Where people keep an emergency fund

Resources · Home loans and saving · 5 min read Starting out

Key points

• When you’re deciding where to keep an emergency fund, safety and quick access come first. Interest comes third.
• Common homes for it include high-interest savings accounts, notice or term accounts, and home loan offset accounts where they exist.
• On a typical fund, the interest gap between account types can be a few hundred dollars a year.
• Some people split the fund across two places to balance access against return.

Where to keep an emergency fund: what matters most

An emergency fund does a different job from your other savings. It sits there for the day something goes wrong. That changes what you want from it.

Safety comes first. The money shouldn’t drop in value right when you need it. Next is access: you want to reach it within a day or two, without big penalties. Interest matters, because some return helps the fund keep pace with rising prices. But it comes last.

Most choices trade a bit of one of these for a bit of another.

Common places people keep it

Everyday transaction account

The simplest option. The money is there instantly, with no delay and no rules.

The catch is that these accounts usually pay little or no interest. And when your safety net sits right next to your spending money, it’s very easy to dip into it for things that aren’t emergencies.

High-interest savings account

You’ll also see these called high-yield or online savings accounts. Plenty of people use one as their main emergency fund.

Access is easy, usually within a day, and the rate is higher than an everyday account. But rates can change at any time. Some accounts only pay the higher rate if you meet conditions, like depositing a set amount each month or making no withdrawals.

In some countries, money market accounts offer something similar.

Notice accounts and term deposits

With a notice account, you have to give warning before you take money out. A term deposit locks the money away for a set period. Names change from country to country, so you might see the same idea called a term deposit, a fixed-term bond or something else.

You often get a higher rate, sometimes a fixed one. In return, access is slower, and breaking early can cost you interest or a fee.

Some people put part of a larger fund here and keep the rest in an easy-access account.

Home loan offset account

Where home loans come with offset accounts (common in Australia, less so elsewhere), some people keep their emergency fund in one. Here’s how offset and redraw accounts work. The money earns no interest itself. Instead, it cuts the interest charged on the home loan.

So your “return” is effectively your home loan rate, which is often higher than savings rates, and the money stays within reach. The downsides? Only some loans offer it. And some people find it harder to keep the fund apart from everyday spending.

Cash at home

Some people keep a small amount of physical cash for times when cards and banking aren’t working. It does the job during an outage. But it earns nothing, it can be lost or stolen, and it may not be insured.

Investments such as shares

Some people with bigger savings hold part of their safety net in investments, for the chance of higher long-term growth.

The problem is timing. Values can drop sharply, and emergencies often turn up at the same time as market falls, during a recession for example. Sell at a low point and you lock in the loss. That’s why most descriptions of an emergency fund focus on cash.

A worked example: how much the account type changes

Assumptions:

• Balance: $10,000, with no deposits or withdrawals
• Interest paid monthly at one-twelfth of the yearly rate
• Period: 12 months

The same maths works in any currency.

These are example rates, not offers. Real rates change often and differ by country. Look at the gap, though. On a fund this size, moving from a low-rate account to a higher-rate one can make a few hundred dollars a year of difference. Depending on where you live, that interest may be taxable.

Is the money protected?

Many countries have government deposit protection schemes. If a licensed bank fails, they cover savings up to a limit.

Limits and rules differ, and not every type of provider is covered. So check whether the place you pick falls under your country’s scheme.

Splitting the fund

Some people use two layers:

• First layer: a month or so of expenses in an easy-access account, for anything sudden.
• Second layer: the rest in a notice account, term deposit or offset account, for bigger or slower emergencies like losing a job.

You give up a little access for a little more interest. Whether that suits you depends on how fast you’d realistically need the whole amount.

Keeping it separate

Wherever it lives, give the fund its own account with a clear name, like “Emergency only”. Money you can see has a job is much easier to leave alone.

Common questions

Should an emergency fund be in a savings account?

Many people use an easy-access savings account. It’s safe, quick to reach, and usually pays more than an everyday account. Others split the fund across two places.

Can you invest an emergency fund?

Some people with bigger savings hold part of it in investments. But values can drop sharply, often right when an emergency hits. That’s why most descriptions of an emergency fund focus on cash.

Is my emergency fund protected if the bank fails?

Many countries have government deposit protection schemes that cover savings at licensed banks up to a limit. Limits and rules differ, and not every type of provider is covered.

Try it

The emergency fund calculator helps you set a target and see how long it might take to get there. If debt is part of the picture too, you can find your Freedom Date.

General information only, not financial advice. Your situation is your own.