You know you need an emergency fund, and that it should be held someplace safe.
But the options of where to hold those emergency funds can be a bit confusing.
There are so many accounts that it is not quite clear what the benefits and drawbacks of each of the accounts are.
Here I have a review of where you can keep an emergency fund and how to decide what is best for you.
Savings Account at a Bank
Your first option is a standard savings account at the bank. This account is FDIC insured and usually there’s a very small opening balance.
Your interest isn’t going to be a lot and there there can be fees attached to the account if you don’t keep a minimum balance.
But there are ways to waive the fees, such as keeping a minimum balance.
There is a big difference in the this minimum requirement between banks. Many traditional banks are around $300 a month, and many online bank are $0 to $25 a month.
Remember with interest rates low, if you are below the minimum, you most likely will be paying the bank to keep your money. This is not a good idea!
You want to check into what the account rules for your bank.
Savings accounts are restricted by federal regulation to only allow you six transfers per month. This was set up to ensure that saving account were used to save and not as checking accounts.
If you go over that number of transfers, then they can either penalize you with a fee, or they can close your account. This depends on your bank, so ask!
Savings accounts are FDIC insured. This means you will not lose value on this account if the bank goes under. FDIC does have limits on what they cover, so don’t keep too much at one bank.
Currently this limit is $250,000 per depositor per bank.
So if you and your spouse have $300,000 in one bank you are covered for the entire amount. However, if you have $550,000 then $50,000 will not be covered.
Money Market Account at the Bank
The main difference between a money market and a savings account is that the balance minimums on a money market are higher. You typically will also get higher interest rates on a money market.
You’re still FDIC insured because you are at a bank, and you still have a set number of transactions each month.
The difference between these two accounts is the minimums and the interest paid.
Money Market Fund at a Mutual Fund Company
A money market fund is at an investment company and it is not FDIC insured.
This means the value of your money can change and you could lose it. While they try and maintain a one dollar net asset value, this is not guaranteed.
In the history of money market funds, there have only been a couple that failed. So they have a fabulous track record.
Money Market Funds are governed by the Investment Company Act from 1940. This restricts what they’re able to invest in, thus further protecting your value.
Most of the time these tend to have a lot more flexibility on withdrawals. Some companies offer check writing on the account. Sometimes they can make more than your savings from the bank but not always. Most importantly it gives you more access to your money as they don’t have the six withdrawal rule.
They do have a higher minimum. Many funds have minimums of $2500 to $3000.
Some do allow you to set up an automatic transfer and then waive the minimums.
What to Look at When Deciding on an Account
Here are some things you should consider when you are deciding where to keep your emergency fund.
- Do you want the FDIC insurance? If you want the FDIC insurance, you need to be at a bank.
- Do you want to have check access? Some money market accounts at banks do have check access but not all do. Ask if you account offer check access, plus what the minimum check size is that you are allowed to write. Many accounts require you to write checks of at least $250 or more.
- Fees – can you waive the fees? Side note: with a mutual fund at a brokerage firm, there is no way to waive fees, but it is charged as a percentage that comes out before they pay interest.
- Interest Rate – what are you earning on your money. This should not be your primary focus on your emergency fund. But, if comparing two banks then the one with the lowest fees and highest rates would be better. If you get too high on an interest rate you are trading safety of the savings for return. Your risk will be going up somewhere.
Below is a cheat sheet that compares the accounts so you can pick the right one for you. (Right click on the words Savings Account comparison and it will open up!)