Emergencies pop up when you least expect them.
The best plan for dealing with such crises is to prepare long before they arrive at your doorstep. Having money set aside in an emergency fund means one less thing to worry about when times turn tough.
But where should you stash that cash? Following is a look at three options. They are among the best options for emergency savings in that they all:
- Are insured: The Federal Deposit Insurance Corp. (FDIC) or National Credit Union Share Insurance Fund insures your money — usually up to $250,000 — in the event that your bank or credit union goes under.
- Offer liquidity: You can withdraw your emergency savings at a moment’s notice, although a penalty fee might apply in some situations.
- Pay interest: Don’t expect to earn much, as rates are low right now. But at least your money can earn something, and with the Federal Reserve now in rate-hiking mode, your returns might improve over the next year or so.
- Are free of market risk: When the stock market tanks, your emergency fund will not go with it.
Certificate of deposit (CD)
When you put money in a certificate of deposit, you agree to keep it locked up for a certain length of time, often called a “CD term”.
Say you purchase a one-year CD. In exchange for agreeing to leave your money in the bank for 12 months, you generally will receive a rate of return — often called a “CD rate” — that will not change during that period.
The advantage of CDs is that they generally pay higher rates of return than the other options on this list. However, if you remove money from a CD before the term is up, you typically will have to pay a penalty.
Just about everyone is familiar with a savings account. You simply open the savings account, put some money into it and then sleep well at night knowing the cash is safe.
Bank savings accounts are more liquid than CDs: You generally can withdraw money at any time without paying a penalty. But that liquidity comes at a price, as the rate of return for a savings account is usually lower than what you would get on a CD.
In addition, you traditionally have not been able to take money from the account more than a half-dozen times each month without your bank charging you a fee for exceeding that limit. In light of the pandemic, the Federal Reserve enabled banks to waive that fee, as we report in “New Rule Change Makes Savings Accounts More Attractive.”
That waiver is still in effect, although it is up to individual banks to decide whether they want to use it. If the bank so chooses, it can still penalize you for violating the half-dozen withdrawals limit.
Money market account
These accounts resemble traditional savings accounts. For example, they are subject to the same six-per-month limit on certain types of withdrawals and transfers, and your bank may charge you a fee for exceeding that limit with a money market account as well — unless it chooses to waive the fee.
However, savings accounts and money market accounts differ in some important ways.
In many cases, money market accounts pay higher interest rates than traditional savings accounts. And, unlike a savings account, you often can write checks on a money market account.
Of course, you could skip all of these suggestions and simply stuff your money under the mattress. But we advise against that. For more, check out “6 Reasons You Should Stop Hiding Cash at Home.”