Where to keep an emergency fund: 4 options

Life happens—often when you least expect it. A flu gets the best of you. A clunking noise comes from your car. A water heater busts. You get the picture. It’s why most financial experts suggest building an emergency fund.

An emergency fund is meant to protect you and your family from unexpected expenses that could lead to financial hardship if you’re not prepared. You may want to consider keeping your emergency fund (think 3 to 6 months of living expenses) separate from your regular checking and savings accounts so it can be set aside for emergencies only. Your emergency fund can provide a financial cushion and help cover your expenses while you get your finances back on track.

Below, you’ll find options for an emergency fund, along with recommendations to help your savings grow.

You’ll want to make sure you keep your emergency fund in a safe spot, and one that gives you a return on your cash reserves. But since this cash needs to be readily accessible in case you need it, you have to choose where to keep your emergency fund wisely.

When deciding where to keep an emergency fund, consider these four different account types that offer easy access and benefits:

A high interest rate savings account might be an ideal place to keep your emergency fund. Not only are your funds accessible, but you’ll also earn interest on your deposits.

To find a high interest rate savings account for your emergency fund, consider factors like interest rates, monthly fees and balance requirements. That’s one reason many people choose Capital One. Our 360 Performance Savings accounts have no minimum balance requirements, so you can keep more money in your wallet.

When deciding where to invest your emergency fund, don’t forget about money market accounts. They’re similar to savings accounts in that they can offer higher interest rates. You can open one online or at a local bank, then access your money through web-based account management or at an ATM.

Money market accounts can be easy to use, but it’s important to note that some banks may restrict the number of withdrawals you’re allowed to make each month. Even so, they can be a good option for your emergency savings. Just remember to be mindful of any fees that could reduce your returns.

Certificates of deposit, or CDs, offer a fixed rate of return for a specific length of time (for example, 12 or 24 months). Because your rate of return is guaranteed, opening a CD could be a way to earn extra interest on your emergency fund.

CDs “tie up your money” where it’s somewhat out of reach. That means you may have to pay a penalty to access your funds before your term ends. To avoid this scenario, some people use a CD ladder. This involves opening multiple CDs with different maturity dates, so some of your money becomes available at regular intervals. If you choose that course of action, it can help to have an easy way to track your accounts and maturity dates.

Some people may consider keeping some of their emergency savings in an individual retirement arrangement (IRA). You may not want to keep all of your emergency fund in an IRA because access to your funds is generally not on demand, and a mistake can be costly. However, unlike a regular savings account, an IRA lets your money grow either tax-deferred or tax-free over time.

To consider an IRA to hold some of your emergency fund, it's important to understand the rules—arrangement types (Traditional or Roth), contribution limits and distribution rules, including taxes and penalties for early withdrawals.

There is an emergency distribution option for IRAs if your IRA plan allows it. The Internal Revenue Code allows emergency distributions from an IRA of up to $1,000 no more than once a year. The amounts can be repaid to the IRA within 3 years. If not repaid you have to pay tax, and the emergency reason has to be supportable as an emergency (unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses).

Using an IRA to store your emergency fund is a complex concept that you should discuss with your qualified financial or tax advisor.

Your emergency fund can help protect you and your family from financial stress when unexpected expenses arise. You may not need the money right away, so keeping it in the right account can help your savings grow. 

Where to keep an emergency fund:

• High interest savings accounts: Offer easy access to your money while allowing your balance to earn interest.

• Money market accounts and CDs: May offer competitive returns, though CDs can limit access to your money until they mature.

• IRAs: May offer tax advantages and growth potential, but withdrawal rules and contribution limits apply.

Give your emergency fund some serious momentum with a great rate that helps every dollar go further. One way to do that is with Capital One’s 360 Performance Savings, which offers a great rate to help your balance grow.