Reader Question: Best Account for an Emergency Fund

If you have questions about your finances, you are not alone. In fact, here at Your Finances Simplified we often receive financial questions from our readers. For example, one of our readers, Leon, asked:

What are the best accounts to open for an emergency fund?

The Answer

Thanks for the great question, Leon! Emergency funds are an important financial milestone to achieve. Everyone should have an emergency fund for… well, emergencies and the peace of mind that comes with being prepared.

The very nature of emergency funds suggests that ease of access is paramount. In other words, liquidity is your principal consideration. While I can think of nothing more “liquid” than cold, hard cash, I can’t recommend that you keep your emergency fund under your mattress (well… maybe a little) but seriously, this isn’t money you want tied up in a complex investment strategy that could take days to unwind.

Unfortunately, the trade-off for high liquidity is low return on investment. Here are your options in order of liquidity, highest to lowest:

  • Cash
  • Demand Deposit Accounts
    • Checking
    • Money Market Checking Account
    • Savings Account (Passbook or Statement)
    • Certificate of Deposit (Short Term)
    • Short term U.S. Treasury Bonds

The list could go on, but once we get past short term treasuries, the liquidity needed for emergency situations diminishes rapidly.

I’m sure it hasn’t escaped your notice that all of the above options would not be investment options. The returns are either non-existent or weak. However, cash excepted, they are very safe and readily accessible, which, after all, are the primary considerations for emergency money.

A Final Thought

You did not mention your marital status, but emergency funds should be equally accessible for you and your significant other. Consider the possibility that you may be incapacitated and will need someone trustworthy to access those funds on your behalf. If you are single, maybe a parent or sibling would be a good choice.

What about You?

Which type of account do you think is best for an emergency fund? What tactics do you use to boost your emergency fund?

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