Q.  I am setting up my emergency fund but my bank has a high minimum for a savings account and pays almost no interest. What other emergency fund options are available?  What should I consider when deciding where to put my emergency money?


Unfortunately, today’s historically low interest rates make it painful to set aside money in an emergency fund!  Plan on not earning much interest no matter where you house it.  Just remember than an emergency fund isn’t an investment – it’s a form of insurance against having to go into debt if (or when!) an emergency hits.

There are other emergency fund options besides just using your local “brick-and-mortar” bank.  I personally use an on-line bank for my emergency fund.  Here’s why:

  • It is still FDIC insured.  Make sure whomever you use is FDIC insured!
  • It is linked to my local checking account so transfers in and out are as easy as logging on to the bank’s website and requesting a transfer.  Note:  This does usually take a day or two, but most emergencies will have that much payment flexibility.  And requiring a day or two helps reduce the chances of the new HDTV “emergency” as it’s a bit more inconvenient.
  • The interest rates are much better.  In my area, local banks are paying around 0.25% for a money market savings account.  On-line banks are currently offering around 1%.  While this is still a pretty low rate, it is four times better than the local options.

If you’d feel better with a local bank, be sure to check with some of the smaller community banks or credit unions as they often (in my experience) have better rates.


John is a CPA and personal finance coach.  Email your questions to john@60minutefinance.com.

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