Where You Should (and Shouldn’t) Keep Your Emergency Fund

Let's look at options beyond the "cash under your mattress" approach.

As we've covered before, an emergency fund is a stash of money set aside to cover unexpected expenses. If you're hit with a sudden car repair, medical bill, or period of unemployment, you'll be grateful that you have designated funds to draw from for this very purpose. But where exactly are you pulling those funds from?

Stuffing cash under your mattress may seem like an easy option, but there are better choices that allow you to earn interest—while still keeping your funds safe and liquid.

Stuffing cash under the mattress

(Or a shoebox, or piggy bank—you get the idea.)

Pros: Immediately accessible, no fees or account minimums

Cons: Zero interest earned, security risks, can be lost or destroyed

While hiding cash around the house seems like the ultimate in easy access, it's simply not a smart move. Your money will lose value over time due to inflation, and there are risks of theft, fire, or just plain losing track of where you stashed those bills. An emergency fund needs to be secure yet still readily available when you need it.

Traditional savings account

Pros: Quick access, insured by FDIC, interest-bearing

Cons: Very low interest rates, may have fees/minimums

Savings accounts used to be a decent place to stash your rainy-day fund. With easy access via your local branch or online transfers, they're highly liquid. And as long as your bank is FDIC-insured, your money is safe. The downside these days is that most savings accounts pay interest rates of just 0.01%-0.05% APY. So your money will grow very, very slowly over time. Better than under the mattress, at least!

High-yield savings account

Pros: Higher interest earned, still liquid, FDIC-insured

Cons: Must meet requirements, rates can drop over time

For a better return without sacrificing access, consider opening an online high-yield savings account. While rates have come down from their peak, you can still find accounts offering around 5% annual percentage yields from reputable banks. Here’s our guide to choosing a high-yield savings account.

Money market account

Pros: Competitive interest rates, check-writing, FDIC-insured

Cons: May have high minimum balance and fees

A money market account (MMA) is a way to earn higher interest rates than you would with a regular savings account. MMAs are notable for having the features of a checking account, like debit cards and limited check-writing privileges. However, MMAs are not ideal for people starting out with smaller savings, since they require a higher minimum balance than most savings accounts (usually between $5,000 to $10,000).

Short-term CDs

Pros: Higher interest rates than savings, low-risk

Cons: Funds are less liquid, with early withdrawal penalties

CDs are time-based, usually offered in terms ranging from three months to five years. Longer terms come with higher interest rates. However, if you withdraw your money from the account before the set time period, you pay a penalty.

The bottom line

The key for your emergency fund is to find the right balance between earning a return while still keeping your money safe and accessible. While a high-yield savings account may be ideal for your full six to nine month cash reserve, using a CD ladder or money market account for a portion can boost your earnings as long as you have enough liquidity. Just be sure to review rates and terms periodically, as the best accounts can change over time. But wherever you decide to store your rainy day fund, do so intentionally—because the money under your mattress won't do you much good when you need it most.