Where You Should Put Your Emergency Fund

If there’s one thing we all should’ve learned from the ongoing COVID-19 scare, it’s that having an emergency fund is a necessity.

So many people who thought their job was secure or their business could not fail did not anticipate the damage a pandemic could do to the economy. And who could blame them? Nobody saw this coming.

Unfortunately, we are told on a regular basis by newspaper articles and various websites that a huge percentage of Americans don’t have enough cash on hand to cover a $1000 emergency.

If you haven’t yet established an emergency fund, you need to do so ASAP. If you have started saving for an emergency fund, you might be wondering, “Where do I put this money?”

Do not put your emergency money in a certificate of deposit (CD) or the stock market. CDs will earn you a little bit of interest, but you’ll have to pay a penalty if you withdraw the money early. And the stock market will earn you a lot more money over time, but what if the stock market tanks and you need your money?

For example, let’s say you had invested your $2,000 emergency fund in stocks in January. When COVID-19 caused the stock market to tank 30% in March, your emergency fund would’ve sunk to $1,400. Not good.

Also, do not simply earmark part of the money in your regular checking account for emergencies. If you leave it in your regular savings or checking account, there’s an excellent chance the emergency money gets “absorbed” into the other money, and one day, it will get spent. You have to actually separate your emergency fund from your other money.

The best place to put your emergency fund is a regular, boring checking account at your favorite local bank. Why? Because you’ll be able to access your money quickly and easily. Make sure to open the type of checking account that won’t charge you a monthly maintenance fee or require you to maintain a minimum balance, though.

Don’t worry about the fact that your emergency fund probably won’t be earning you any money. The purpose of an emergency fund is to keep you from going into debt when you have an emergency expense, not to make money for you.

If you absolutely can’t stand the idea of your emergency fund earning 0%, then I’d suggest you put your first three months’ worth of expenses in the checking account. After that, you could put any extra money you save into a short-term CD or online savings or money market account.

That way, you’d still have three months’ worth of emergency money that is safe and instantly accessible, and your extra emergency money would be making you at least a little bit of money. Interest rates for short-term CDs and money market accounts are so low right now, though, I’m not sure it would be worth the effort.

The main point though, is to establish an emergency fund if you haven’t done so already. You should be able to open a separate checking account quickly and easily. Just get it done and sleep easier at night knowing you’ll be ready for your next emergency.