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Can You Use a Money Market Account for an Emergency Fund?

See if you should keep your emergency fund in a money market account, which has key differences from a typical savings account.

When you are setting up a financial plan for yourself, one of your first priorities should be to establish an emergency fund.

Emergency funds are stores of cash that you decide not to spend unless you absolutely have to.

They can come in handy if you wind up with a medical bill, unexpected car repair, or loss of your job.

Being able to pay for these sorts of unexpected expenses out of pocket can help you avoid taking on expensive debt.

Credit cards, which are commonly used to pay unexpected expenses, charge exorbitant interest rates. Even lower rate loans such as personal loans or home equity lines of credit can be very expensive.

This leaves the question: where should I store my emergency fund? Savings accounts are a popular choice for emergency savings. They keep your money easy to access but pay a better rate of interest than checking accounts do.

However, savings accounts aren’t the only option. Money market accounts can also be a good place to store your emergency fund.

What is a Money Market Account?

A money market account is a special type of bank account. It combines the benefits of savings accounts and checking accounts.

Typically, money market accounts pay a higher rate of interest than savings accounts do. They are able to offer this higher interest by requiring a larger minimum balance.

While many banks will let you open a savings account with $50-$100, you might not be able to open a money market account with less than $1,000. Even if you can open the account with a small amount of money, money market accounts usually charge maintenance fees unless you maintain a certain balance.

The good news is that your emergency fund should be relatively large. Most people will want a thousand or more dollars in their emergency fund. That makes it easy to meet the balance requirements, which lets you take advantage of the higher interest rate.

Another benefit of money market accounts is that the money is more accessible than money in a savings accounts.

While some savings accounts offer ATM cards, nearly every money market account will offer an ATM card option. That will make it much easier to withdraw cash when you wind up needing it.

Money market accounts also offer check-writing ability. You can write checks against the balance of the account as though it were a checking account. Savings accounts don’t offer that feature. Just take note of the limits on the number of transactions you can make each month.

MMA for an Emergency Fund

You can definitely use a money market account to store your emergency fund.

They have a number of benefits over using a savings accounts but do also come with a few drawbacks.

When it makes sense

For the most part, money market accounts are a great place to keep your emergency savings.

High account balance

It makes sense to use one for your emergency fund if you expect to maintain a high balance in the account.

Because many money market accounts charge maintenance fees on accounts with a low balance, you want to be sure you can avoid those.

Your emergency fund should be, above all, safe. If your emergency money is slowly eaten away by fees, you could find yourself in trouble if you need to make use of the money.

Easy accessibility

Another time when it makes sense to use a money market account is if you expect to need easy access to the money.

Money market funds give you check-writing and ATM access just like a checking account would. That makes it incredibly easy to withdraw or spend the money in the account.

This can be dangerous if you’re tempted to spend the money on a non-emergency. Because you can never know when you’ll need to use your emergency fund, you shouldn’t spend the money in it unless you need to.

Having the easy access that a money market account provides will increase the temptation to spend.

On the other hand, you’ll be able to easily deal with emergencies because you can get access to your savings in no time at all.

When it doesn’t

The key characteristics of an MMA also make it inappropriate for some people.

Low balances

Money market accounts are not a good place to keep your emergency fund if you can’t meet the minimum balance requirements.

The last thing that you want is to have your emergency fund reduced each month by fees. You should prioritize keeping the money you have over earning slightly more interest at the cost of higher fees.

Spending temptation

Another reason to avoid money market accounts is if you’re easily tempted to spend money. Having easy access to the cash will make it very tempting to spend it frivolously. Making your emergency fund a bit harder to access will help reduce that temptation.

If you decide that a money market account isn’t right for you, look into online savings accounts. They pay great rates of interest and usually have very low minimum deposits.

How Much Money Should Be in an Emergency Fund?

Once you’ve decided to build an emergency fund, you’ll need to decide how much money you want to have in the emergency fund.

It’s difficult to give specific amount for how much you should save. The answer will be heavily based on your personal situation.

People with very secure jobs and a low-risk lifestyle don’t need a large emergency fund. If you work odd-jobs, enjoy extreme sports, and have health issues, you’ll want a very large emergency fund.

You want your emergency fund to be able to fund any reasonable, unexpected expense that you may face. That may be a repair bill for your car or an unexpected medical bill. You may want to use your emergency fund to keep paying the bills if you lose your job.

No matter why you eventually use the emergency fund, you’ll want to have enough money to meet your need.

A common rule of thumb is to base the size of your emergency fund on your monthly expenses. Most experts recommend that you keep between 3 and 6 months expenses in your emergency fund.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

So, if you spend $4,000 each month and want to have 5 months expenses in the fund, you should save up $20,000.

That should be enough to pay the bills if you lose your job or cover an unexpected bill.

While it may seem daunting to want to save up that much money, remember that emergency funds can save you from huge headaches down the road. Using debt to pay for an unexpected expense can cost hundreds or thousands of dollars over time.

How Emergency Funds Can Help You Save Money

If you want to see how important emergency funds and avoiding debt are, consider this example.

You’re driving your car to work and get into a small accident. The mechanic tells you that the repair will cost $4,000.

You don’t have an emergency fund, so you ask about financing options. The shop offers you a payment plan. You’ll make a payment every month for the next four years, at an interest rate of 8.99%.

Each month, you’ll send a check for $99.52 to the mechanic. After four years, you’ll have paid a total of $4,777.02 to repair your car. Because you didn’t have an emergency fund, the repair will have cost $777.02 more than it needed to. The increase in the cost of the repair due to the interest is more than 19%.

If you happen to run into another financial emergency while you’re paying for the car repair, you’ll have to take out another loan.

With just a few unexpected expenses, you could find yourself with multiple loans and thousands of dollars in interest expenses.

In another scenario, you had built an emergency fund of $10,000. When you bring your car to the shop you’re able to pay the bill out of pocket. Your emergency fund will now have $6,000 in it. That’s enough to cover some future expenses should they arise.

You can then take some time to rebuild your emergency fund through a combination of depositing money and letting interest accrue in the account.

Conclusion

Money market accounts provide a unique combination of benefits that make them a great place to store emergency savings.

If you can meet the minimum balance requirements, you’ll earn a great rate of interest and have easy access to your money. If you aren’t able to maintain the minimum balance required by money market accounts, consider an online savings accounts.

Most have very low minimum deposits and great interest rates.

Once your emergency fund has grown, you can transfer the money to a money market account.