Best Places to Keep Your Emergency Fund

A broken piggy bank and a hammer as someone taps into an emergency fund.

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Having an emergency reserve of cash you can rely on can make dealing with life's rainy days easier. Whether it's an unexpected home or car repair, or a visit to the vet or doctor that was unplanned, your emergency fund can help cover the cost, but where should you keep your emergency savings?

You could stick it under the mattress but you have some better options. If you're searching for the best places to keep your emergency fund, consider these four savings vehicles.

High-Yield Savings Accounts

Several things make the high-yield savings account different from a traditional savings account. First, high-yield savings accounts tend to offer a higher annual percentage yield or APY on deposits, as their name suggests. What that means for you is that your money earns more interest over time.

Another key difference is that high-yield savings accounts may carry fewer fees than regular savings accounts. For instance, you may not pay a minimum balance or monthly maintenance fee.

Where do you find high-yield savings accounts? Brick-and-mortar banks can offer them but you may find more variety when considering an online bank instead. The pros of opening a high-yield savings account with an online bank include:

  • Potentially higher APY on savings compared to a traditional bank
  • Fewer, if any, fees
  • Low minimum deposits (some online banks let you start saving with as little as $0)

There may be downsides to choosing a high-yield saving account for your emergency fund, particularly if you decide to go with an online bank. The biggest may be the convenience. If you have your emergency fund at an online bank and the bank doesn't have any branches or ATMs nearby, you may have to transfer money from your savings to an account at a traditional bank, then make a withdrawal. That could be a hassle if you need the money quickly.

Money Market Accounts

Money market accounts can be similar to high-yield savings accounts in terms of the APY and monthly fees. There are some differences that may or may not make them a more attractive choice as one of the best places to keep your emergency fund.

Unlike regular savings accounts, money market savings accounts may come with a debit card, check-writing privileges or both, depending on where you bank. That can make a money market account very convenient if you need to make an emergency purchase or write a check to cover an unanticipated expense.

A potential downside is that money market accounts may require a higher minimum deposit to open. For example, instead of getting your emergency fund started with $1, you may need $100 or more to open an account. That could put a money market account out of reach, at least in the short term until you've had a chance to increase your savings cushion.

Certificates of Deposit (CDs)

Certificates of deposit or CDs are time accounts and they work a little differently than a high-yield savings or money market account. A CD requires you to commit to leaving your savings alone for a set period of time. This can range from 30 days up to 10 years, depending on the CD term you choose. Once that term ends, your CD matures and you can withdraw your initial deposit, along with the interest earned.

The positives of using a CD for an emergency fund is that you may be able to get an even better APY than you would with a savings or money market account, and CDs typically have no monthly or maintenance fees. A drawback, however, is the early withdrawal penalty that can be imposed if you withdraw money from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned.

One way to get around the fee is to create a CD ladder, using multiple CDs of varying term lengths. For instance, you might have a three-month CD, a six-month CD, a 12-month CD, and an 18-month CD. The advantage of laddering CDs is twofold. First, your CDs have rolling maturity dates so it may be easier to withdraw money if needed without triggering a penalty. You can take advantage of higher APYs since the longer your CD term, the better the rate.

Roth Individual Retirement Account (IRA)

A Roth IRA is a tax-advantaged vehicle designed for retirement savings but it could double as an emergency fund in pinch. The beauty of a Roth is that your money is invested in the market, meaning you can earn a much higher rate of return than you would with a savings account or even a CD. And qualified withdrawals from a Roth IRA are always 100 percent tax-free.

Using a Roth IRA for emergency savings may not be an ideal solution, however. Depending on how long you've had your account and your age when making an emergency withdrawal, you may have to pay income taxes on the earnings you withdraw, along with a 10 percent early withdrawal penalty. You're also short-changing your retirement since the money you take out no longer benefits from the power of compounding interest.

Consider a Multi-Faceted Approach

If you're torn when trying to decide where the best places to keep your emergency fund are, consider using more than one option. Allocate some of your emergency cash to a high-yield savings account, some to a money market, some to a CD and some to your Roth IRA. That way, you'll have multiple options for covering an emergency when a curve ball comes your way.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Topic No. 557 Additional Tax on Early Distributions From Traditional and Roth IRAs."

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