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HerMoney How-To: All About Emergency Funds (How Much, Best Accounts, Rules for Women and More)

Dayana Yochim  |  March 12, 2020

Your emergency fund should be in an account that is safe, liquid and earning more interest than the low rates traditional bank savings accounts are paying. Here’s where to put your money, how much to save and answers to all your emergency fund FAQs.

Emergencies don’t announce their pending arrival months in advance. They pop up unexpectedly and trigger a mad scramble for cash to cover whatever catastrophe (faulty plumbing, a distracted teen driver or novice laser hair removal technician) fate may have in store. 

Enter the financial world’s most oft-cited insurance policy: The emergency fund.

Everything we’re about to tell you about emergency funds — how much you need, strategic ways to save, where to stash your cash — applies to both men and women, save for one huge thing: Women need these funds more, but are less likely to have them. 

HerMoney Take: Why Women Really Need An Emergency Fund

Emergencies can impact anyone, but the financial fallout is potentially much more severe and prolonged for women than it is for men. Think about it: 

  • We’re the go-to caregivers: When a child or elderly relative or loved one requires assistance, women tend to (and are expected to) step up more than their brothers, husbands or other male family members and friends. Taking time off work and incurring the expenses to provide care and support can take a sizable financial toll, especially if you’re the sole earner in your household.
  • Finding employment after job loss may take a while: It’s not even a matter of the kind of work we’re seeking and whether or not we have the qualifications: A recent LinkedIn study revealed that women apply for 20% fewer jobs than men and are less likely to ask for a referral from their network to get the position, both of which can delay the time it takes to land a job.
  • We already pay a higher price for our longevity: Not only do we face the danger of running out of money in retirement, but living longer than men means we’ve got more years of exposure to unexpected expenses. An emergency fund in old age can be a literal life saver when you’re living on a fixed income and a side hustle simply isn’t a realistic option. 

The HerMoney bottom line: Everyone needs a stash of cash you can get your hands on when the you-know-what hits the fan (as it inevitably will when you least expect it). But if you’re a woman, an emergency fund is absolutely critical for your well-being. So… let’s get to it!

HerMoney Guide to Emergency Funds

Emergency Fund TLDR

An emergency fund is a pool of money set aside to cover your must-pay expenses in case of job less, illness or injury or getting hit with some other costly, unexpected life event. The size of your financial safety net depends on whether you have dependents, are the sole (or primary) breadwinner, if you have access to other money, and your status as the favorite niece of a wealthy and benevolent uncle. Even if the rich uncle thing is a non-starter, don’t fret: Six weeks’ of living expenses — as opposed to the traditional advice to save three-to-six months’ worth — is a perfectly adequate emergency savings goal. 

You want to keep your emergency fund separate from your regular spending money in an account that’s safe, liquid and earning the highest rate of return possible without putting your money at risk. Think high-yield savings account, money market account or certificate of deposit (CD). Even a Roth IRA can serve as an emergency source of cash when necessary, and help grow your retirement savings if you don’t need to tap into the account early. 

*Those two densely packed paragraphs may not meet accepted TLDR (“too long, didn’t read”) standards, but we wanted to get all of it out there straightaway before diving into the details. 

What Is An Emergency Fund?

An emergency fund is a pool of money earmarked for surprise expenses that fall outside of your regular budget. It’s a financial safety net — a rainy-day fund — so you don’t have to run up a balance on a high-interest credit card, tap into your home equity or withdraw money from retirement savings or the kids’ college funds to pay for Fido’s hip replacement surgery. 

Exactly How Much Should I Have Saved In An Emergency Fund?

Answer: Perhaps not as much as you think!

The standard emergency fund savings guideline is to have enough money to cover three to six months’ of essential living expenses. But more recent research shows that a six-month cash cushion may not be necessary. In fact, six weeks of living expenses may be plenty

Just starting? Set a manageable weekly savings goal — $10, $20, $50 — and just get the ball rolling.

(Quick review: Essential living expenses include rent/mortgage, food, insurance premiums and gas money to get to and from places you need to go. Non-essentials are premium cable, weekly salon waxings and every adorable sample-sized item in the strategically placed bins flanking the Sephora checkout line.) 

Don’t know where to start? Then start with the goal of saving $2,000. Do that, and you’ll have achieved a savings milestone that half of all Americans have not yet reached. Other savings guidelines:

  • If six weeks of savings seems impossible … set a manageable weekly savings goal — $10, $20, $50 or whatever amount you can afford — and just get the ball rolling. Set up an automatic transfer on pay day to funnel whatever you can spare into a separate account (one of the ones we recommend below) so you never notice the money was ever there. When you’ve amassed a several hundred dollars, set your sights on that $2,000 goal. 
  • If you’re retired … the prudent move is to have enough cash on hand to cover one year of expenses and another chunk to cover three years of living less liquid, but still sheltered from the whims of the stock market. 
  • If you’re single or the sole earner in your household … you need a larger emergency fund (think double) than a two-income couple (where one partner’s salary can provide a temporary financial bridge). 
  • If you’ve got competing savings goals … split the difference. For example, if you’re currently saving 10% of your income, funnel 3% into an emergency fund and 7% into long-term savings until your rainy-day fund is whole. (Pro tip: If your employer matches a portion of your 401(k) contributions, take full advantage of that as you’re building your emergency fund.)

