Where to Store the Emergency Fund?

First let's look at what an emergency fund is and when you need one. Before a full emergency fund, you want to pay off all of your debt except the house, so that includes your cars, credit cards, stuff like that.

Once you're done with debt besides the mortgage, you want to build up an emergency fund of 3-6 months of expenses. Add up your mortgage or rent, food, utilities, gas, phone, anything you pay on a monthly basis, then pile up enough money to cover 3-6 months.

A question I see a lot is where to store the emergency fund. It needs to be in a place that is easy to access with no fees or penalties. A savings account or money market account works fine.

Some people don't like that because it earns so little interest, but an emergency fund is not meant to earn interest. If it's sitting in a savings account or money market it will only earn .50 or .75 percent and that's fine, nothing wrong with it. But an emergency fund is there so you don't have to cover an emergency by cashing out retirement or taking out a home equity loan or personal loan. An emergency fund protects your home equity or your retirement. That's what it's there for, not to earn interest.

It helps if your savings account or money market account has a debit card and checks. Personally my emergency fund is with Ally bank in a money market account. I have a debit card and checks so if an emergency happened I can write a check or use the debit card just like a checking account.

It's understandable that people want to do something more exciting with their emergency fund. But it's important to remember that the emergency just sits there for when there's an emergency. If it earns a little interest that's fine. But it's purpose is to protect your retirement accounts and other investments that are earning more money for you.

So an emergency fund should be easy to access with no fees or penalties. A money market account or savings account with check writing works perfect. An emergency fund is not an investment, it is meant to protect your investments.

I am available as a personal finance coach, as of this writing I focus more on helping people out of debt. See the Coaching page for more information.