Image source: Getty Images
Saving money for emergencies is extremely important to build financial security. Without an emergency fund, you could end up turning to credit cards or other types of debt when surprise expenses creep up.
You'll want to be sure you have plenty of money in your emergency fund in order to be prepared for the unexpected. Ideally, this will mean you have three to six months of living expenses saved up. But you'll also want to make sure you put your savings in the correct account.
For most people, a high-yield savings account is the best place for emergency money. Here are four reasons why.
1. To earn extra interest
If you have the recommended three to six months of living expenses in your emergency fund, it means you have several thousand dollars invested. With so much money in your account, the interest rate you're paid on your balance can make a big difference.
Most checking accounts and traditional savings accounts pay little or no interest so your money will just sit in the account losing ground due to inflation. If you opt for a high-yield savings account, you'll maximize the money your emergency savings earns while it's sitting waiting for you to use it. These extra funds you get paid from your savings account can help to increase the amount you have invested for unexpected expenses.
2. To keep the money separate from your bank account
You don't want your emergency savings in your regular checking account because it's important to keep this money separate. Otherwise, you could end up spending it inadvertently for reasons other than emergencies. This could be a huge financial disaster if the money has been frittered away on everyday expenses and you don't have it available when you need it.
If the money is in a separate high-yield savings account, you'll know it's earmarked for emergencies and you'll be less likely to use it for other things.
3. To make it easier to keep track of the funds
Keeping your money in a separate high-yield savings account allows you to easily keep track of exactly how much you have invested for emergencies at all times. This can be especially helpful when you're in the process of working on building your emergency fund.
If you're still in the process of saving several months of living expenses, you can also set up automated transfers of money to your emergency fund account each month. You can monitor your progress as the fund grows so you can ensure you're on track to saving the recommended amount ASAP.
4. To ensure you can access your emergency savings when you need it
Finally, you'll want to opt for a high-yield savings account for your emergency fund, rather than investing it in other assets such as stocks, bonds or CDs, because then your money is accessible when you need it. You won't risk facing losses or having to sell investments at an inopportune time, and you will be easily and quickly able to access your emergency money when unexpected expenses arise.
For all of these reasons, you should seriously consider opening a high-yield savings account for your emergency money ASAP if you don't already have one.
These savings accounts are FDIC insured and can earn you 8x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 8x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
