An emergency fund is your own self-formulated insurance policy against destroying your financial health. Saving money in just any bank account could qualify as an emergency fund but there are better way to make that money work for you.
Credit cards were the typical go-to solution for people who needed to pay for something but didn’t have the money. Usually, these people didn’t have any money saved up to pay the credit card bills after making unexpected purchases and ended up swimming in a pool of debt.
Because of the tendency to use credit cards as emergency funds, it is one aspect of personal finance that has received increased attention.
Reasons for an Emergency Fund
There are two predominate events that would activate an emergency fund. One would be an unexpected expense for occasions such as repairs after a car accident, medicals bills from sudden illness, or replacing the expensive smartphone you dropped in the pool. The other is a dreaded life-changing event — losing your job.
For spontaneous expenses, you would probably swipe your credit card and access your emergency fund to pay the credit card bill right afterward. If you lose your job, your emergency fund becomes your only source of discretionary spending.
In either case, an emergency fund must be readily accessible where funds in a bank account can be transferred to cash in your hands within days.
While a stack of bills under the mattress can be considered an emergency fund, a bank account is ideal for people who want to maintain an emergency fund that earns low-risk interest and is easily accessible.
Online High Yield Savings
The online high-yield savings account is a popular place to hold an emergency fund. Interest yields from online high-yield savings accounts will beat the majority of tradition savings accounts found at larger banks. Because an online savings account is relatively easy to withdraw from, it is also easy to spend it even if there wasn’t an urgent expense.
Currently, American Express Bank, FSB. is offering the highest savings return at 1.30% APY, which would be the optimal option for anyone who is chasing the highest rates.
Another highly recommended bank is ING Direct, which is offering 1.10% APY. The highlighted feature is the ability to create multiple sub-accounts within your ING Direct account so customers can dedicate a separate account towards a separate goal, such as building an emergency fund.
Certificates of deposit (CDs) can offer greater yields than online savings accounts but they are highly illiquid. You can make an early withdrawal but the penalties may end up causing you to lose money.
A great alternative is a no-penalty CD, which doesn’t impose a penalty if you suddenly decide to pull your money out of the account. CDs can make you less likely to use the emergency fund for anything other than a true emergency.
The top no-penalty CD currently available is Ally’s No-Penalty CD that is paying 1.20% APY.
A newcomer to the emergency fund discussion is the interest checking account. Being highly liquid, interest checking accounts offer immediate access to emergency funds at your beck and call. That’s also the downside because it is too easy to deplete on a whim.
If you have the willpower to resist spending, an interest checking account provide great returns on an emergency fund. Incredible Bank is a commonly mentioned bank that’s offering a steller 1.35% APY on its interest checking account, which offers a free debit card, ATM fee refunds, and no account fee.
|Bank||Product||APY (as of 2/4/11)||Minimum balance required||Offer link|
|American Express Bank, FSB.||High-Yield Savings Account||1.30%||$0||View offer|
|ING Direct||Orange Savings Account||1.10%||$0||View offer|
|Ally Bank||No-Penalty CD||1.20%||$0||View offer|
|Incredible Bank||Incredible Checking||1.35%||$1||View offer|
If you would like to find and compare more bank accounts, visit the bank rates page.