Best Emergency Savings Accounts

The Expert Guide to Your Rainy Day Savings Fund

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A recurring theme around ModMoney is the importance of saving early to build wealth. The ability of time to exponentially grow your nest egg is a real thing!

Most of us already save through a retirement account like a 401(k) or a Roth IRA. But your savings should not stop there! Since you can't withdraw from these accounts until retirement, you need to have savings you can access today in case of unexpected events. What if you lose your job? Or your car needs a new battery? Or your AC breaks in the middle of summer? That's where your rainy day fund comes in. But how much should you save, and what are the best savings accounts for your emergency fund? Here's everything you need to know.

How Should You Start Saving Up for a Rainy Day?

We know it's important to have an emergency fund. The problem is that it takes time and effort to actually save up to an amount that's meaningful. That's why I love Qapital—a free app that makes saving fun, easy, and automatic. My favorite thing about Qapital is that you can customize exactly how you want to save. For example, Qapital can round up your everyday purchases to the nearest dollar. Or transfer cash every time you get paid. You can even plan a budget for a special category and automatically save what you underspent. Qapital can also move cash into savings every time you hit the gym by connecting to your fitness apps. The options are endless! The app is super intuitive and will help you hit your savings goal before you know it.

Best Saving App: Qapital

How Much Should You Keep In Emergency Savings?

This is one of the most frequent questions I get from readers. Here's my answer: I recommend saving 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, and insurance. 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 your salary went away.

The Best High-Yield Savings Accounts for Your Emergency Fund

Let's be honest. Most people prefer 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 like Chase, Wells Fargo, Citi, and Bank of America for your checking. However, the interest rates on their savings accounts are minimal at 0.01%. Meanwhile, smaller online banks offer savings accounts with interest rates of 1.6% to 1.8% with no monthly maintenance fees and no minimum deposits. Here are some of the best high-yield savings accounts:

So why do these online banks offer higher yields? The answer is very simple. Larger banks with a physical footprint 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 1.8% 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 over $40,000 in a Goldman Sachs savings account and about $20,000 in a Chase savings account. That's a big difference!

The Bottom Line

A 1.7% interest rate might seem low compared to what you could earn investing in the stock market. And barring another global recession, it probably is. However, the purpose of your savings account is to protect yourself against unexpected events or expenses in a safe, risk-free way. 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.

Drop me a comment below - where do you keep your emergency savings fund?

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