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Having a rainy-day fund is important these days, what with how unpredictable life can be. But once you start getting serious about saving, it’s not always clear where you should put this money.
Here’s your chance to get some clarity; keep scrolling to learn more about the accounts that store your rainy-day fund.
First, Some Rainy-Day Fund Rules
Before you open an account for emergency savings, it’s important to understand the ins and outs of this fund.
1. It Needs a Goal
You need to set a specific goal to keep you on track; it gives you something to work towards. Most people aim for three to six months of living expenses.
2. It’s for the Unknown
Once you start saving in earnest, you might have a lot of cash squirrelled away. Don’t give in and use this money on anything that catches your eye. Any time you dip into this fund for fun things (vacations or new tech), you leave less money for real emergencies. You could run out and not have enough to fix your car or see a doctor.
3. It May Fall Short
It’s crucial you know that your emergency fund may fall short, even if you’ve been good and kept your hands off these savings. If your emergency exceeds what you have on hand, consider using a direct online loan carefully. The folks at MoneyKey describe direct online loans as safety nets when you’re stuck without other options.
Direct online loans may include cash advances, installment loans, and lines of credit. Whatever you choose, make sure you can afford its specific repayment schedule.
3 Possible Places to Stash Your Savings
1. A Basic Account
A basic savings account is where most people stash their emergency funds. It’s the easiest, most accessible account available. In fact, it usually comes with the first checking account you open.
Although it’s convenient, the basic account isn’t doing you any favors. It has the lowest annual percentage yields (APYs) out of any of the accounts on the list. That means you’ll earn minimal interest over the lifespan of your savings.
2. High-Yield Account
As its name suggests, a high yield saving account offers a larger APY than the average basic option. You can get as high as 5% APY if you’re lucky.
Sometimes, banks only apply these higher APYs to tightly controlled accounts. You might have to keep a certain balance to qualify for more interest. You may also face withdrawal holds, transfer charges, and other restrictions that make the account inappropriate for an emergency.
3. Money Market Account
Another account that may bear higher interest is a money market account (MMA). It also comes with unique perks, such as a debit card that lets you make purchases directly. However, they can be less flexible than the basic option, which may make them inappropriate for emergencies.
Should You Put Your Rainy-Day Fund in Stocks?
With all this focus on the interest you earn on savings, you might turn to the stock market. Depositing your savings here promises the greatest rate of return on your money.
However, most investment opportunities have complex rules regarding how and when you can remove money, plus you could face fees and taxes for early withdrawals. Stocks, bonds, Certificates of Deposit (CD), and Cash Management Accounts (CMAs) are better suited for long-term savings, not emergency funds.
Keep these tips in mind as you move around money and save for a rainy day.