsored by a trade group called the Credit Union National Association. The latter is an official U.S. government website.

Financial technology players

Financial technology companies — called fintech for short — are making big waves in the banking world. As a general rule, they offer higher interest rates than even the online banks. They also offer a streamlined customer experience right from the palm of your hand.

Examples of fintech companies that offer high rates of interest on your savings include Wealthfront and SoFi Money.

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Wealthfront is better known as a roboadvisor for investment money, while SoFi made its name offering student loan refinances. But now both are branching out into other products.

“As long as the accounts are arranged where you have FDIC insurance, those are great,” Clark says. “It’s done by both Wealthfront and SoFi as a way to attract people to their other services, but you don’t have to use the other services with either of them. So I think that’s absolutely great.”

(Editor’s note: Both Wealthfront and SoFi Money far exceed the standard $250,000 of FDIC protection. They achieve this by spreading your deposits over that amount out to partner banks for more protection.)

Roth IRA account

Clark’s final suggestion about where to put your emergency fund is a bit unorthodox. But for the right person, putting your emergency money into a Roth IRA account may be the right move.

A Roth IRA is an investment account funded with after-tax money. It lets you grow your nest egg tax-free and spend the money tax-free in retirement.

But here’s the point that’s important for savers: Because you fund a Roth IRA with money that’s already been taxed, you’re allowed to pull out your contributions at any time for any reason — just not the earnings.

So that makes it another possible place to stash emergency cash. But with one big caveat, according to Clark.

“This approach has got to be for the right mentality kind of person, which is going to be the rare individual,” Clark says. “But if somebody is really disciplined and they would not go tap it like a mad money account — but only for a true financial emergency — then that is A-OK.”

Of course, there is a downside to this strategy that we need to note. Since the money will be invested in the stock market, the value of your account could be subject to wild swings.

It’s entirely possible that your account balance will shrink in the short term, as well.

Let’s say you contribute $6,000 and then need the money just a couple of months later. By that time, your account may only be worth $5,500 — and that’s all you’ll be able to withdraw. So it’s just something to keep in mind.

Of course, the flip side of this is that if you don’t need the money, it has the chance to grow for years to come. So it’s a bit of a gamble, but Clark says it could work for the right person.

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If you decide the Roth IRA strategy is right for you, we’ve got full instructions on how to open this account here.

Here’s where you don’t want to store your emergency fund

Now that you’ve got some options about where to put your emergency fund, let’s recap by outlining where you shouldn’t put it:

  • At a traditional bank paying a low interest rate
  • With the money you need for daily life in your existing checking/savings account — because it’s too easy to tap into. You need a separate account
  • Under the mattress, because it won’t earn any interest or keep up with inflation

Final thought

An emergency fund is a necessary part of your financial life. By having a minimum of three months of living expenses stashed away, you can smooth out the bumps in the road. Your money can help you deal with a car repair, a big doctor’s bill or even a temporary job loss.

If you keep your emergency fund at a traditional institution, you’re going to earn paltry interest on your money. Why not earn more by picking a better venue when you’re considering where to put your emergency fund?

Be sure to check out our guide to the best online banks, which has current interest rates for more than half a dozen great places to stash your cash.

More money stories on Clark.com

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