Anyone who has ever had to hide the “good” snacks from a voracious roommate knows that a proper stash must maintain the perfect balance of three factors:

  1. Separation: Storing your chocolate-covered almonds somewhere other than the shared pantry not only decreases the likelihood that your roommate will hog them all, but also helps ensure you eat them intentionally, not mindlessly.
  2. Accessibility: Keeping the fancy tortilla chips at your parents’ house may prevent your roommate from eating them, but you also won’t be able to chow down on them without a lot of advance planning. Your stash needs to be separate from the rest of your food, but still easily reachable.
  3. Safety: The entire point of a secret stash of snacks is to ensure the Girl Scout cookies will be there when you want them. Whether you need to protect the Thin Mints from roommates, high temperatures, or critters (ugh), you need to choose a safe hiding spot.

Finding the right home for your emergency fund is very similar to protecting your favorite munchies from snack-obsessed roommates. Here’s how you can use the same framework to figure out where to put your emergency savings:

Separating Your Emergency Fund

Storing your snacks outside of the kitchen is mostly about protecting the goods from other people — but separating your emergency fund from the rest of your money is usually about protecting the funds from yourself.

Sam Lewis, founder of SJL Financial, recommends keeping emergency funds in a “separate, online, high-yield savings account — completely separate from your daily/monthly operating accounts.” And when Lewis says separate, he means it.

“(Choose a bank) where you don’t carry an ATM card, where it will require a few days to move the funds over — and where there’s no brick-and-mortar location you can walk into and withdraw several thousand dollars for an impulse purchase,” Lewis says. 

According to Lewis, this separation gives you a “layer of friction to help curb the tendency to dip into the account for spending that is not truly an emergency.” 

Of course, you may want to keep some funds available for last-minute emergencies — like if your car is towed and you need to pay $100 in cash to get it back. Keeping a cushion of a couple hundred dollars in your checking account or a linked savings account could help you do that, but only if you know you won’t dip into it. Otherwise, come up with some backup plans — like borrowing from a friend or family member–that you’ll use in case of a true last-minute emergency.

Keeping Your Emergency Fund Accessible (i.e., Liquid)

Of course, too much separation could cause an accessibility problem. Whether you’re putting your Ben & Jerry’s in the neighbor’s freezer or placing your emergency fund in a CD, money market account, or investment, you could be up a creek if you have an unexpected emergency and need to access your Cherry Garcia or your cash in a hurry.

Billy Hatton, CFP and owner of Billfold Budget Counseling, explains why accessibility is so important: 

“Rising interest rates may make a CD or money market account seem more appealing (than a high-yield savings account) … but they are less liquid. And in an emergency, being able to quickly withdraw or transfer cash is of the essence.”

When your money is tied up in something like a CD, a money market account, or an investment, you generally cannot access it without either paying a penalty, losing some portion of your principal, or having to wait a certain amount of time before receiving the money. Since financial emergencies are often urgent, holding your money in an accessible but separate account will be the best option for your emergency fund.

Ensuring the Safety of Your Emergency Fund

Separate but accessible does come with a potential third problem, however: the safety of your funds.

To start, money in a high-yield savings account at a bank or credit union is insured through either FDIC or NCUA up to $250,000. So you can feel absolutely confident that any money you park in a savings account will maintain its principal value. Just as the Mallomars you hid under the loose floorboard in your room will still be there when you go looking for them — because you’re sure your roommate can’t find them.

But there are other risks facing your floor snacks and the money in your savings account — risks like inflation. (Also, it’s hot under those floorboards.) Inflation eats away at the buying power of your money so that the same amount of cash in your savings account can buy less and less as time marches on. 

Historically, inflation has averaged about 3% per year, meaning that $100 in emergency savings would only be able to buy $97 worth of emergency Doritos after a year has passed. But inflation from May 2021 to May 2022 was an eye-watering 8.6% — which means an emergency savings earning any less than 8.6% in interest over that time lost that amount of buying power.

Balancing Separation, Accessibility, and Safety

So how can savers find the right balance of these three competing needs?

According to Mark Struthers, founder of Sona Wealth Advisors, most people need a multi-pronged approach. “Access to liquid low-risk cash is critical,” Struthers says. “After that bucket is filled, finding additional yield to offset inflation should be next.”

What this means is that most people will want to start building their emergency funds in a high-yield savings account.

 According to Hatton, you should aim for an emergency fund equal to 3-to-6 months’ worth of expenses in a high yield savings account before you start putting additional emergency money aside in other vehicles.

As for which vehicles to explore after maxing out your high-yield savings account, both Struthers and Hatton have similar suggestions:

“Something like CDs or a money market account is a good idea,” Struthers says.

“A laddered CD strategy may also make sense,” Hatton adds. With this savings tactic, you purchase CDs with varying maturity dates so that you will never have to wait long before the next CD matures and you can access your money without penalty.

Finally, Struthers likes to recommend I-Bonds as another option for increasing your yield. “The biggest issue for I-bonds is the one year of illiquidity,” he explains. “But they are a great choice once you get past that.”

The Best Savings Vehicle For Your Emergency Fund

Like the perfect hiding place for snacks, the best savings vehicle for your emergency fund will be separate, accessible, and safe. That means nearly every saver will want to start their emergency fund within a high-yield savings account at a separate bank. 

Once you have 3-to-6 month’s worth of living expenses saved there, it can make sense to start looking into higher yield/lower liquidity vehicles like a CD, a money market account, an I-Bond, or an investment vehicle.

Ultimately, however, treat your emergency fund like your emergency Oreos: make sure they will be there when you need them.

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