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This is the US companion of the same question for Canadians Where can I park my rainy-day/ emergency fund?. Basically I want to know what options I have for my emergency fund?

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5 Answers

up vote 15 down vote accepted

First off, you generally want to park your emergency fund somewhere that is "safe", meaning something that is not subject to market fluctuations. Your emergency fund is something you need to be able to count on when times are tough! That rules out things like stock market investments.

Secondly, you need to think about how quickly you will need access to the money. If you have an emergency, odds are you don't want to be waiting around for weeks/months/years for the money to become available. This rules out most fixed-term investments (Bonds, traditional CDs, etc).

If you are concerned that you will need near-instant access to your emergency money, then you probably want to keep it in a Savings or Money Market Account at the same bank as your checking account. Most banks will let you transfer money between local accounts instantly.

Unfortunately, your local bank probably has pitiful interest rates for the Savings/MMA, far below the inflation rate. This means your money will slowly lose value over time. Be prepared to keep contributing to it!

For most people, being able to draw the cash from your fund within a few days (<1 week) is sufficient. Worst case, you charge something on your credit card, and then pay down the card when the emergency fund withdrawal arrives.

If "money within a few days" is okay for you, there are a few options:

  • Money Market (Mutual) Funds (not to be confused with a Money Market Account) - This is the traditional place to keep an emergency fund. These are investment funds you can buy with a brokerage account. An example of such a fund would be Fidelity Cash Reserves. MMFs are not FDIC insured, so they are not exactly zero risk. However, they are considered extremely safe. They almost never go down in value (only a few times in the past few decades), and when they have, the fund manager or the Federal Govt stepped in to restore the value. They usually offer slightly better return than a local savings account, and are available in taxable and non-taxable varieties.

  • Online High-Yield Savings or Money Market Account - These are a relatively new invention. It's basically a the same thing as what your local bank offers, but it's online-only. No local branch means low overhead, so they offer higher interest rates (2.0% vs 0.5% for your local bank). Some of them used to be over 5% before the economy tanked. Like your local bank, it is FDIC insured.

One bit of caution: Some of these accounts have become "gimmicky" lately. They have started to do things like promo rates for a few months, only offering the high interest rate on the first few $K deposited, limiting the amount that can be withdrawn, etc. Be sure to read the details before you open an account!

  • No-Penalty CDs - Certificates of Deposit usually offer a better rate than a Savings Account, but your money is locked up until the CD term is up (e.g. 36 months). If you need to cash out before then, you pay a penalty. Some banks have begun to offer CDs that you can cash out with no penalty at all. These can offer better rates than the savings account. Make sure it really is no-penalty though. Also watch what your options are for slowly adding money over time. This can be an issue if you want to deposit $100 from every paycheck.

  • Rewards Checking Accounts - These are checking accounts that will pay a relatively high interest rate (3% or more) provided you generate enough activity. Most of them will have requirements like you must have direct deposit setup with them, and you must do a minimum number of debit card transactions from the account per month. If you can stay on top of the requirements, these can be a great deal. If you don't stay on top of it, your interest rate usually drops back to something pitiful, though.

Personally, we use the Online High-Yield Savings Account for our emergency fund. I'm not going to make a specific recommendation as to which bank to use. The best deal changes almost week to week. Instead, I will say to check out Bankrate.com for a list of savings accounts and CDs that you can sort. The Bank Deals blog is a good place to follow rate changes.

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+1 Thank you for the thorough answer. –  Leigh Riffel Apr 30 '10 at 11:54
    
The money market fund is no longer the invincible bastion it was perceived to be before the crisis. Make sure it's getting a significantly better rate (at least .25%) than comparable FDIC MM accounts. Also make sure all your accounts at any given bank are under the historic FDIC insurance limit of $100,000 if you're going to leave money around. –  SpecKK Sep 4 '10 at 0:10
    
Capital One's High Yield Money Market account was one of those 5% offerings years ago. It is now at 1.10%. –  Troggy Oct 12 '10 at 0:33
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I would suggest your local credit union or local bank for security and liquidity. Liquidity is probably the most important issue for a emergency fund.

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Some people may need to be able to get at the funds on a moments notice. For me the (up to) two days it would take to transfer into my bank account is quick enough. In fact as long as I could get to it within 20 days I'd be fine with it. –  Leigh Riffel Apr 27 '10 at 0:59
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@Leigh I understand, but different people have different priorities. I personally like having money I can (quickly) drive to a bank and pick up if I want. –  C. Ross Apr 27 '10 at 14:05
    
+1 I understand thanks for the answer. –  Leigh Riffel Apr 28 '10 at 2:25
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And remember, an emergency fund is not an investment, so cash is king. Do not invest the money. Just park it in a savings account in cash. –  Mike Apr 28 '10 at 4:13
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I am using ING for my emergency savings, but sometime last year I discovered SmartyPig. As of 4/24/2010 they offer 2.1%, which is even better than the 1 year CDs at most banks. I've switched two small accounts to SmartyPig and plan to switch my emergency savings. Their accounts are geared around monthly contributions, but you don't have to use that feature.

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Are deposits at SmartyPig insured by the FDIC? –  Chris W. Rea Apr 26 '10 at 13:57
    
Yes, although their only cash redemption option (debit card) is a little troubling. –  cabbagecalculator Apr 26 '10 at 20:38
    
You can have your funds transferred back into your bank account and then get cash from your bank. This does take up to two business days. smartypig.com/about/faq#b7d25672-be3c-4ba7-ae52-a7f1afba2bc9 –  Leigh Riffel Apr 27 '10 at 0:56
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This is probably a good time to note that credit is not a liquid asset, and not an emergency fund. Credit can be revoked or denied at any time, and Murphy's law states that you may have issues with credit when everything else goes wrong too.

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Something with an FDIC guarentee, so a bank. With an emergency fund, I think the 'return of capital' is more important than the 'return on the capital', so I'm fine with putting it in a standard savings account in a local bank(not an internet account) even if it pays next to nothing. The beauty is that since the bank is local, you can walk in and withdraw it all during any weekday.

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Re: "you can walk in and withdraw it all during any weekday". Read the disclosures. They may have rules that delay your access to funds if you try to withdraw a large amount all at once. For example, BofA says that they may require "reasonable advance notice" of a large cash withdrawal. I had a local bank balk at a large withdrawal I made once; the teller asked me to give them 3-4 days notice next time. –  bstpierre Apr 26 '11 at 15:42
    
That may be so, but it's still as fast or faster than any other similar option, such as an online bank, T-bills, etc. As pointed out above, you could have a checking account set up at the same bank and transfer the money from saving to checking almost instantly and then write a check for the whole amount –  chrisfs May 15 '11 at 1:24
    
I guess my point is that the strategy in your comment (transfer to checking and write a check) doesn't provide any advantage to using a local bank when you can probably get a slightly better rate from an online bank and still have the savings to checking option, or possibly even the rewards checking as described in other answers. –  bstpierre May 15 '11 at 2:29
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