Ask Jesse: Interest-bearing accounts for emergency funds?

We are aggressively trying to get our emergency fund to five months’ worth of living expenses right now. However, when I think about all that money sitting around and not making any interest, it bothers me. Have you all found any good accounts that are accessible and still earn a little bit of money? I am just having a hard time thinking $15,000 is just “sitting around”. -Shannon

It can give you heartburn to think of having a substantial amount of your hard-earned money sitting in a non-to-low interest bearing account earmarked as an emergency fund. I know the feeling well; we money “nerds” always try to think of better ways to have our money work better for us!

When it comes to the emergency fund, I’ve found it is helpful for me to think of it more as an insurance policy than a fund that needs to be earning money. With an insurance policy, you are constantly paying premiums for a product that you more than likely will never need. In addition, an insurance policy is a product that is usually for a certain amount in the event of a loss and is not indexed to increase with inflation. So in reality, with an insurance policy, you are losing money due to inflation and constant premium payments, albeit for a specific purpose — risk management.

It is the same with the emergency fund. It is not an investment where your goal is to make a certain rate of return. Rather, it is a “insurance policy” to protect you from a significant loss or set back. When you have an emergency fund, what could be a disaster becomes a mere inconvenience.

Just as with insurance, you do indeed lose money with having an emergency fund in a liquid, easily accessible account due to inflation. That is a price I am willing to pay, however, for the peace of mind that comes from having a cushion to soften the blows when trouble strikes.

We currently have our emergency fund in a local bank’s money market account. I chose this for the easy access and CD-like rates. It may not be keeping up with inflation, but at least its not losing as much as keeping money under a mattress — not that that is a bad place to keep it if you had the discipline not to touch it! I know myself well enough to know if I were to keep the emergency fund in it’s most liquid form (cold hard cash), I would find “emergencies” all over the place.

Some people like CDs; those are a safe place for your fund, but you will have to pay a percentage fee to get the money out in case of an emergency before the maturity date. Another option is a money market fund with check-writing privileges.

In today’s economy, you might as well be resolved to the fact that your emergency fund is going to lose money by sitting there, no matter if you are getting interest or not. In the end, though, the non-tangible benefits of having the emergency fund readily accessible far outweigh any tangible losses.

Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.

The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.

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Comments

  1. says

    I like the idea of thinking about it as an insurance policy and not being so worried about the interest, I’ve been struggling with the same thoughts as Shannnon myself. I’m currently keeping our emergency fund at an online bank which typically pays a slightly higher interest than a local bank (it isn’t much though). However there is a downside to this due to the fact that it takes a couple of days to transfer the money back. If the emergency was a job loss this may not be a big deal since we would just be using it to pay bill, but it if is something where the cash was needed immediately it could be an issue for us. Thanks for your insight.

    • Leslie says

      We do something similar, but to counteract the inconvenience of the transfer delay we opened a free checking account at a different bank than the rest of our regular checking and seeded it with our $1,000 baby emergency fund. That way if we are traveling and have an immediate emergency we can use that account instead of risking over-drawing our regular account (no credit cards over here).

  2. Jan says

    There are online banks like ING that offer savings accounts that currently pay 1.1%, which is better than any short term CDs I have seen and the money is very accessible-usually 3 business days. This gives a little time for you to make sure it is a real emergency (you can pay for immediate withdrawal). ING also lets you set up multiple accounts for your kids, wedding fund, car fund etc. You also can get a bonus for setting up accts for your kids or for friends. Also have an account with FNBO-First National Bank of Omaha.

    • Shantique says

      I was going to say ING also. I would keep about 2k in my regular savings that can instantly move to the checking for a TRUE emergency and then the rest at ING. It is rare that you would need more than that in less than the 2 business days for the money to move.

      I hope that “mattress” you are talking about is fireproof. There is no way to get that cash back if there is a break in or fire. How do you prove to the insurance company it was there?? Also, DO NOT put CASH in a safe deposit box at the bank. The contents of SDB’s are NOT covered by FDIC insurance! Sure you won’t have to worry about break in or fire, but if that bank goes out of business, it may be a LONG time before you can access your SDB contents!

      • Lynn says

        I think the “mattress” comment was probably just being a bit quippy and hopefully most people realize that is not a wise move. You bring up a good point though Shantique. That being said, just in case people should be aware that most homeowners insurance policies (while the amount varies by state and can be increased by endorsement) have a policy limit on what they will pay for cash in a loss – for example in my state it is $200. If you are keeping cash at home, you should really consult your policy to know what your coverage is – even if you can prove you had it the cash may not be covered in full. Just something to keep in mind!

