Emergency funds are great because they help us meet unforeseen circumstances when they happen. While you keep your money parked safely, you can earn interest annually on your emergency funds, sometimes up to 4-6%. You can invest your emergency funds in high-yield savings accounts, high-yield treasury bonds, or stake your crypto to earn interest, among the many options available. Leaving your money in regular savings or checking accounts would cause it to lose value over time due to high rising inflation.
Let’s dive right into it.
What is an emergency fund?
Different people have different emotions when describing an emergency. For some, it’s a concern, while for others, it’s fear. All these emotions have led us to prepare for it differently. One of the best ways to prepare for emergencies is to create a fund set aside to meet these unforeseen occurrences.
So, an emergency fund is that money set aside from others. The purpose is to help you deal with urgent, unexpected occurrences that require money to ease the pain.
For example, your car breaking down, medical emergencies, home repairs, loss of jobs, and others.
How much to set aside for emergencies
Most financial experts will tell you to save and set aside a minimum of three to six months of your monthly expenses as an emergency fund. The problem with that is that it could be a lot of money depending on the size of your expenses and how well your budget is prepared. Saving six months’ worth of expenses could take a long time.
An alternative plan would be to start with a particular amount and gradually grow it. You can grow it by making it part of your monthly budget, where funds are allocated periodically. Treat your emergency fund as you would your investment and retirement financial goals.
Emergency funds are not regular savings that you access daily and spend. The idea is to leave this fund for a purpose for unforeseen circumstances. While planning to grow your emergency fund, you could consider saving it in accounts where you can earn some interest instead of a regular savings account. This strategy will also accrue interest and growth in your fund.
How to build interest on emergency funds
Where are the best places you can keep your emergency fund and start building it from there? Remember, these funds have to be separated from your regular savings account. You want to make your emergency fund easily accessible but not like an everyday account. You also want to save your funds to earn interest for as long as it stays in that account untouched.
Below are some best options where your fund will be safe, and you can easily access it when you need it and earn some interest while it stays in these accounts.
1. High-yield saving accounts
A high-yield saving account is one of the best places to keep your emergency funds. These types of accounts are readily accessible, plus you also get to earn interest on your money. Some of the features you need to look out for when choosing the best high-yield savings account will be competitive interest rates, no monthly fees, and minimum balances.
You may even find some banks that offer “welcome bonuses,” which would be a great way to launch your emergency fund.
According to Investopedia, “these are the high-yield savings account rates in the country. They are listed below in order of APY. Where more than one institution has the same rate, they’ve ranked accounts by those requiring the smallest minimum ongoing balance.”
Bask Bank, Interest Savings Account – 0.70% APY
- Minimum initial deposit: Any amount
- Minimum ongoing balance: Any amount
- Monthly fee: None
- ATM card: No
- Mobile check deposit: Yes
- Checking accounts available: No
- CDs available: No
Sallie Mae, SmartyPig High Yield Savings Account – 0.70% APY
- Minimum initial deposit: Any amount
- Minimum ongoing balance: Any amount
- Monthly fee: None
- ATM card: No
- Mobile check deposit: No
- Checking accounts available: No
- CDs available: No
- Note: The advertised APY applies to the first $10,000 of your account balance, followed by a lower interest rate tier on amounts beyond that.
Affirm, Savings Account – 0.65% APY
- Minimum initial deposit: Any amount
- Minimum ongoing balance: Any amount
- Monthly fee: None
- ATM card: No
- Mobile check deposit: No
- Checking accounts available: No
- CDs available: No
- Note: Only available and accessible via the Affirm mobile app
Bo (Bank Onward), Bo Savings – 0.65% APY
- Minimum initial deposit: $250
- Minimum ongoing balance: Any amount
- Monthly fee: None
- ATM card: No
- Mobile check deposit: Yes
- Checking accounts available: No
- CDs available: No
USAlliance Financial Credit Union, High Dividend Savings – 0.65% APY
- Minimum initial deposit: $1
- Minimum ongoing balance: $500 to earn interest
- Monthly fee: None
- ATM card: Yes
- Mobile check deposit: Yes
- Checking accounts available: Yes
- CDs available: Yes
A simple internet search will present you with several options. So, ensure to do your due diligence and where you are unclear about what to do, put a call through to the bank or consult with a financial expert for proper guidance.
2. Earn Interest Cryptos
Besides the traditional savings account where you can put money and earn interest on your emergency fund, you may need to consider new methods like investing in cryptocurrencies. These digital currencies are fast becoming part of our everyday financial lives, with more people and organisation embracing their usage.
You may want to consider investing your emergency fund in a crypto account for an interest rate of between 4 to 6% annual return on your investment. For example, you can buy, hold, and stake your crypto for a good return.
Alternatively, you can invest through some of the best crypto investment companies around. These accounts have the same features as the standard high-yield savings accounts.
