Best Emergency Savings Accounts

The Expert Guide to Your Rainy Day Savings Fund

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If you keep up with ModMoney, you know I talk a lot about the importance of saving early to build wealth. By now, you are an expert on the power of compound interest and the ability of time to exponentially grow your nest egg, allowing you to retire earlier than you ever thought you could.

Most of us save primarily through an employer-sponsored retirement account like a 401(k) or a Roth IRA. However, your savings should not stop here! You can't withdraw from your 401(k) until retirement, so it's important to have savings you can access earlier. This savings account should protect you against unexpected events and expenses. But how much should you save, and what are the best high-interest savings accounts? Here's what you need to know.

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How Much Should I Keep In My Savings Account?

This is one of the most frequent questions I get from readers. I recommend keeping three to six months' worth of living expenses in a savings account. If you're not sure what this means for you, consider what your monthly obligations are. These might include your mortgage, rent, car payment, food, utilities, insurance, and more. Only include the items that you need or have a long-term obligation to pay. In other words, exclude the items you could cut from your budget if you took a pay cut (shopping, entertainment, etc.).

You might have heard the terms "emergency fund" or "rainy day fund." That's exactly what this should be! In the event that something unexpected happens (you lose your job, your car needs a new battery, your washing machine breaks, etc.), you need to have a savings account to take care of these issues. Some people like to separate their emergency fund from their rainy day fund. The emergency fund covers living expenses in the event they lose their job, while the rainy day fund covers unexpected expenses. I personally like to keep things simple and combine it all into one account.

Depending on your risk tolerance and job security, three to six months of expenses should give you a good cushion. Now, if the thought of building up a rainy day fund sounds daunting, you're not alone. I know firsthand that saving takes time and effort. That's why I love using Digit to help me save without thinking about it. I raved about Digit in this post, so be sure to check it out! Trust me, it is so easy to use and makes saving a complete no-brainer.

The Best Savings Accounts for 2017

Let's be honest. Most people like simplicity. If they have a Chase checking account, they will likely opt for a Chase savings account. If you are one of those people, you are leaving money on the table! It's fine to use large banks such as Chase, Wells Fargo, Citi, and Bank of America for your checking account. However, the interest rates on these savings accounts are minimal at 0.01%. Meanwhile, smaller banks offer savings accounts with interest rates of 1.0% or greater. They also offer no monthly maintenance fees and no minimum deposits. Here are some of the best savings accounts offering the highest interest rates:

So why are these smaller banks able to offer higher yields? The answer is very simple. Larger banks have more overhead expenses. They have brick-and-mortar branches, more employees, and generally more infrastructure. These smaller institutions run on the Internet and can afford to pass along their cost savings to customers in the form of higher interest rates.

A 1.0% and 0.01% interest rate might not seem like a huge difference at first glance. However, the power of compound interest can have a real effect on your savings balance. For example, if you build your savings account to $20,000 and let it compound over 40 years, you'll end up with about $30,000 in a Goldman Sachs savings account and about $20,100 in a Chase savings account. That's almost a $10,000 difference!

Ally Bank | ModMoney
Barclays | ModMoney
Synchrony Bank | ModMoney
Goldman Sachs | ModMoney

The Bottom Line

A 1% interest rate might seem low compared to what you could potentially earn in the stock market. And barring any global catastrophe, it probably is. However, the purpose of your savings account is to protect yourself against unexpected events or expenses. Not to earn a high return. Think about it this way. Employment rates and the health of the general economy are correlated. During the Great Recession of 2009, many people lost their jobs, and the stock market plunged. If these people invested their rainy day funds in the market, they were in a bad situation. That's why it's important to have some cash tucked away in a safe, easily accessible account. Protect yourself against the unexpected.

I hope this post was helpful! I'd love to know where you all keep your rainy day funds. Comment below!

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