  3. ediehardy says

    You could put some of it in short-term CDs and “ladder” it so that you have CD’s maturing regularly. Also, my bank has CDs that you can withdraw early once with no penalty. Of course, CDs aren’t paying squat lately either. Hard to make money with money these days!

    • Becky says

      That’s exactly the plan we are working on. I am opening a 12-month CD each month this year that will be at least equivalent to our mortgage payment. The rest of the money is going in no-penalty 11-month CDs. We are doing this all at Ally.com. I am unimpressed with their customer service, but otherwise it’s working well so far.

  4. Kristi says

    We have our emergency fund in an Orange Savings account with ING Direct which is currently earning 1.1%. Much better than our bank’s .25% in a Money Market and definitely better than our bank’s savings account at .16%.

  5. Celena says

    We are keeping our emergency fund and savings largely in the form of physical silver. The value of the silver will never go to absolute zero, whereas the value of the dollar is declining (especially against other currencies) rapidly. We keep 1 months living expenses as a cushion in our checking account, some is in an investment account, and the rest is all silver.

    • Ducky says

      While it’s true that silver will never go to absolute zero in value, it, like all investments (e.g. stocks, mutual funds, corporate bonds, other commodities), are inherently dangerous for an emergency fund. The idea of an emergency fund is to have a “money cushion” that stays at a particular value and doesn’t really change much — the values of commodities will change from day to day, and there’s no guarantee that it’ll stay above what you paid for it.

      Plus, in the event of an actual emergency, it’s unlikely you’ll be able to unload the silver at decent market rates unless you shop around — which, considering it’s an emergency, you probably won’t have the time to do.

      So, while it’s commendable to hedge against the falling dollar by buying silver ingots, it’s not really a suitable way to maintain the value of an emergency fund.

      • Celena says

        We also have a very considerable stockpile of food and other resources, so an ‘emergency’ for us likely wouldn’t be the same as for many people. Yes, it’s true that silver is volatile, there is an up and coming shortage of the metal, so I don’t see selling as an issue. We also have other precautions set, so our method works quite well for us. We have so far seen quite a considerable increase in our ‘emergency fund’ which NEVER would have been possible with it sitting in a bank or any other financial institution.

    • Elizabeth says

      Did a licensed financial advisor suggest that you do that? Because it flies in the face of ever piece of financial advice I’ve ever heard. Commodities are extremely volatile– I think they can be a part of a reasonable investment strategy, but an emergency fund isn’t the place to invest, IMHO. Could you tell us why you picked silver, rather than gold or copper, or diamonds? I’m totally curious. :-)

      • Rachel says

        I am also curious why silver.

        Our financial advisor told us that the first $1000 of any emergency fund should be accessible immediately (no selling or overnight transfers). So we set up a second checking account with our bank. The funds can then be removed by ATM, check or transferred to our other account with no delay.

        The rest of our emergency fund was then invested at ING. We can still reach the first $1000 and we can transfer the other in less than 3 business days.

  6. says

    I agree with Liz. I keep money savings and emergency fund in money market account with an online bank – Zion’s Bank. They have a higher interest rate than the local banks – Wachovia/BOA, etc. I make $30 or so a month in interest. Granted, I do have more than $15,000 in the account.

    I pay for everything via credit card and wipe out the balance each month. This way I receive benefits – such as, cash back in check form every couple months. Most emergencies can be paid for initially with a credit card or most bills take 30 days to process and be due.

    • Salley says

      I do something very similar to Rachel. I decided recently that I no longer wanted to support Bank of America so went looking for a local bank (Raleigh NC). I found Capital Bank, which has a 4% interest bearing checking account for up to $10,000 and 1.5% for amounts over $10k with certain stipulations (you have to use your debit card 10 times a month, etc).I moved $12k into that account and use it as my checking account and savings account. I also use a credit card that gets cash back for everything and pay it in full every month, effectively earning twice on the same money. This certainly isn’t for everybody, but since I don’t have a problem with spending my emergency fund on non-emergencies, and do not have a cash based household, but it has worked for me and made me hundreds of dollars while supporting a local bank.

  7. says

    One thing that I have heard of people doing regarding CDs is to buy one each month for 12 months and then just continue to turn them over. This is ideal if your emergency fund is solely to cover living expenses. You will want each CD to be the minimum amount you would need to live on for 1 month if you lost your income.