Remember to look out for the same features like easy access, no minimum balance and zero monthly charges.
When considering a crypto investment, consider the implication on your overall retirement financial plans. This is because cryptocurrencies remain high-risk investments, with prices fluctuating too frequently.
3. Money Market Deposit Accounts
Cashay defines a money market deposit account as “a type of savings account offered by financial institutions that pay interest or dividend rates that are higher than those offered by traditional savings and checking accounts, and competitive with certificates of deposit.”
Money market accounts are a haven to invest your emergency funds in and earn some interest. These accounts are similar to your standard bank savings account, but they offer higher yields.
You can open an account online or with your local bank and access the account digitally and make ATM withdrawals. Money market accounts are a great option for your emergency funds because you will earn interest on your deposit and have easy access to your funds.
Examples of money market accounts include:
- US Treasury bills
- Repurchase Agreements
- Commercial Papers
- Negotiable Certificate of Deposits (aka Credit Union Share Certificates)
- Bankers’ Acceptance
- Money Market Mutual Funds
According to Bankrate, a trusted provider of accurate rates and financial information, these are some of the best money market accounts at the moment:
- Highest Rate: Vio Bank – 0.56% APY
- High Rate: BrioDirect – 0.55% APY
- High Rate: Ally Bank – 0.50% APY
- High Rate: Sallie Mae Bank – 0.50% APY
- High Rate: First Internet Bank of Indiana – 0.50% APY
- High Rate: Navy Federal Credit Union – 0% – 0.50% APY*
- High Rate: CIT Bank – 0.45% APY
- High Rate: Discover Bank – 0.40% – 0.45% APY**
- High Rate: TIAA Bank – 0.40% APY
- High Rate: Synchrony Bank – 0.35% APY
When considering money market accounts, take note that most accounts charge fees. So, if you’re not careful, these charges may eat up the interest returns on your deposit. Take time to shop around for the best fees, among other conditions.
4. Certificates of Deposits (CDs)
Certificates of deposits are among the oldest forms of investments, and they offer fixed rates for different periods. The longer the period, the higher the rates. This could be a great place to save your emergency funds since you know the rates your deposit will attract.
To enjoy the entire interest from a CD, your deposits may be tied for the specific period you agreed to, but if you chose to request for them earlier than agreed, you may be charged some penalties for withdrawal along with losing the interest you could have gained.
Avoid this type of risk by opening multiple CDs with different maturity dates. This method is called “ladder” CDs. It ensures a certain amount of cash is available to you at all times while still earning interest on other deposits. Check here for some of the best CD rates and minimum balance requirements.
5. IRA Accounts
Putting your emergency fund in an IRA Account is another option you may consider. When you make deposits into a Roth IRA, you will enjoy higher interest rates than the traditional savings account without taking too much risk.
You can contribute your after-taxed funds to a Roth IRA account, and when you need to withdraw your funds, you can do so tax-free. Although, with an IRA Account, there are rules about eligibility, contribution limits, potential taxes, and early withdrawal penalties. While planning your withdrawal, consider IRS early withdrawal penalties and how they may deplete your fund.
While shopping for the best place to put your emergency fund, consider IRA Savings Account that allows flexible contributions and withdrawals without restricting specific terms.
6. Standard Bank Account
The purpose of putting your funds in any of the accounts mentioned earlier is to ensure you earn some interest on your emergency funds while it sits in those accounts. Any addition to your fund should be welcomed.
You will earn more on the above accounts than you would in a traditional savings or checking account, especially if your deposits will be increasing periodically and left there for some time.
Having said that, if you feel you are more comfortable in keeping and growing your emergency fund in a standard bank account, that too is fine. The only risk is that you might not enjoy better rates like the accounts we mentioned earlier.
Also, you might have “too easy access” to the fund, which might not be suitable for the discipline you are trying to achieve. Although, you could open a separate regular saving or checking account to put your funds to create some form of control.
Where not to put your emergency fund
One of the reasons it is not advisable to keep your emergency funds in your traditional savings and checking accounts is that the interest you will earn will be paltry.
Additionally, all your earnings are still taxable, despite how minute they are. The interest on CDs is equally taxable, but the interest rate on your deposit would be better than traditional accounts because the money is locked for some time.
You also need to factor in the rate of inflation. You need to know if the interest you are earning is keeping up with the prevailing inflation rate. This is why an emergency fund saved in a checking or savings account reduces value over time.
The danger of inflation on your cash is that you don’t see the negative impact until it’s time to spend money. That is why experts say, “inflation is the invincible enemy of cash.”
Conclusion
Invest your emergency fund and let it work for you instead of just sitting in an account losing value to inflation. Since the purpose of the fund is to protect you and your family against financial stress, you might as well make it start earning and working for you.
There are several ways to invest your emergency fund without stressing accessing it; consider the options discussed above and let your money start growing.