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 is a 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 a 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.
Here are the top online banks that have highest savings accounts rates and free interest checking accounts: