Where to Put Your Emergency Fund

One of my coworkers and I were on a mission last week.  We were trying to find places to store our emergency funds. She was looking for somewhere other than her bank savings account that earns her .25%. Ben and I are creating a joint emergency fund, rather than keeping our two separate accounts with Emigrant.

With so many different online investment options, it’s hard to decide where to put your three- to six-months of living expenses. Here are some tips that make the decision a little easier.

1)     Keep the Money Liquid: The consummate question with emergency funds is whether to invest all or part of your money in a vehicle that can provide more interest than 1%. Resist this temptation for a high yield. By definition, an emergency fund is something that you can access quickly. So make sure that money is liquid and separate from your everyday funds. Your best vehicle for that will be an online money market account. Check out Bankrate.com for online accounts that pay the highest interest. I also like analysis from sites like NerdWallet, which provide reviews based on different goals. You can find plenty of reviews by googling “The Best Online Savings Accounts 2015.″

2)     Look for Qualities Other than a High Interest Rate:  Interest rates change all of the time. And while your account may be the highest one day, it could be middle of the pack or the lowest the next. (This happened to Ben and me with our individual Emigrant accounts.) Look for online banks that may offer other qualities that interest you. For example, you may want great customer service, a user-friendly mobile app, or maybe just the ability to talk to someone 24 hours a day if need be.  A bank with an all-around great review may be worth a .25 reduction in an interest rate.

3)     Consider Your Roth: If you’re having trouble saving for emergencies and investing, you may be able to do both at the same time. With a Roth IRA, you can take out any money that you contribute to your account out at any time. (You just have to make sure to keep earnings in there.) You should still keep the money in cash-equivalent investment.  However, if you are one of those people that really wants to invest part of your money, you could keep three months in cash and the other portion in short-term bond funds or CDs, if your provider offers it. You still won’t make a ton of interest, but at least the money will stay safe, which may not happen if you invest aggressively in an equity fund. Don’t qualify for a Roth? Think about the back-door option.

The bottom line is there’s nothing really sexy about emergency funds, nor should there be. I hope for your sake that you never have to use that money. But it’s important to keep and it safe accessible in case you do.