What’s Better for an Emergency Fund: High-Yield Savings Account or Money Market Account? | Banking Advice
Key Takeaways
- High-yield savings and money market accounts are ideal places to keep an emergency fund for easy access, insurance for your money and high interest rates.
- High-yield savings accounts are better for longer-term emergency funds, holding the recommended three to six months of living expenses.
- Money market accounts are better for short-term emergencies since they offer check and debit card services that make it easier to access your money.
A high-yield savings account or money market account will offer the best place to keep your emergency fund in easy reach while earning interest. See how you can figure out which one is the best account for your emergency fund, along with what to avoid.
How High-Yield Savings and Money Market Accounts Compare
High-yield savings or money market accounts can be good places to keep your emergency fund, as both offer accessibility and safety for your funds. A savings or money market account with an FDIC-insured bank offers up to $250,000 per depositor, per account in insurance protection in case the bank fails.
“When you save your emergency funds in a high-yield savings account, the funds are easily accessible when needed,” says money coach and certified financial planner Ohan Kayikchyan. “On the other hand, money market accounts offer competitive rates with check-writing and debit card privileges.”
It’s easy to transfer your funds out of a high-yield savings account and into a checking account where you can pay for emergency expenses. With a money market account, you can likely use a debit card or write checks straight from your account.
Interest earnings are another appealing aspect of high-yield savings and money market accounts. How much you’ll earn depends on the bank and account you choose. Generally you can expect money market accounts to earn more than traditional savings accounts, but a high-yield savings account may offer a slightly higher return.
“For highest rates, usually HYSA with online banks will be highest,” says Derilyn Freeman, a certified financial planner with Prudential. “Go with a name you trust that’s FDIC insured.”
Both accounts are useful for maintaining an emergency fund, but Freeman suggests there are situations where each one shines brighter.
“I recommend keeping more cash set aside in HYSA for major expenses within the next four years like a home purchase, renovation, big trip or new car,” says Freeman. She recommends setting aside three to six months of expenses in a high-yield savings as a general rule of thumb.
On the other hand, Freeman suggests money market accounts for shorter term emergency funds.
“A safe bet would be one month of basic expenses in your money market for urgent and immediate needs, since they typically come up with debit cards. The rest can be transferred from your HYSA if needed, which usually takes a couple days,” says Freeman.
The drawbacks of high-yield savings and money market accounts are the potential for minimum balance requirements and fees. You may be required to maintain a minimum daily balance or pay a monthly maintenance fee for a savings or money market account. When you open an account, look for these fees and find out how you can avoid them if they apply to the account you choose.
How to Find the Best Account for Your Emergency Fund
“The best place to start is figuring out what you’ve spent the last three months and using that to figure out your average monthly spending. You can use this to determine how much of a lump sum you should keep in your HYSA and/or money market,” says Freeman.
You’re likely to find that online banks offer the highest interest rates on savings and money market accounts and may have little to no fees. Without physical branches, these banks can pass overhead savings on to customers in the form of higher rates and potentially lower fees.
However, check the details on service limitations of online banks, such as how easy it is to withdraw cash from your account. Also, look into ATM availability and ratings for the bank’s online banking and mobile app functionality.
Some banks offer competitive interest rates on high-yield savings and money market accounts. In addition to comparing fees and features, always compare interest rates so your emergency fund can earn the most interest.
“Be aware of promotional offers but understand their terms, as some promotional rates will expire in a month or so,” says Kayikchyan. He also recommends consulting with a financial planner and staying updated on market trends to adjust your accounts as better rates become available.
Places to Avoid Putting Your Emergency Fund
Accounts that lack the security and accessibility of high-yield savings or money market accounts aren’t a good choice for your emergency fund. Checking or CD accounts, the stock market, savings bonds or cash stored at home can be risky and expose your emergency fund to potential loss.
- Cash. It’s good to have some cash on hand for emergencies such as natural disasters, but don’t put your entire emergency savings in cash. Cash doesn’t earn interest, has a greater risk of theft and could be lost in an emergency such as a house fire.
- Checking accounts. Checking accounts are secure but usually earn little to no interest compared to a savings account – and there’s a greater temptation to spend funds.
- Certificates of deposit. CDs with early withdrawal penalties could charge a fee if you withdraw your money before the end of the term, like you might in the case of an emergency.
- Savings bonds. You’ll lose interest if you need to cash in your savings bond before it matures, which could be as long as 30 years.
- Stocks. Stocks can offer gains but also come with a greater potential for loss. Market volatility could lead to losing your principal investment – your emergency fund – and leave you without enough funds in an emergency.
That’s not to say investments such as CDs, stocks or bonds are bad places to store money – just not your emergency fund.
“Once you have achieved your personal savings goal, which we usually recommend is three to six months of expenses, it could be time to reallocate any cash savings that exceeds that goal into a different account with the goal of higher returns,” says Freeman.
