JUN. 13, 2017 4 min read

Where do you house your emergency fund? As in where do you house your cash reserve that’ll cover anywhere from three to six months of expenses?

The two most important features of an emergency fund are that it’s highly liquid and low-risk.

You want high liquidity because, in the event of an emergency, you want to be able to access your funds quickly and easily.

And you want low-risk because these are funds you want to be sure you can rely on at any given moment. This isn’t funny money. What good would an emergency fund be if you housed it in stocks and you happened to need those funds right when the stock market plummets?

Your emergency fund should live in a highly liquid, low-risk account.

Financial products like CDs, mutual funds, ETFs, bonds, cryptocurrency are poor candidates for an emergency fund because they’re either not very liquid, risky or both.

Checking accounts on the other hand are strong candidates as they’re:

1: highly liquid since you can quickly and easily withdraw funds if need be
2: and low-risk since they’re federally insured—be it through FDIC or NCUA if you bank with a credit union.

But the interest on checking accounts is practically nil. And while you, yes, want a cozy home for your emergency fund that’s highly liquid and low-risk, you also want one that’ll earn you at least some bucks in the process.

After all, you should have a healthy chunk of cash in your emergency fund (three to six months of expenses) which has the potential to earn a healthy chunk of interest.

Thus a better option than a checking account is a free high-yield savings account.

In the past I’ve used SmartyPig, which is a free high-yield savings account designed to encourage you to save towards goals. Current annual percentage yields (APY) on a SmartyPig account at the time of writing are:

  • 0.85% if your daily balance is more than $0 but $2,500 or less
  • 0.90% if your daily balance is more than $2,500 but $10,000 or less
  • 0.95% if your daily balance is more than $10,000 but $50,000 or less
  • 1.12% if your daily balance is more than $50,000

Today I use GS Bank, which was formerly GE Capital. Its APY at the time of writing is 1.20%.

Clearly these yields are less than what you might earn with stocks or bonds, but they’re greater than vanilla checking accounts. But remember: stocks and bonds are also riskier and less liquid than savings accounts. And yield is a secondary concern when establishing an emergency fund. High liquidity and low-risk come first.

There are other high-yield savings accounts besides the two I mention and you might want to investigate them. NerdWallet keeps a list here. Be sure to also explore high-yield savings accounts offered by credit unions, as sometimes credit unions offer attractive benefits to its members. And be sure to keep your head on a swivel for minimum deposit and balance requirements and sneaky fees.

This last point is worth repeating: when it comes to financial products, always—and I mean always—keep your head on a swivel for sneaky fees. Outside of illegal black markets, the financial industry is the most dishonest and deceitful and opaque industry alive.

One thing to remember with savings accounts is that they have a six withdrawal limit per month. This makes them slightly less liquid than checking accounts. Federal law won’t let you withdraw funds if you’ve already done so six times within the month. I learned this the hard way.

And another thing to remember is that the banks and credit unions that offer high-yield savings accounts can change the yields willy nilly, either in response to the whims of the market or the whims of an executive.

Despite these caveats, a high-yield savings account, with a trusted bank or credit union, is a fine home for your emergency fund.