      • Teresa says

        While this sounds good, think about having to remember every month to go and set up a new CD. Most only renew at a much lower rate if you would forget. Once every three months or so would be more practical and less time consuming.

        • Andrea Q says

          But then you’d only have access to the money once every three months. The beauty of Danielle’s suggestion is that you could cash out a CD basically whenever you needed it without paying a penalty and without giving up the interest that six to twelve months of living expenses would generate.

    • Susan says

      This is what I have done. Buy CD’s, but stagger them so that one of them will mature each month. That way if you have an emergency, you won’t have to cash out a CD and pay the penalty.

  8. says

    This isn’t guaranteed for your area, but a couple of our local banks offer 12% APY interest rates on checking accounts that meet certain requirements (12 credit transactions per month, use online banking, etc.) We keep out emergency fund in our checking account (but itemize it out on our budget sheet-to keep us from touching it!)

    This also takes some self-control, but we’ve found it works well for us. Check your local banks to see if they offer special accounts like this!

    • Kari says

      This is what I was going to mention as well. Although, I thought our 5% was good! :)

      We know how much of our checking account balance is our actual checking balance and how much is our emergency savings money. In our case, it is actually our savings towards paying 100% down for our future home.

    • Shantique says

      This rate seems a bit much…usually when banks are offering such a high yield, its coming with some risk. That usually means the bank is at risk. Just be sure to check the rating for any bank you are putting your money with. FDIC DOES cover you if the bank goes out of business, but it is a time consuming process to make a claim. Bankrate.com has ratings for most institutions.

        • Shantique says

          The giants, no. But I work in that industry and small, local community banks are shutting down every week still. We get emails every week with a few banks closing. Trust me the big banks are not offering those kinds of rates anywhere. If that is truly the rate, there is a reason for. Higher rewards come with more risk, its the nature of ANY market.

    • NV says

      These banks must be crazy or their loan to deposit ratio is way out of whack. I wouldn’t go there for a loan. The loan rate is probably 25%!!!

      • Niki says

        There are some new FDIC regulations thanks to the last SEC control bill, that limit checking percentage rates. Ours went from 5 to 1.2 :( Anyone else have this problem?

  9. says

    My husband found a “risk free” CD at our bank (Bank of America) that has a significantly lower interest rate than a standard CD, but we can withdraw the money at any point without a penalty. We figure that the point of the emergency fund is to be accessible in an emergency, so getting any interest is a perk!

  10. AnnMarie says

    I, too, use an online bank for our e-fund. We also have $1000 in cash in the house (because one time I was short for an upcoming bill that was on auto payment and had no money locally to cover it. Now we have that cushion for that kind of emergency.) It’s a very low interest rate, but just about everything is a low rate these days. I used to use CDs, but their rates dropped so much it wasn’t worth the effort.

    I treat the little bit of interest as a way to increase the fund drip by drop.

  11. Becky says

    Check with your local bank or credit union. Ours has an account they call “high & free checking”, & it earns 3% (on up to $25,000) if you jump through some of their hoops like using direct deposit or automatic bill pay, on-line banking, & use your debit card at least 15 times per cycle (this is where they earn their cash). I think several other banks have accounts similar to this, & it works great as long as you can keep your hands off of the “emergency fund” money while paying other bills, etc.

    • Jean says

      Glad someone put this up, Becky, thanks. These are a great way to earn some interest if you don’t mind the extra tracking and have discipline not to touch the e-fund. I would add that it is possible to open several of these accounts–if your savings is large enough. In our area, these accounts are paying just over 4%.

  12. says

    We just switched from Bank of America to IngDirect for this very reason & compared to the money market accounts, we’re earning more interest with ING than we would with our money in a money market account. My husband and I just figured that it should do at least SOME good while its sitting there:)

    Its helpful to think of the e-fund as an “insurance policy”- I hadn’t thought of it that way but it makes sense. Thanks for this post!

  13. says

    In situations like this I think you could do both an MMA and a CD. Say you loss your job and need to start tapping your EF. You likely won’t need all 5 months worth of savings right away. You can set up a CD or 2 for some of the money to earn a bit more interest. In fact, over time you can set up a CD ladder. Say each month put $1000 into a 1-year CD. Do this every month for a year. Then every month you will have 1 CD mature and you can either use it if you are having an EF or roll it over if not. Of course it is also smart to keep some completely liquid as well.

