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Most people are all well aware of the importance of stashing a little cash aside for unforeseen financial emergencies.
Whether it be an unexpected medical expense, job loss, or car trouble, an emergency savings fund is crucial to avoid accruing unnecessary and hard to pay off debt.
Financial experts recommend setting aside anywhere from 3 to 6 months’ worth of living expenses. This can amount to tens of thousands of dollars depending on your cost of living, job security, etc.
While there are plenty of approaches to building a savings that will protect you from the financially unexpected, the issue of where to store your savings is an often unexpected decision to be made.
Stashing a such a substantial amount of cash away in your sock drawer will definitely not cut it, and a traditional savings account might be insufficient as well. While traditional savings accounts offer the security and accessibility of your funds, they’re usually accompanied by many banking fees.
Additionally, traditional savings accounts have extremely low interest rates making this an uninteresting approach to growing your savings.
Alternative approaches to traditional savings accounts are often safer in that they protect you from the negative effects of inflation, so you won’t lose the money that you’re saving.
There are quite a few options as to how to go about putting away emergency savings funds. These options vary in risk and interest yielded.
High yield online savings accounts for example, provide a simple and more profitable alternative to traditional savings accounts.
Money market accounts are also a potential option for those looking to safely deposit more substantial amounts of emergency savings money.
The prospect of starting a no penalty certificate of deposit account should be considered for those looking to make a more long-term high payoff investment.
Roth IRA accounts are a plausible option as well. They may provide a good way to invest part of your savings and potentially maximize the interest your money can earn.
Investment in savings bonds also provides a great option to diversify the way in which your emergency savings earns you money.
These 5 major approaches to keeping savings safe and liquid while still earning are listed below, along with their varying financial requirements and benefits. Let’s begin with a look at high yield online savings accounts.
1. High Yield Online Savings Account
If you are looking for a low risk way to store your rainy-day fund while reaping more rewards than you would with a traditional banking account, a high yield online savings account is a promising option.
A high yield online savings account is essentially a savings account that is operated solely online. The online operation aspect to these accounts offers a variety of benefits in many cases including little or no fees and substantially higher interest rates.
The lower cost of operating a bank online often allows online banking operations to charge far fewer fees and reward their customers with more profitable interest rates.
This approach to storing your emergency savings fund is a relatively safe route to choose as many high yield savings accounts are offered by banks that are insured by the FDIC.
Additionally, many credit unions offer high yield savings accounts online that are insured by the NCUA, providing protection for those who prefer to bank with credit unions.
This means that your funds are protected while they are earning significantly more interest than your typical savings account at a local bank.
Although high yield online savings accounts offer the arguably most simple and convenient way to profitably store your emergency funds, some research is required as there is a wide array of online banking options that vary in cost, interest rates, and minimum deposit requirements.
Here is a compilation of some of the better options for online savings accounts that will meet your specific savings needs and provide you with some level of profitability for your rainy-day fund.
All of these accounts listed provide a competitive APY rate as well as FDIC protection that will give you a better payoff along with peace of mind.
This high yield savings account offers a generous rate of 2.05% APY making it a significant improvement from your run of the mil savings account as far as interest yield goes.
This account also offers an ATM card option, which will allow you to access your emergency funds quickly, making it ideal storage for funds you want to save but also need to have quick access to in a pinch.
An additional benefit to this account is its lack of a minimum balance requirement. Any amount you deposit into this savings account will accrue interest at the same rate.
Ally Bank is another option for an online savings account that offers a high rate of 1.90% APY.
One major benefit to this account by Ally Bank, is that it offers the convenience of direct deposit for checks, which allows you to add funds to your savings by simply snapping a photo of a check.
With this Ally Bank account, interest is compounded daily, which can be extremely beneficial to those trying to get the most yield out of every deposit to their savings account.
The Marcus online savings account offers competitive rates as well, currently at 2.05% APY.
This high yield savings account comes with no transaction fees and does not require a minimum amount to open a savings account. With this bank, you can begin your savings here with any starting amount.
This online savings account is perfect for someone who is looking to keep a regular bank account in operation as it does not have an automatic deposit feature and requires all funds to be transferred from a different bank account.
If you are looking for a safe alternative to a traditional savings account that will increase the rate at which you earn interest as well as provide a safe place to store your emergency fund, high yield online savings accounts are a great option.
