Best Places to Keep Your Emergency Fund

Having an emergency fund is important because you don't want to have to sell investments, borrow from your retirement plan, or use a credit card every time an unexpected expense occurs.

Unfortunately, too many Americans are not financially prepared for emergencies. According to one recent survey, 57% of Americans couldn't afford a $1,000 emergency expense without borrowing the money or selling something.

Read on for a closer look at the best places to keep your emergency fund.

How much should you have in your emergency fund?

The most common guideline used by financial planners is that you should aim to have six months' worth of expenses saved in a readily accessible account. Setting aside six months' worth of rent or mortgage, car payments, utilities, groceries, insurance, and other expenses can seem like an extremely intimidating task.

Having said that, six months is a good eventual target for an emergency fund, but you might need more or less, depending on your situation. For example, if you're married or living with a partner and you both have extremely stable jobs and little debt, you may be well prepared for emergencies with far less than six months of expenses. On the other hand, if you have a relatively unpredictable income, you may want to aim even higher.

While there are some very good reasons financial planners use the six-month guideline -- specifically to deal with periods of unemployment -- many people don't reach this target for years, even if they save responsibly. The key is to get started and set milestone goals along the way, such as $1,000 or $2,000. With each milestone, you'll be better equipped to deal with unexpected financial challenges than you were before.

Learn More: Emergency Fund Calculator

Where to keep your emergency fund

There are several places you can keep your emergency fund. As long as it's in a secure place that you can access quickly in emergencies, and have little chance of losing money, you aren't making a bad call.

Keeping your emergency fund in a high-yield savings account

Perhaps the most logical place to keep your emergency fund is in a high-yield savings account offered by a reputable, FDIC-insured financial institution.

High-yield savings accounts are somewhat of a recent phenomenon. With the surge in financial technology in recent years, the online banking industry has grown rapidly, and many banks offer easy-to-navigate online savings account products. Because these companies don't have to pay for a branch network, they can pass the savings on to customers in the form of higher yields.

If you build up a $10,000 emergency fund, a high-yield savings account could mean $450 or more in essentially free money on an annual basis while you're protecting yourself against the unforeseen. Of course, it's important to realize that savings account yields can and will fluctuate over time, but a high-yield savings account can help you maximize your emergency savings in any environment.

Keeping your emergency fund in a money market account

Money market accounts can be smart places to keep emergency savings, as they combine some of the best features of high-yield savings accounts and checking accounts. Being able to simply write a check or swipe a connected debit card is a nice accessibility feature that could make a money market account worth considering.

Money market accounts often have higher minimum deposit requirements than savings accounts. For example, there are accounts on our top money market account list that have minimum opening balance requirements as high as $2,500. With emergency funds this is less likely to be a roadblock, and there are some options with little or no minimum deposit required. As far as interest rates go, some of the top online-based money market accounts have yields that are on par with what you might expect from a high-yield savings account.

Keeping your emergency fund in a Roth IRA

As a final example, one outside-the-box emergency fund solution is to use a retirement account -- specifically a Roth IRA.

A Roth IRA is a unique investment vehicle that can allow you to save for retirement and prepare for emergencies at the same time. There's a feature of Roth IRAs that allows you to withdraw your original contributions (but not any investment profits) at any time, and for any reason, without penalty. In other words, if you put $5,000 into a Roth IRA in 2022 and added another $5,000 in 2023, and you have an unexpected expense in 2024, you can access as much as $10,000 of the account early.

A Roth IRA isn't perfect for emergency savings. But it can be worth considering if you need to catch up on both retirement and emergency savings.

How to build your emergency fund

If you don't have an emergency fund, or you do but still feel inadequately prepared for emergencies, there is no better time to get started than right now. And here are some steps to do it:

• Start by opening an account that is separate from your non-emergency checking and savings accounts.
• Make the process automatic. This is perhaps the best tip to help you get started and stick with your emergency savings plan.
• Figure out an amount of money you could comfortably afford to contribute to your emergency savings every time you get paid.
• Set up a recurring automated transfer from your checking account into your designated emergency account.
• Occasionally make additional contributions. For example, if you get a bonus from your employer, maybe allocate a portion of it to your emergency savings account.

If you do these five things, you might be surprised at not only how quickly your emergency fund builds, but how much peace of mind it gives you knowing that you could get a flat tire or need emergency dental work tomorrow and it wouldn't derail your financial life.

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