DR 124: Where Do People Keep Their Emergency Fund?

Where to Keep an Emergency FundWhere do people stash their cash for emergencies? That’s the question I asked more than 18,000 subscribers to the weekly Dough Roller newsletter. The common wisdom is to keep emergency funds in an FDIC insured bank account, preferably one that pays a high yield. But with interest rates at historic lows, are people taking on more risk to reach for higher yield?

The results showed the diversity of our readership. While many continue to use traditional savings accounts, others opt for a more unique approach. Listen to the results in the podcast or read them below.

Bank Accounts

As expected, most people keep their emergency fund in an FDIC insured back account. A high yield savings account took top honors, although folks also use checking accounts and certificates of deposit.

Several mentioned their specific bank. Capital One 360 was the top pick. Here are others:

A quick note on SmartyPig.  It’s a unique savings option that is based on savings goals you set.  The interest rate is very competitive, but there are restrictions on withdrawals.  If you are considering SmartyPig, please make sure you understand all of the restrictions.

Here are what some of the readers had to say in their replies:

Danny: “I keep my emergency fund in my savings account at my bank. Even though I am not earning a lot of interest on it, I know it is for emergencies and I am not trying to make money off of it.”

Katie: “Keep emergency fund in savings account but interested in a better option.”  It’s true that savings accounts don’t pay much.  As we’ll see below, however, there are options with higher yields.

Patrick: “I only keep $1,000 in a crappy low yielding savings account with Santander. I know the return is awful, but that motivates me. My wife and I are actively paying down our debt, and I tell myself I’ll move it once the debt is gone.”

RV: “I keep my Emergency Fund in a money market account at Sallie Mae online bank. I also have part of my ER fund in a Capital One online savings account because there was a promotional $75 when I signed up.”

Several people keep their emergency fund in a checking account.  One reader named Rick managed to find a checking account that pays a whopping 3%.

Credit Unions

A number of readers use credit unions for cash management.  One big advantage is that interest rates can be significantly higher than a bank.  That being said, the higher rates typically come with some hoops you have to jump through or restrictions (e.g., limit to the balance that earns the higher rate, direct deposit requirement).  Here’s what some folks had to say about credit unions:

Wendy: “Emergency fund – deposit into another credit union monthly for 2.9% return. It dumps out every august so whatever is there some goes to roth and some to other farm expenses and the year starts over. Since I am of age for soc sec (not drawing) and continue full time at fairly secure university job, emergency fund not as stressful now.”

Joyce: “We keep our emergency fund at the credit union. We have a regular subscriber acct and laddered CDs with maturities from 2 to 5 years.”

John: “More specifically, I have a one year CD at 3% (Special EasyStart Certificate, max $3,000). In October, Navy Federal also offered one year CDs at 5% (Celebration Certificate, max $5,000) as part of a month celebrating their members. Add to the fact that my wife is a member, we can each have these CDs.”

Because my son is in the Marines, we now qualify to open an account at Navy Federal Credit Union.  I’ll be keeping a close eye on their rates.

Investment Accounts

Several folks use investment accounts for their emergency fund.  For example, a reader named Michael keeps his cash in a Roth IRA invested in an FDIC-insured account.  Remember, a Roth doesn’t have to be invested in stocks and bonds.

Several readers use Vanguard’s money market fund.  The fund, which is not FDIC-insured, pays extremely low rates.  A reader named Jeff had this to say:  “Vanguard Tax-Exempt MMF. It makes nothing but I know it is safe. I am intrigued with what I think I heard you say once …to put part of it in Vanguard Short or Intermediate term in order to earn something, but I haven’t done that yet …”

A couple of readers use Betterment.  One named Ace explained his approach:

I’m glad you asked. I used to keep roughly 3-6 months of take home pay as Dave Ramsey recommends. I actually did three months of salary, more or less, which is more than 3 months expenses when you take out savings, which you would in an emergency.

I read an article (I think I heard about it from you) that Betterment said you should invest your emergency fund with them with a lower stock to bond ratio. That was a few months after I started using YNAB. So, I ended up taking my emergency fund out of CapitalOne360, and threw enough into my checking account to be one paycheck ahead (per YNAB’s philosophy). I liked the idea of budgeting a month in advance with money I already have. The remainder of the money I invested through Betterment with (I think) 40% stocks.
To sum it up, my emergency fund is imbedded in YNAB to make me a month ahead (I’m not explaining this more since I assume you are familiar with that “rule”) and the rest is in a “lower” risk Betterment account. I am in the military and feel that I have pretty good job security, and even if my wife quit working, we’d be fine, so I’m not too concerned with the extra risk of having the money in Betterment. i.e. I feel that the chances of me needing to use the fund is low. As a side note, with the arrow carried forward function of YNAB, I do sometimes use that buffer in certain categories when I go over but know that on any other given month I might go under and I’ll be able to catch up with it.

The article that Ace refers to is this one — Safety Net Funds: Why Traditional Advice Is Wrong.

Finally, Stephanie uses a combination of a Capital One 360 account and a TD Ameritrade brokerage account.  She stashes 80% in the savings account and 20% in index funds.

As you can see, there are a lot of options.  Certainly safety of capital is paramount when it comes to an emergency fund.  But some are comfortable taking on some risk to boost yield.

As for me, I keep my emergency fund in a combination of high yield savings accounts (Capital One 360 and Ally) and an intermediate term municipal bond fund at Vanguard.

Where do you keep your emergency fund?  Let us know in the comments below.

Topics: Personal Finance

3 Responses to “DR 124: Where Do People Keep Their Emergency Fund?”

  1. Bill Talmadge

    I told you about Smartypig. You should have mentioned they are not only competitive, they have the highest bank rate in the nation.
    Also GE Capital was taken over by Synchrony Bank. I have some funds in there too. They pay the second highest rate in the country (.95%).
    Here is a trick I use for non emergency cash though it can be used for emergency funds. . I find a bank with the least penalty in months for a 5 year cd. When I started this, Ally was paying a 2.4 percent on their 5 year cd and had a 2 month penalty (I would guess this is no longer true but the concept is still of value). If you keep the money for one year, your interest is 10/12 times 2.4 percent, Thats 2 percent, better than anything available.

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