2. Money Market accounts
If you already have a substantial amount of savings and are looking to safely capitalize on what you have, a money market account is a good option to look into.
These accounts differ from traditional banking accounts, in that they have more freedom in which to make investments with the money they accrue, while still maintaining the protection of your money via the FDIC.
Money market accounts are able to offer substantially higher interest rates than savings accounts in exchange for larger minimum initial deposits and heavier withdrawal restrictions.
For example, most money market accounts require that you deposit a minimum of 5,000 to even 10,000 dollars to start and restrict your withdrawals to 6 per month or per statement cycle.
Although money market accounts are typically ideal for those looking to invest a large chunk of money safely to gain higher returns, there are also a few money market options that allow for a smaller minimum balance.
Here are a few of the more impressive offers for money market accounts ranging from smaller minimum balances to larger minimum balances and their corresponding APY rates and benefits.
Sallie Mae accounts offer a uniquely high interest rate, 2.12% APY, for a money market account with no minimum balance.
This account is a great option for someone interested in opening a money market account to earn higher interest rates, but does have a large sum to fork out for the initial deposit.
Additional benefits to this money market account include no annual fees, checks that can be written to access funds directly from the account, and FDIC insurance so you know that your money is not only increasing, but that it is also safe.
Money market accounts with UFB Direct Bank are great if you have a little more cash to set aside and are looking for the convenient ability to directly deposit checks into the account remotely.
This money market account requires a minimum balance of 5,000 to start and offers an APY rate of 1.60% which is compounded daily.
You will also have the option to request a UFB Direct fee-free ATM card. This will make accessing your savings in a bind a little more convenient.
The money market account offered by Capital One is great for someone who already has a substantial savings established and is looking to make a safe investment that will increase their emergency fund balance.
Capital One requires a hefty minimum balance of 10,000 dollars but offers a high APY rate of 2.0%.
If you are still wanting to open a money market account with Capital One but do not have a savings of 10,000, they will still offer you a money market account at a rate of .85% APY
There are quite a few options to look into if you are leaning towards opening a money market account.
Your intended initial deposit, your desired APY, and the amount of accessibility to your funds that you will require, are all important to take into account when choosing a money market account.
3. No Penalty Certificate of Deposit Account
A Certificate of Deposit Account can be beneficial for those who are interested in building their rainy-day fund but do not anticipate needing to use this fund anytime soon.
A Certificate of Deposit Account is an account that is often opened with the intent that the account will remain untouched until it has reached its maturity date.
The length between the initial deposit and the maturity date can vary greatly from one account to the other. Generally, the longer you leave your money in the account, the more your savings will earn.
These accounts offer fixed interest rates and will often penalize account holders who access funds before the maturity date.
However, there are a select few accounts available that offer the benefits of a CD account and do not penalize customers for the early withdrawal of funds.
This type of account might be ideal for two income households, who do not anticipate any immediate financial emergency in the near future but still want to get the most bang out of their savings.
Here are a few options for savers looking to open a penalty free certificate of deposit account that will provide safe and profitable storage for your emergency savings fund.
If you are looking to invest 25,000 or more in to a CD account, but want the flexibility to withdraw your funds in the case of an emergency without penalty, this account is worth looking into.
At a rate of 2.20% APR compounded daily, this account offers a substantially higher rate than other high yield savings accounts and money market accounts.
If your savings amounts to less than 25,000 dollars, no need to fret. Ally bank offers a variety of other no penalty CD accounts at lower APY rates.
A minimum deposit of 5,000 dollars will still earn you 2.05% APY and no penalties will be placed on your account should you need to withdraw before the 11-month period is complete.
CIT is another bank that offers penalty free CD accounts with competitive APY rates of up to 2.05% for deposits of only 1,000 dollars or more.
In addition to the low minimum payment required, CIT bank offers a short term as well.
At only 11 months, the brief CD term offers a flexible way for savers to capitalize on their money while still maintaining the option to withdraw funds at any time without penalty.
If you’re interested in utilizing CD accounts to grow your savings, but unsatisfied with the limited options for penalty free CDs, an approach referred to as CD laddering is also an available option.
This option may allow for more flexibility while maintaining high APY rates.
CD laddering is when multiple CD accounts are taken out in various amounts and term lengths.
