How can I earn the most interest on my emergency fund?
- A reader asks: Where should I put my emergency fund to earn interest and easily access it?
- Rates are low overall right now, but you can’t go wrong with a high yield savings account.
- A certificate of deposit is another option, but these accounts are time sensitive.
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Thanks to the reduction in spending over the past year due to the pandemic, I was finally able to build up a decent emergency savings fund. What is the best place / product to park it that will allow it to gain value while remaining liquid enough to be accessible in an emergency?
The pandemic has made it clear how necessary personal emergency funds are.
Glad you are looking to get the most out of yours. That’s what good money management is: maximizing what you have and preparing for the unexpected.
Since you want the money to be accessible in the blink of an eye, you have two options: a high-yield savings account or a certificate of deposit (CD).
My advice is to find a good, high yield savings account, deposit your money, and then forget about it until you need it.
Few financial products meet this balance between growth and
. When it comes to emergency savings, the most important thing is that your money is safe and ready when you need it. A high yield savings account can guarantee this, while also helping you earn some extra cash.
But I don’t want to say it: interest rates in all areas are ridiculous right now.
For a few years before the pandemic, putting your money in a high yield savings account, as opposed to a traditional savings account, meant you had a chance to beat inflation. But now interest rates are near record lows and inflation is on the rise.
At the largest US banks, annual percentage returns (APYs) on savings accounts range from 0.01% to 0.06% in May 2021. Yikes.
– which share many, if not all, of the same features of a basic savings account – offer APYs between 0.40% and 0.61% as of May.
You and I both know 0.61% is better than 0.06% … so take it! A balance of $ 10,000 earning 0.61% interest, compounded daily, would earn you $ 61 over the course of a year (assuming the rate stays the same, although it probably isn’t). It’s not a fortune, but peace of mind is priceless.
The only way to earn a lot more is to invest money. With something like an individual stock investment or even a
, you risk your savings to potentially earn more. It’s not worth the shot.
Interest rates can fluctuate every few months on savings accounts based on decisions
makes. So you shouldn’t choose a high-yield savings account just for its interest rate. Also, be sure to factor in fees and minimum balance requirements.
Finally, keep in mind that most high yield savings accounts don’t come with a debit card or ATM access. You need to initiate a wire transfer to a checking account when you need the money, which can take several days. If you don’t have another mechanism to cover a last-minute emergency, such as a credit card that you pay off in full every month, it may be best to choose a high-yield savings account at your bank or credit union. popular current.
What’s wrong with CDs?
A CD can protect your money from market risks, just like a savings account. You also lock in your interest rate, which is good if you expect rates to change soon.
The wrong side? You can’t get your money as easily as you could with a high yield savings account.
A CD keeps your money at a fixed interest rate for a specified period of time. When you earn interest on your CD money, you have the option of collecting these payments monthly or reinvesting them.
But you can’t touch or add money to your original balance without paying a penalty equal to some of the interest you earned. You can deduct this penalty on your tax return later, but you will still have to pay the money up front.
Most banks offer variable rates for different durations and different deposit amounts – generally the longer the term, the higher the rate. That’s a nice bonus, but it’s not the best place for an emergency fund that you might need tomorrow.
Tanza Loudenback, CFP®, is the Personal Finance Correspondent at Insider. She writes most often about savings, retirement planning, taxes, debt management, and wealth building strategies. Got money for Tanza? Fill out this anonymous form.