MORE ON HERMONEY: Answer 5 Questions To Figure Out How Big Your Emergency Fund Should Be

3 Account Must-haves (And Where Not To Stash Your Cash)

Stuffing emergency cash in a mattress or coffee can went out of style sometime after the Depression. (Modern-day equivalents — a Ziploc freezer bag of twenties shoved in the 10-pound bag of frozen chicken breasts; your checking account — are also not great options.) 

The best place for your emergency savings is somewhere safe (as in low-risk and FDIC-insured), accessible and earning the highest possible interest rate.

The best place to put your emergency savings is in an account that is safe (as in low-risk and FDIC-insured), accessible and earning the highest possible interest rate. Let us explain the logic behind these emergency account must-haves:  

1. Safe from potential losses: Here we’re talking about ensuring that your cash cushion — every single penny — is there when you need it. So let’s take investing your emergency fund in the stock market off the table: The market’s sometimes wild short-term fluctuations make it just too risky. Plus, you don’t want to be forced to sell an investment you planned to hold for the long-term. (Don’t let this scare you off of investing entirely. You absolutely need to invest in the stock market for long-term goals like retirement.)

“Safe” investments — e.g. high-yield bank savings accounts, money market accounts and certificates of deposit (CDs) — may sound boring, but the chances of losing money in these accounts are basically nil.

2. Accessible, but not too easy to access: When you need cash fast, you don’t want to have to jump through a bunch of hoops to get to it. This puts things like collectibles (which you have to sell to convert to spendable currency) and real estate (borrowing against your home is costly, risky and involved) out of the running. 

Scoring high returns shouldn’t be your primary emergency fund investment goal. But you don’t have to settle for paltry interest rates, either.

At the same time, your emergency fund shouldn’t be too accessible. A little inconvenience creates a nice barrier to spending this cash thoughtlessly, which is why we recommend keeping your rainy-day fund separate from the cash you tap for everyday expenses and — even better — sequestered at a completely different financial institution that is nowhere near your favorite discount shopping spots. Here’s where an internet savings account comes in handy for the bulk of your emergency fund money. (You should still keep some cash truly accessible.) It can take three days for money to be transferred back into your brick-and-mortar bank, which is a good waiting period if there’s a purchase you’re trying to pass off a “want” expense as a “need right now” one. 

3. Earning a respectable interest rate: Scoring high returns shouldn’t be your primary emergency fund investment goal. But there’s no reason to settle for the paltry zero-point-zero-nothin’ interest rates you’ll get in a traditional checking or savings account. (Seriously: The average interest rate on a plain-vanilla bank savings account is 0.09%, according to FDIC data.)

You can do much, much better — and tick the “accessible” and “safe” boxes, too — with the account types we outline below.

4 Emergency Fund Account Options

Safe, liquid and interest-bearing. Check, check and check. Here are the best emergency fund account options — high-yield online savings account, money market account, certificate of deposit, a Roth IRA (with caveats) — pros and cons of each and guidance on finding the right place for your cash cushion: 

High-yield online savings accounts: A high-yield savings account offers simplicity (it’s easy to open and fund an account), safety (your money’s insured by the FDIC up to $250,000 per depositor per bank), accessibility (via transfer in or out from a linked bank account) and decent interest rates (thanks to low overhead costs compared to brick-and-mortar banks). You can open one through internet-only banks and credit unions, and through the online banking arms of big-brand traditional banks. (Ready to comparison shop? You can get started here.)

Pros/cons: High-yield savings accounts dish out higher interest rates than you’ll get from a traditional bank — like, 10 times more. You can score 1.5% or more on your savings, depending on your account balance. Plus, right now competition is so fierce that institutions are offering signup bonuses — as in, extra emergency fund padding. Just be aware of teaser rates that last only a short while. And, as with any financial product, read the fine print: Look for asterisks on advertised rates and bonuses to see if there is an account minimum, if the rate applies only to balances above a certain threshold, and if there are any requirements to qualify for the bonus (signing up for direct deposit is a common one) and any fees (there are plenty of no-fee options).

Best for: 

  • Easy access to the money. Withdrawals are not limited and some accounts come with a debit card. 
  • If you’re just starting to build your emergency fund. The low initial deposit requirements offered by some institutions are right in your price range.
  • You want to park a portion of your emergency fund balance in a liquid account and the rest in a money market account or CD.

