Where Should You Keep Your Emergency Fund?
The best place to keep emergency savings can change based on your financial situation. If you’re just starting out and still have a long way to go, a standard savings account is often preferable. It gives you easy access to those funds when you need them.
The answer becomes more complicated when you have met or exceeded your savings goal.
Continuing to add money to the same account may feel like the safest option. Having more cash available can provide additional security, but keeping more money than you realistically need in an easily accessible account may also mean giving up higher returns elsewhere.
Once your emergency fund reaches a comfortable level, it may be worth reconsidering where different portions of that money belong.
Keep Enough Money Readily Available
The most important part of an emergency fund is accessibility.
You may need to withdraw or transfer money right away to cover a major vehicle repair, an insurance deductible, an emergency travel expense, or a sudden interruption in income.
A regular savings account is often a practical option since it keeps the funds separate from the everyday spending money in your checking account while still making it easy to access.
Keeping your entire emergency fund in checking is usually less desirable since those accounts typically earn less interest than a regular savings account, and there’s always a risk of spending the money you meant to keep for emergencies.
Does Your Entire Emergency Fund Need to Be Immediately Accessible?
That depends on how much you have saved and your personal comfort level.
Someone who has just saved enough to cover one month of living expenses may have good reason to keep all that money readily available. The calculation can change once you have accumulated several months of expenses.
If your household normally spends $4,000 per month and you have $20,000 or $25,000 set aside, it is unlikely that every dollar would need to be withdrawn at once. You might prefer to keep enough for immediate needs in a savings account while considering other options that provide a better return for the remaining reserve.
When Share Certificates May Make Sense
Share certificates, commonly called CDs, can be a useful tool for savers with well-established emergency funds.
In exchange for leaving money deposited for a specific length of time, typically six months to four years, certificates may offer higher dividend rates than a regular savings account.
The tradeoff is accessibility. You can close out a share certificate early, but doing so may result in an early withdrawal penalty and reduce the benefit of using a certificate in the first place. There’s no option to withdraw just some of the money early.
They can be a useful tool if you already have a large emergency fund and are comfortable keeping a portion of it less accessible.
Some savers also ladder share certificates by opening several certificates with different maturity dates so portions of the money become available on a predictable schedule.
Staggering certificate maturity dates can become complicated, so the strategy isn’t right for everyone.
When Extra Savings May No Longer Be Emergency Money
Once you have reached the emergency-fund target that makes sense for your household, it may be worth asking whether every additional dollar still needs to serve the same purpose.
Continuing to build cash reserves can provide extra security, particularly if your income is unpredictable. But money you are unlikely to need for years may potentially be better directed toward other goals, such as:
Paying down high-interest debt
Increasing retirement contributions
Investing for longer-term goals
Saving for a home or vehicle purchase
Creating separate savings accounts for major planned expenses
Long-term investments can offer greater growth potential than savings accounts or certificates, but they also carry greater risk.
Find the Right Place for Your Savings
Ouachita Valley Federal Credit Union offers savings options for money you need to keep accessible as well as funds you may be able to set aside for longer periods. Contact our team at 318.387.4592 to learn more about savings accounts, CDs, IRAs, and other ways to organize your savings around your financial goals.