  14. Rae says

    Right now we have our emergency fund in a ING saving account (we have one that is just for emergency fun) and then we always keep atleast $1000 in our regular checking account for emergencies that are urgent (plus we have a pretty high limit on our credit card and no balance so if an emergency popped up, we could also put it on there and pay it off as soon as the money transferred from ING) so we can get to it right away. I like the idea of the rolling cd’s though so once the cd rates go up again (not really worth it right now), I think I’ll do that with half our fund.

    • Shantique says

      You can do CD’s with ING too and their rates will usually beat the local banks (unless they are trying to beef up deposits).

      • Rae says

        yes I love how easy they make it to get cd’s (well I love ING in general actually). I just want to wait until their rates go up since they are so low right now :)

  15. DJ says

    I have a checking account that pays 3% interest up to 30K. When I first started with them, they paid almost 5%, but it has dropped due to the economy I’m sure. Anyway, not sure if it’s ok to share a link on here, but this is the bank we use. I’ve been happy with them. There are not too many Liberty banks around, but we can use US Banks ATM’s without a fee, so it makes it convenient. We do have restrictions, like we have to make at least 10 transactions a month, have to have at least one direct deposit and we have to use their online banking.
    https://www.therisingstar.com/

  16. A.S. says

    Another person here with an emergency fund at ING. It does pain me to see it do “nothing” but make a little interest here and there, but I totally agree with the response of “the non-tangible benefits of having the emergency fund readily accessible far outweigh any tangible losses.” Well said.

  17. says

    If you have a no-credit household, you can get a free interest-bearing checking account online. I know that Ally Bank has one. I believe ING does, too. You can transfer money in or out from your regular checking account if you have time to pay the bill, but can still write a check from your emergency fund if an instant payment is required.

  18. Lucy says

    Currently the best I’ve found is ;

    Morrill + Janes Bank
    Kansas

    1.5% on routine checking, no ceiling + no hoops.

  19. Shannon says

    Thanks Jesse for answering my question! I had never thought of it as an insurance policy. The moment I read that, part of that ‘feeling’ just left. I don’t have to worry about it any more. God used you to calm my heart! Plus the dividends God can pay (to one who is trying to honor Him with our finances) definately far outweighs any dividend from a bank.

  20. Debbie says

    Another place to invest is thru your church’s denominational loan fund. These organizations pay a higher interest rate and use the money you loan them, to in turn loan to churches for building projects. The downside is they are not usually FDIC insured. Currently our 6 mos CD’s are paying 2.5% at one of these.

  21. says

    If I had $15K in emergency funds, I might consider starting a blog or site to “aggressively” generate further emergency funds. May take as little as $1K to set up and market, the other $14K put into what has been suggested. I would suggest that this “risk” could be well worth it and potential to increase the emergency funds worth the $1K.

  22. Rory says

    2 Words. SMARTY PIG! http://www.smartypig.com

    I have been with SmartyPig now for around 3-4 years. The site is amazing! You can create a goal for a certain purpose, i.e. a vacation, a tv, etc. But, I like to use my accounts for more frugal endeavors. I have one goal labeled car insurance that I cash out/begin again every six months, and one goal labeled Christmas 20xx that I cash out/begin again every year for Christmas gifts. I also have a goal that contains about 3 months worth of bills (1/4 of my emergency fund is here) in balance. A set amount goes in to each of these accounts every month. Last I saw the interest was 1.75% and it does change occasionally. Before the economy fell on hard times, the interest rate was somewhere above 3% and it’s climbing back there.

    The beauty of Smarty Pig is that you can take the money out with no penalty within 1-3 days and you get to keep all of the interest. SmartyPig also teams up with retailers who will give you 5-10% (of your savings goal) more if you cash it out in the form of a gift card. This is used in the event that you are saving for something personally satisfying.

    Basically, this has provided me an awesome tool to make money while saving towards my next car insurance & Xmas budget. In addition, I’m constantly & automatically saving to an ever growing emergency fund that is growing better interest that any other thing out there.

    If anyone is interested, please e-mail me at fwrockstar@gmail.com so that I can send you a referral. I do get $25 for each referral, but that is not why I have taken the time to write this. This is just one of the many tools that I have used to get my wife and I out of debt and now that we are ahead of the game, this is one of my most cherished places for growing wealth.

    • says

      I have a SmartyPig account, but I’m liking it less as I’m with them longer. It was a nice way to save up for a new freezer, except that they charged us money to take our money out, even though we took it in gift cards. Plus the interest rate has plummeted since I’ve been with them, so now it is barely better than my ING savings account. I think the merger they did recently really hurt their relationship with their customers.