MORE FROM HERMONEY: Compare high-yield savings account rates

Money market accounts (MMAs): Similar to a high-yield savings accounts, money market accounts (not to be confused with money market mutual funds) pay rates that are comparable to what you’ll get at an online bank. Some MMAs offer tiered rates, paying more interest (some more than 2%) to depositors with higher account balances. You can open an MMA at a bank, credit union or online. 

Pros/cons: Earning more interest on your money is always a plus. Just be aware that money market accounts often have higher minimum deposit and ongoing balance requirements than the high-yield savings accounts covered above. Most money market accounts offer check writing privileges (with limits), and some come with a debit card. That’s one for the “con” column if easy access will tempt you to spend down your balance on non-emergency Nordstrom sales. However, most MMAs limit customer withdrawals to six per month. One costly gotcha: Falling below the minimum account balance requirement can trigger a penalty fee.

 Best for: 

  • If you can beat the rate offered by a high-yield online savings account and you meet minimum initial account balance requirements.
  • You anticipate needing only occasional access, since the number of monthly withdrawals are limited.
  • The temptation to spend money in a more easily accessible account is too much.
  • You keep a large emergency reserve and want to spread it across multiple types of accounts (e.g., some in a high-yield savings account, some in a MMA and some in a CD). 

Certificates of deposit (CDs): A CD pays a fixed rate of return over a specific time period ranging from months to years. For example, at Bankrate.com we found a 1-year CD paying 2.10%, a 3-year CD at 2.42% and a 5-year CD paying 2.88%, all of which required just a $500 minimum deposit. In exchange for these higher rates of return, you agree to keep your money invested for the entire term of the contract. 

Pros/cons: Unlike bank and money market accounts rates, CD interest rates are fixed, meaning you don’t have to worry about rate fluctuations. The ability to choose your term (the amount of time until a CD matures) is also handy. The tradeoff: Your money is locked up for a period of time, making a CD the least liquid of all the emergency fund account options. Although some CDs allow a limited number of penalty-free withdrawals, most will hit you with an early withdrawal penalty. A CD “ladder” (buying multiple CDs with staggered maturation dates) can help you avoid a massive early withdrawal penalty and losing out on all the interest you’ve earned if you only need a portion of your savings to cover an emergency. 

Best for: 

  • You have a sizable cash cushion — closer to six months of expenses saved — and/or cash reserves elsewhere to cover smaller emergencies.
  • You want a guaranteed rate of return on your savings.
  • You want to spread your emergency reserve across multiple types of accounts. Consider keeping some of your cash cushion in an easily accessible high-yield savings account or money market account and the bulk of it in a CD. 
  • You’re comfortable not having a debit card or checks to access the money.

MORE FROM HERMONEY: From bump-up to zero-coupon, your CD choices explained in plain English

If you’re juggling multiple savings goals — putting away money for retirement and building up an emergency fund — a Roth IRA can help you satisfy both.

A Roth IRA: If you’re juggling multiple savings goals — putting away money for retirement and building up an emergency fund — a Roth IRA can help you satisfy both. A Roth IRA is a retirement savings account: You deposit after-tax money, invest it within the account, and in retirement your withdrawals are tax-free. Ideally you let your money ride until retirement. But one key difference between the Roth IRA and other retirement savings accounts (like a traditional IRA) is that the IRS allows savers penalty- and tax-free early withdrawals of contributions. Important note: This applies only to money you contributed (your deposits). Hands off those investment earnings! Touch that money and you’ll get hit with a 10% early withdrawal penalty and owe Uncle Sam income taxes. Yowch.

Pros/cons: A Roth IRA is your gateway to investing in stocks, bonds, mutual funds and exchange-traded funds (ETFs) and more, all of which have the potential to yield returns that are much higher than what you’ll get in the other accounts covered here. But A Roth IRA is far from a perfect emergency savings solution: You could lose your money — all of it — if you put it in volatile investments like stocks and mutual funds. Although the market has always recovered from downturns, there’s no way to ensure you’ll be made whole in time to cover an emergency. 

Best for: 

  • You have no retirement savings and want to build both emergency and long-term savings at the same time.
  • You want access to investments that pay higher potential returns than you’d get in a CD, MMA or high-yield savings account. Note: Only invest money if you can stomach the additional risk of losing it. 
  • You’re able to cover most emergency with money saved outside of a Roth. If you never have to tap into this “just-in-case” stash, the money will continue to grow throughout your working life, and into your golden years.
  • You double pinky swear that if you need emergency cash, you’ll only withdraw contributions. If you tap investment earnings, the IRS will give you the stink eye and a bill for taxes and early withdrawal penalty fees. 

LET’S TACKLE THE NEXT STEP… TOGETHER. 

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