This Account Is a Terrible Place for Your Emergency Fund

Having an emergency fund is a great way to sleep better at night — you know that you’ve got saved cash that’s ready to help you tackle an unplanned bill or even a period of joblessness, and you don’t have to go into debt in those situations. (Trust me, not having an emergency fund isn’t a fun time.)

But it’s not enough to have the cash saved up — you’ve also got to find the right place to keep it. It should be somewhere safe and accessible, so you don’t lose it and can get to it when you need it. Chances are good you use your checking account for a lot of your everyday bills and expenses, so you might assume you should just keep your emergency fund there. But this is a bad idea, and here’s why.

It likely won’t earn interest

The first reason why your checking account isn’t the right place for your emergency fund is that it’s likely not going to grow from interest there. Yes, okay, high-yield checking accounts do exist, but they’re not terribly common, and some have high balance requirements or other hoops you must jump through to earn the highest APY offered. According to the FDIC, the average APY for interest-earning checking accounts is currently 0.07%. There are other places for your emergency fund that earn real money (more on those below).

You might accidentally dip into it

While I do recommend keeping a little cushion in your checking account (to give yourself some wiggle room in case your regular bills come in a little higher than usual — overdrafting your account is also no fun), keeping your emergency fund there can be a bad idea for another reason.

Simply put, you might lose track of how much you’re supposed to be saving for a rainy day and accidentally chip away at the balance. Or worse, you might figure that it’s okay to spend a little “just this once,” and leave yourself short of money for actual emergencies because of an expense that simply isn’t one. We’re all human, and who among us hasn’t had a moment of longing for a purchase and attempted to justify taking the money out of a pool of savings for it?

Where should you keep your emergency fund?

Well, a checking account definitely isn’t the right place for your emergency fund, but this doesn’t mean you should keep that money out of the bank altogether — keeping a pile of cash under your mattress is also a bad idea. Instead, look to a different type of bank account. Specifically, consider high-yield savings accounts and money market accounts.

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A high-yield savings account is accessible to just about anyone, assuming you’re comfortable banking online (as the best high-yield savings accounts are offered primarily by online-only banks). Many come with no fees or minimum balance requirements, and APYs are more than 4% these days. As of this writing, I’ve earned over $1,000 worth of interest on my savings account this year so far — passive income, as I’ve done nothing but consistently fund the account. One potential pitfall of these accounts is a lack of easy access to your money. I had to open a linked checking account to go along with my savings so I could get a debit card, as one didn’t come with the account.

If you’re concerned about access to your cash, consider opening a money market account. These are like a cross between a checking account and a high-yield savings account, in that the best money market accounts come with check-writing privileges and/or debit cards, and they earn APYs as high as those available from savings accounts. You may have to contend with a minimum balance requirement, though, so read the fine print on any account you’re considering.

Pick the right bank account for your emergency fund

Banks are really the safest place for your emergency savings, provided you choose one that’s insured by the FDIC. Just don’t fall into the trap of thinking you should leave that money in your checking account where you won’t maximize your earnings.

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