This allows for more flexibility, in that different funds will be available at different intervals. Meanwhile your savings funds will be earning interest at higher rates than other savings options.
This option might appeal to those who are attracted to the higher APY rates that come as a reward of locking down funds, but do not want to place all of their financial eggs in one basket.
By using the ladder technique, certain funds become available again earlier than others, allowing for a little more flexibility.
Although there are currently only two companies offering penalty free CDs, both offer enticing APY rates and might provide a good option for someone interested in storing their savings in a CD.
If neither company interests you, the option of CD Laddering is always worth a look.
4. Roth IRA Account
Although a Roth IRA Account is often used for a retirement fund, it can also be a plausible option for a backup emergency fund as well.
Placing all of your emergency savings in a Roth IRA fund might not be ideal as it is slightly more risky than other forms of savings. However, if you are wanting to disperse your savings between a few different types of accounts, this type of account is a good option to include.
A Roth IRA account consists of funds from income that has already been taxed, and you are therefore legally entitled to withdraw these funds at any time without penalty.
You will however, be expected to provide 10% of all interest that has accrued if the funds are withdrawn before you turn 60 years old.
You should plan on leaving any earnings from interest in your account until you’ve reached the age of 60.
Having a financial plan for retirement never hurt anyone and utilizing a Roth IRA account could kill two birds with one stone.
The added benefit to this form of emergency savings is that in the case you do not encounter a financial emergency before you reach the age of retirement, you should have a decent form of tax-free income to support your retirement.
Roth IRA accounts can be a little more complicated and there are a few things to consider if you are choosing a broker to open an account with.
It is important to consider the amount of fees charged by the broker as well as the minimum you plan to invest in your account initially, as minimum initial deposit requirements vary from broker to broker.
Here are a few options to consider if you are interested in opening an IRA Roth account.
Ally provides IRA Roth account services with no account fees and a competitively low commission trading fee of 4.95 per trade.
An additional benefit of working with ally invest is that there is no account minimum allowing for you to start a Roth IRA regardless of your savings starting point.
If you are willing to pay a slightly higher trade commission in exchange for a wider variety of investment options, Ameritrade might be a good option for you.
At 6.95 per trade, this rate is higher in comparison to other brokers, but the payoff might be worth it depending on what you are looking for in a brokerage company.
Like Ally, Ameritrade also has no minimum account balance requirement making it a good option for those who are interested in starting an IRA Roth account but do not have a large sum of money to invest in this manner.
Roth IRA accounts provide a more long-term savings account that might serve as a good alternative to a traditional IRA account if you are wanting your taxed funds to accrue higher interest but also want those funds to be beneficial should they last to your retirement.
5. Savings Bonds
While savings bonds are in no way an ideal way to invest the entirety of your emergency fund, they can provide a great way to diversify the way in which your savings fund accrues value.
Savings bonds are investments that you place towards the government that accrue a set amount of interest over a period of time.
A major benefit of investing in savings bonds is that the interest earned from them is nontaxable by the state. Aside from federal taxes, you keep the majority of your interest earnings.
There are a few things to keep in mind if you are thinking about investing in savings bonds.
- You are not allowed to invest more than 10,000 dollars in savings bonds per year.
- Savings bonds stop generating interest after 30 years.
- A bond cannot be cashed out until 12 months after the bond has been purchased.
There are two different types of savings bonds available in the US.
Series I savings bonds do not feature a fixed interest rate. Instead they are adjusted for inflation and deflation, so the interest rate may vary until the bond has reached maturity.
Series EE savings bonds offer interest at a fixed rate. These savings bonds can be redeemed for their full value, plus any accrued interest following 12 months after purchase or when the bond has reached maturity.
Both forms of savings bonds provide a relatively safe way to invest a chunk of savings for more long-term periods and will provide you with some form of payoff in the long run.
There are a variety of different ways in which an emergency fund can be stored. The size of your savings and the amount of interest you are looking to earn on your savings will determine the best route to take.
The alternatives mentioned in this article provide many options to replace traditional savings accounts that will allow your money to grow while it keeps your mind at ease.
Whether you choose high yield online savings accounts, money market accounts, no penalty certificate deposit accounts, Roth IRA accounts, savings bonds, or a combination of any of these options, you will rest easy knowing that you are covered for the financially unexpected.
You will also have peace of mind knowing your money is not being slowly eaten by inflation.