Where to save
Overview
Where you put your emergency savings is an important thing to consider. Using the wrong account could mean that the real value of your savings shrinks with inflation.
The two most important considerations for where you put it are:
- Easily and freely accessible
- Earning a decent return
Easily and freely accessible
In an emergency, you need access to your savings fast and don’t want to have to pay fees or penalties or wait a long time to get them. Make sure that wherever they are saved you can get them out and spend them as soon as you need them.
Locking all of your savings into fixed term investments (e.g. 90 day notice deposits) is not a good idea, even if the returns are good, as you’ll pay high fees and penalties to cash them out early.
If you have saved more that 3 months worth of expenses then you can split your fund into two accounts. Keep 3 months worth of expenses in a liquid (easily accessible) account but you can move the remainder into an account that requires you give notice before withdrawing as these will often provide better return. If you need to use your emergency savings you can give notice on this account and use the liquid savings while you wait for the less liquid savings to become available.
Earning a decent return
Just because your emergency savings need to be easily accessible doesn’t mean they should be idle. At a minimum your savings should be earning enough interest to be beating inflation.
There are plenty of good savings accounts that will guarantee a fixed return without requiring that they be locked up for a fixed period of time.
Some of the best options have a minimum deposit amount so if you are just starting to build up your savings they may not be available, but once you’ve got enough savings to use them you should transfer your savings over.
Review regularly
Your life situation is probably going to change over time so make sure you review your emergency savings plan every year and ensure you have enough saved (but not too much, rather move the excess into better long term investments) and also have your savings in the optimal savings account.
Best accounts for emergency savings
The best account to keep your emergency savings in varies based on how much you have to invest (some accounts have a minimum investment amount)
It may be easiest to open an account with an institution you already bank with. Just make sure the interest you earn is close to what you could be earning to maximize your return.
These tables are generated from the data on ratecompare. If you want to get more insight into the various options, visit their site.