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Where You Should (and Shouldn’t) Keep Your Emergency Fund

Spoiler: The answer is not ‘under your mattress.’

Written by Toni Husbands, Liliana Hall

Edited by Kelly Ernst

Saving for unexpected costs can be just as important as saving for anticipated goals because if you aren’t prepared when life strikes, you might find yourself with high-interest debt. An emergency fund should be a reserve you can fall back on in case you find yourself in a precarious situation. 

Most experts suggest having at least six months’ worth of expenses in an emergency fund, but how much you should have depends on your individual circumstances. That said, where you should keep your emergency fund is less complicated: It should be out of sight and mind until you need it. 

Here are some of the best places to keep your emergency fund — and some places you should avoid. 

Where should you keep your emergency fund?

Experts recommend keeping your emergency fund in an account that’s liquid and easily accessible. It should be completely separate from your primary checking account so you aren’t tempted to use it in a non-emergency.

“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 to keep it in a bank that’s insured by the Federal Deposit Insurance Corporation or with a credit union insured by the National Credit Union Administration. These accounts are federally insured for up to $250,000 per person, per account category.

You also don’t want to tie up your 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.” 

The best places to keep your emergency fund

You should be able to access your emergency fund quickly if something unexpected pops up, like job loss, a home repair or other hefty expenses. An emergency fund helps you plan ahead 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 high-rate environment, that’s leaving money on the table.

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 onto you in the form of higher annual percentage yields, or APYs. The best APYs available on high-yield savings accounts are as high as 5.35%. 

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 earns competitive interest only helps your bottom line.

Traditional savings account

Most 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 national average annual percentage yield for a savings account is only 0.47%, according to the FDIC. Though 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.

Money market account 

money market account is similar to a high-yield savings account. It offers a higher interest rate than a traditional savings account but provides the accessibility of a checking account. Unlike most savings accounts, MMAs generally offer debit card access and check-writing privileges. 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. 

Where should you avoid keeping your emergency fund?

Checking account

Keeping your emergency fund in the same account as the funds you use for everyday finances is a bad idea for two reasons: It’s too accessible, and you aren’t tapping into the interest-earning potential other accounts offer. 

“By leaving funds in your normal checking account, they are more likely to be spent like normal savings and not be saved for emergencies,” said Nicole T. Strbich, managing director of financial planning at Buckingham Advisors.

The national average APY for an interest-bearing checking account is only 0.07%. So your earning potential doesn’t even come close to competing with some of the best high-yield savings accounts. 

Certificate of deposit

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 5.4% 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 option for your emergency fund. That’s because if you need to withdraw your funds before the CD term ends, you’ll pay an early withdrawal penalty (typically equal to a portion of the interest earned). Some more flexible CD types, like no-penalty CDs, could be better options but currently earn less interest than high-yield savings accounts.

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. The current rate for the next six months is 5.27%. The interest rates for I bonds change twice a year, in May and November, so you can lock in this rate for the next six months if you open one before May 1, 2024.

Savings bonds are considered one of the safest investments, but they’re not 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.

In your home

It’s never a good idea to keep money under your mattress or in your sock drawer because you’re missing out on two important things: insurance and the potential to earn interest. FDIC-insured banks and NCUA-insured credit unions protect your deposit for up to $250,000 per person, per account. If anything were to happen to your home, you wouldn’t have any way of getting your money back. Plus, you can’t earn a competitive yield when your cash is parked next to your favorite pair of socks.

The bottom line

Whether you’re just developing a strategy to build your savings or you have enough saved to float a year’s worth of expenses, selecting the best place to keep 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.

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.