  23. says

    I recently made a decision to take half of our emergency fund and put it into a CD. I really wanted to keep it with our bank, however their interest rate was lower than another local bank. I ended up asking my bank to match the interest rate and they did! We got 2.5% on a CD at our own bank, which is part of our online banking account.

    I’m not sure if every bank will do this, but ours did not want to see the money go walking across the street!

  24. Brenda says

    A few years ago, my emergency was the brakes going out on my van. I was tired of pumping money into the old van and decided to buy a used one. I found one, but my emergency money was tied up in conservative mutual funds. It took longer than I expected to transfer the money to my checking account. It all worked out in the end, but I was sitting on pins and needles for a while, afraid that the new van was going to get sold out from under me even though we had the money–we just couldn’t put our hands on it. Now half of our emergency fund still in mutual funds while the other half (or at least enough to replace a van!) sits in cold hard cash.

  25. sarah says

    I don’t see why it would have to be in one spot, leave maybe 1-2 months of emergency money liquid and the rest in something that may have a better yield. That way short term emergency money is there but the long term is growing. We use a credit union for what ever savings we do(we are working on things) and use their cd products. If we needed money in a cd we would lose 3 mths of interest if withdrawal early, but right now thats nothing. It does make you think twice before touching funds. And in a real emergency the small of interest would be the least of my concerns.

  26. Lynn says

    I think the “mattress” comment was probably just being a bit quippy and hopefully most people realize that is not a wise move. You bring up a good point though Shantique. That being said, just in case people should be aware that most homeowners insurance policies (while the amount varies by state and can be increased by endorsement) have a policy limit on what they will pay for cash in a loss – for example in my state it is $200. If you are keeping cash at home, you should really consult your policy to know what your coverage is – even if you can prove you had it the cash may not be covered in full. Just something to keep in mind!

  27. romaine says

    this question couldn’t have been on a better timing.ive been restless for a few days now for my hubby would be facing job loss anytime soon and i am upto my neck trying to work out how we could save the most on our money. Although I am working full time, him losing his job scares the wits out if me. I just pray to God that all works out fine. So for maybe a week now I have been doing my research on ING Direct because they do offer one of the highest rates there is esp compared with local banks. We recently purchased a cd at a credit union which offers 2.5% apy which is really good but i want our emergency fund to be more accessible than that. Our money “just sat” in our checking acct for over a year and now im wondering why i didnt think of these things before. But im thankful enough to learn early on (3 years into the marriage and both in the early 20’s) how to be more money savvy.

    Now that I have read more testaments to ING’s service, i might open an account with them soon. Right now we have 3 banks. A wells Fargo acct that we use for bills and then a chase acct we use for savings and then the credit union for the cds. My question is, we do link one of those accts to ING direct right?

    anyway, thank you jesse and everybody here for this post and comments. this is exactly what i need tonight. i opened money saving mom’s website to search for crystal’s financial goals for 2011 to inspire me some and then i find this!what a bonus!:)

    • Leslie says

      yes you’ll have to link at least one checking account, but you can link all three of them if you’d like. Then you’ll always have the option of transferring to whichever account needs the money.

  28. Lori S says

    ING is the way to go. I have an account that currently earns 1.25%. That is better than I have seen on CDs. It is very easy to get the money when you need it.

  29. says

    Every month $800 is deducted automatically from our checking acct and goes into an account with Waddell & Reed. $500 goes to a money market (which is making surprisingly good interest right now) and $100 goes into accounts for each of our 3 kids. (Not the education accounts but something a bit higher earning.) I can manage the money market account online and easily transfer money from it to my checking account. I can also write checks directly from the money market. When the money market reaches $10,000 the additional money is transferred to a different higher earning account. We can easily transfer money between the two accounts. (For example if we needed to write a 20k check out of the money market account for some reason.) We also put 5k in each of our Roth IRA’s each year and I usually tuck an extra money we have into the higher earning account with hopes of someday adding on to our house. An additional $75 comes out of regular checking and goes into a savings account (having two accounts with the bank allows me some perks like overdraft protection etc) that we refer to as the appliance fund. It makes pathetic interest but we have an ancient house and we seem to be replacing appliances/pressure pumps/well parts/pellet stove parts on an alarmingly regular cycle…. so it is nice to have a little cash handy for that… although I have learned the pellet stove repair guy will do minor repairs in exchange for homemade cinnamon rolls.

    Anyone see any flaws in our system or things we could improve?

  30. Lori says

    We use an internet savings account for our emergency fund. We used to get great interest on it, but not right now. But a little is more than nothing and we can get our money penalty free in 3 business days.