Having an emergency savings fund is a key component of your financial security. But when it comes to building up your funds, there’s a lot of debate about the best place to save money.
A recent analysis and advice piece by Betterment challenges the traditional opinion that savings accounts are the best places to put funds. Instead, it suggests longer term savings options instead.
You’re probably wondering, “So where should I put my money for emergencies?” Here’s a rundown of different ideas to consider, from short term savings options and traditional bank accounts to savings investments.
Where should I put my money?
The easiest place to keep your emergency savings is with the rest of your money. By having it attached to a debit account, you can access it whenever and wherever.
However, there are some major disadvantages to this method. Blending your funds could get confusing and messy very quickly. And if you’re prone to overspending, you could be tempted to use emergency funds to cover superfluous expenses.
Also, basic checking accounts typically don’t earn much interest. Some checking accounts even charge you for account usage.
In other words, when it comes to checking accounts, you may be paying the bank to hold your emergency funds. Instead, it should be the other way around.
According to a survey released last year from GoBankingRates, 78 percent of Americans have an open savings account. 19 percent of them also have more than $5,000 in their savings account.
Savings accounts are naturally quite popular for holding personal funds.
“When I was in my 20s with no kids, I kept extra cash in a checking account so it was always accessible,” says Julie Starnes Raine of Investing to Thrive. “Now that I have more demands on my money (there’s always something, whether a major repair to my home or college tuition bills), I need more of a separation of accounts.”
A savings account is the most convenient way to designate funds for one particular purpose. However, finding a high-interest savings account can be difficult. Especially with rates currently under one percent.
Local credit unions often have higher interest rates for savings accounts than big banks. So do online savings accounts.
Either option may prove to be the best place to save money. Especially if you plan on saving a smaller amount for a longer period of time. While your account will continue accumulating a tiny bit of interest, you’ll also have the ability to transfer money if necessary.
Money market and certificates of deposit accounts
If you’re more focused on building your wealth and less concerned about access, short term savings options may be the best place to save money.
Although there are quite a few to choose from, money market and CD accounts are the most popular.
Money market accounts are short term savings options that are perfect if you have more than $1,000 set aside for emergencies already. That’s the minimum threshold for most banks before you can open a money market account. Then you have access to the higher interest rate.
Rachel Hernandez, a real estate investor and author of Adventures in Mobile Homes, discourages people from being too concerned about going under the account threshold if you need to.
“Some banks, like credit unions, will allow you to keep the funds in a money market fund and not penalize if you go below a certain threshold,” Hernandez explains.
“If you simply go under a certain amount, then the account simply becomes a savings account,” adds Hernandez. “To get it back to a money market account with the interest, you simply have to put in the minimal amount.”
Certificates of deposit, or CDs, are another smart option. They have high interest rates similar to money market accounts.
However, with CDs, you will be penalized if you take money out of your account before the account matures. This can totally negate the interest you made by putting it in the account in the first place.
In other words, CDs and money market accounts are great if you have a paycheck that can cover smaller emergencies. Or, if you only had a few bills you’d need to cover if you lost your job.
Traditional banking accounts are often considered the best place to save money because you can access your funds quickly. Even money market accounts give holders bank cards or even checks to use to access their money.
However, Betterment’s assessment suggests that those with emergency funds should be more concerned with money growth and savings investments.
For instance, Betterment states that inflation may actually eat away at your savings when it is making little to no interest. Especially when it comes to lower interest bank accounts that house emergency savings funds for decades.
Instead, Betterment suggests investing emergency savings towards long-term goals in moderate risk portfolios where there is a 40 percent investment in stocks.
To offset higher investment risk, Betterment also advises putting 30 percent more into your savings than you think you need. For example, if your emergency goal is $10,000, save and invest $13,000 instead.
“Since Roth IRA contributions are made post-tax, you’re able to withdraw them penalty-free,” Falcone says. “You just can’t touch the earnings unless you’re over 59-and-a-half, and have had the account open for at least five years.”
IRAs can also be withdrawn for medical emergency expenses. or to pay for school with money available in a short period of time.
Where’s the best place to save money?
Whatever works for your emergency savings
When determining where to put your emergency savings, you first should think through what would qualify as an emergency. Is it unexpected car repair? Long-term job loss? Medical bills?
Next, consider your financial priorities. Are you looking for growth in your wealth or financial security? These questions will help you sort through your emergency savings options.
Or, perhaps you’re interested in taking Betterment’s advice and blending it with traditional short term savings options.
For example, for immediate emergencies, save a small chunk in a money market or savings account while placing the rest in a savings investment account.
The bottom line is that the best place to save money is where you feel comfortable keeping it and accessing it when the time comes.
Whether you invest for the long-term or start small with eyes on the short-term, make sure your funds work for you.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.72% – 8.32%6||Undergrad & Graduate|