If emergencies happen when you least expect them, there may be no way to predict when something will go wrong in life. But you can be prepared for the fallout with savings. An emergency fund is an inimitable financial tool that helps you afford life’s unpredictable and costly expenses, even when your paycheck is tied up with the usual bills.
Gone are the days when you can keep this emergency stash underneath your mattress. Not only is this place in your bedroom not the most secure spot, but it also precludes you from all the perks of holding a digital account, like insurance and interest.
5 Things to Consider When Opening an Emergency Savings Account
An official savings account is the best place to store your emergency fund. If you haven’t opened one yet or want to find a new account with better perks, this guide can help you. Here are five things your next account must offer.
Accessibility
One of the most important features of your savings account is accessibility. An emergency fund must be liquid for it to be convenient in an emergency. Unfortunately, some banks restrict withdrawals on some accounts, making them ill-suited for emergencies.
Watch out for any kind of hold on withdrawals that delays when you can get your money. Depending on the account, you may have to wait days or even weeks to receive your funds. You should also be wary of accounts that place a limit on how many withdrawals you can make in a month or how much you can take out at one time.
These restrictions are often traded for perks such as a higher Annual Percentage Yield (APY), another crucial feature to be discussed later. As you’ll find out below, you should always aim for the highest APY possible, but a high APY isn’t worth sacrificing liquidity.
Without liquidity in an emergency, it could feel like you don’t have emergency savings at all. Holds on your deposits may restrict you from using them in time. You may even have to take out a cash advance if you have to wait weeks to access your money.
A cash advance can be a convenient alternative to savings. But like bank accounts, they can vary greatly between financial institutions. If you aren’t careful, you can borrow from a financial institution that places similar delays on their funds, impeding how quickly you can get your advance.
Check out a financial institution such as MoneyKey to understand the realistic time constraints of borrowing a cash advance online. If you’re approved, you may receive your cash advance as a direct deposit as soon as the next business day. However, the exact timeline depends on your checking account’s deposit policies.
By shopping around, you can increase the chances you find a cash advance that works on an emergency’s timeline. However, you can avoid having to borrow a cash advance altogether by getting a savings account that is liquid.
High Interest
Interest is not just something you owe on a cash advance. It’s also something you can earn on savings. Maximizing your interest can help you save even more over the long term, as your interest payments will contribute to your balance.
To find out how much interest you can earn on an account, look at the posted Annual Percentage Yield (APY). It represents the true rate of return your deposits will earn.
Most basic savings accounts offer a measly 1% APY, which doesn’t keep pace with the cost of living. That means the purchasing power of the money in these basic accounts loses value over time.
Inflation has hovered around 6%–7% for the past two years. While it’s unlikely you’ll find a savings account with an equivalent APY, you may find a high-yield account offering 5%. Just make sure you aren’t making any concessions to unlock this high APY. You don’t want to deal with withdrawal holds, as mentioned above, nor any costs or balance restrictions.
Zero Cost
The next consideration is cost. Some accounts will cost money, either through a monthly charge or other fees for specific activities. While these costs aren’t unusual for some banks, you should not have to pay them. Plenty of other banks offer savings accounts at no charge.
Some banks may apply monthly fees for the privilege of a high interest rate, but don’t be fooled. Since you’re unlikely to earn a high return of return on an emergency fund, the interest you do earn isn’t worth paying fees.
You should also double-check that your account doesn’t charge you for transactions, ATM withdrawals, transfers, or statement fees. These fees will eat into your savings if your emergency fund with some regularity.
No Minimum Balance
You will never know how often you’ll have to dip into your emergency fund. If you have a streak of bad luck, you may even have to drain your entire account, leaving your balance at $0. You should not be penalized for accessing your full savings. After all, your emergency fund is designed to be used.
Beware of accounts that require you to keep a minimum balance. You could get dinged with penalties if you fall below this minimum.
FDIC Insurance
The last thing you’ll want to check is that your account is FDIC-insured. Standing for Federal Deposit Insurance Corporation, the FDIC is a government agency that secures financial institutions. It provides insurance coverage that protects your deposits in case your bank of choice goes under.
In light of the recent Silicon Valley Bank collapse, FDIC insurance has never been more important. The FDIC will reimburse SVB customers for the full amount of their insured deposits, up to a ceiling of $250,00, so they won’t lose their money.
The same security extends to any FDIC-insured account. Knowing your emergency fund is protected by the FDIC means your hard-earned savings are safe, even in the highly unusual event your bank fails.
The Takeaway
Opening a savings account to hold your emergency fund is quick, simple, and easy, but don’t rush through the process. You need to make sure your savings will be accessible at the drop of a hat.
Fees, balance minimums, and withdrawal holds are often the price that comes with a high interest rate. But when it comes to your emergency fund, interest isn’t worth these trade-offs. You can find free, limitless banking that provides a decent rate of return without compromising accessibility.
Keep this in mind whenever you want a new account. These five tips will help you find the right option.
