Should You Keep Your Emergency Fund in a Separate Bank Account?

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Building an emergency fund you can rely on when unexpected expenses arise can be a great way to protect yourself from future financial problems. Whether you're facing an illness, a job loss, a large repair bill or a global pandemic, adequate savings could be the difference between meeting your financial obligations or falling behind. 

Many financial experts recommend saving three to six months' worth of expenses in an emergency fund. If you work as a freelancer or in a high-risk industry, you might even want to have 12 months' worth of expenses tucked away. But it's OK to start smaller and build up your savings a little at a time.

You also need to keep yourself from dipping into the funds you set aside for nonemergency spending. One way to avoid spending your savings in the wrong ways is to stash your emergency savings in a separate bank account. Here are the main benefits of setting up a separate emergency savings account.

1. Potentially Earn More Interest

There's nothing wrong with keeping your emergency fund in a savings account attached to your primary checking account. But depending on where you bank, moving your savings to a high-yield savings or money market account) might help your money grow at a faster rate. 

The average annual percentage yield (APY) is the rate you can earn on your money over a year and it includes compound interest. Currently, APY on savings accounts in the U.S. is 0.42% according to the FDIC (July 2023). By comparison, some high-yield savings accounts offer APYs of 4.50% or higher if you meet certain balance requirements.  

Let's say you have $10,000 in your emergency fund. Here's an example of the earning potential you might get with a high-yield savings account:

• In an account that earns 0.30% APY, you would have $10,030 after a year (assuming no additional deposits or withdrawals occur during that time). 
• Putting your $10,000 into a high-yield savings account that earns 4.00% could help you end the next 12 months with $10,400. 
• If you opened a new savings account and qualified for a new bank bonus, you could potentially earn even more interest on your emergency savings. 

2. Avoid Temptation

Keeping your savings in an account at a different bank might reduce the chances of you spending that cash on a whim. With your emergency fund at a separate bank, you won't see those funds as available when you check the balance on your main checking account. (Think out of sight, out of mind.) 

Plus, your high-yield savings or money market account might require you to transfer the funds back to your checking to spend them. If that's the case, the extra step could give you time to rethink the situation and overcome the temptation to access those funds for nonemergency purposes. 

3. Access Your Money When Needed—But Not Too Often

When you open a separate account for emergency savings, you may be able to find an online bank with an electronic funds transfer process that's easy to manage. Some banks might even allow you to schedule automatic, recurring transfers that correspond with each paycheck you receive (or however you want to schedule your automatic savings plan). 

On the flip side, it can be just as easy to transfer funds back out of that savings account if an unexpected expense does arise. After all, it's important to have fast access to your savings in the event of an emergency.

Keeping your emergency fund in a retirement account, a brokerage account or even a certificate of deposit (CD), on the other hand, might not be ideal if you need to make a quick and unanticipated withdrawal. 

How to Pick a Savings Account for Your Emergency Fund

There's no such thing as a perfect bank account, but it's possible to find a bank account with benefits that you value. When you compare bank accounts, pay attention to the features that matter most to you. You may want to review APYs, fees, new customer bonuses, financial tools and more. 

Below are a few bank accounts you might want to consider as a home for your emergency fund: 

Recommended High-Yield Savings Accounts

Bank Account	APY	Features	Learn More
UFB Direct High Yield Savings Account Open Account	5.25% More Info UFB Direct breaks balances into five tiers, but, currently, there is only one interest rate.	No minimum deposit No monthly fee	Open Account
SoFi Checking and Savings Open Account	0.50% - 4.50% More Info Customers earn 4.50% APY on savings balances when they set up recurring monthly direct deposit of their paycheck or benefits provider via ACH deposit. Alternatively, deposit at least $5,000 each month to earn 4.50% APY on your savings balance. Checking balances earn 0.50% APY. See full terms and disclosures at sofi.com/banking. Direct Deposit Promotion begins on 12/7/2023 and will be available through 12/31/24. SoFi members with Direct Deposit can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the 4.60% APY for savings (including Vaults). Members without Direct Deposit will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.	No minimum deposit No monthly fee	Open Account
CIT Bank Platinum Savings Account Open Account	5.05% More Info Earn 5.05% APY on balances over $5,000. Balances of less than $5,000 earn 0.25% APY. Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Platinum Savings account are variable and subject to change at any time without notice.	$100 minimum deposit No monthly fee	Open Account
CIT Bank Savings Connect Account Open Account	4.65% More Info Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Savings Connect account are variable and subject to change at any time without notice.	$100 minimum deposit No monthly fee	Open Account

Tips for Building an Emergency Fund

Establishing an emergency fund is an important financial milestone. But if you're starting from scratch (or you're out of the practice of saving money), it can be difficult to know where to begin. The following tips may help:

1. Start with a budget. When you create a budget, you'll have a plan for how you want to spend the money you earn. Even if you're in debt, consider saving a little money each week or month. Better yet, automate your savings. It's important to get in the habit of saving some of the money you earn rather than spending it all. If you can cut expenses, you could free up more money to deposit into your emergency fund.
   
2. Pay down debt. Working to eliminate your debt may seem like it would make it harder to save money rather than easier. But if you can get rid of some of your debt—especially high-interest credit card debt—you'll free up more money in the long run to apply toward emergency savings. 
   
3. Set goals. Eventually, you want an emergency fund that equals three to 12 months of your expenses. But it may be helpful to set smaller savings goals along the way. When you reach your first savings goal—say $1,000—celebrate your success and set the next milestone.