When it comes to choosing the best savings account for your emergency fund, make sure that you’re putting your money in the right place!
High Yield Savings Accounts
You might have heard people talk about high yield savings accounts before, and if your savings is not in one of these accounts, then you are missing out! With a traditional retail savings account, like the one that comes with your checking account at your bank, you probably make between 0.25 and 0.36% of interest on that account. While you might be saying “Wow, I didn’t even know I earned any interest!” Yeah, that’s because of how little you earn. It’s basically undetectable. But if you are keeping a three to six month emergency fund in a savings account, keeping it liquid like you should, we highly recommend you use a high yield savings account.
Earn Compounding Interest on Your Emergency Fund
Interest rates do fluctuate, which is why we’re we are using interest rates as of now. But as of early July 2023, you can find a high yield savings account that offers around 4% interest. That interest means you essentially get paid to save money! What this means is for example, 4% interest on $15,000 in your savings account, will earn you approximately $623 in a year just for having that money in savings. Which you should have anyways because everyone should have an emergency fund! This is possible because not only do you earn interest on your savings account balance. But as you earn interest each month, the interest in your High Yield Savings Account compounds. That means you’re earning interest – on the interest!
Why Does Interest on High Yield Saving Accounts Fluctuate?
You may have noticed over the past couple years, that High Yield Savings Accounts (HYSA) and money markets really haven’t been making you any money. High yield savings account sat around 0% for much of 2020-2022. This is because the interest rate follows the Federal Bank. Interest rates on High Yield Savings Accounts follow the Fed. Now, as interest rates are climbing again, high yield savings accounts are giving a return again which is a real benefit!
Are High Yield Savings Accounts for Investing?
Most investors and personal finance experts agree not to think of your high yield savings account as an investment. While a 4% compounding interest rate is far better than a standard savings account, this is still very modest. Even if it does help keep up with inflation. Since this is not an investment, it’s important to remember we’re not getting rich here. This kind of a return is not going to make you enough money to retire. But it is the best account for your emergency fund and there are 2 main reasons why that – depreciation and liquidity.
Why a HYSA is the Best Savings Account for an Emergency Fund
A High Yield Savings Account is the best savings account for your emergency fund for two main reasons. It protects your cash from depreciating, and keeps your asset liquid.
Over time, cash loses it’s buying power. This devaluation of cash due to inflation is known as depreciation. So as we mentioned before, earning interest on your savings can help protect the value of your money from inflation. At least when the interest rates are keeping up with inflation.
When you’re deciding the best place to keep your emergency fund, keeping this money liquid is key. Meaning that in the case of emergency, if you need the money as soon as possible, it will be available to you. Without having to worry about losing any benefit or having to sell an asset. This is why we are such fans of the High Yield Savings Account. Since you need the liquidity factor for your Emergency Fund, you might as well optimize your money management and earn some interest!
The Best Savings Account for Emergency Funds
Not sure where to find the best high yield savings account? We’ve done the thinking for you and we’ve done the research for you!
Our choice for the best savings account for emergency funds is the High Yield Savings Account from Discover. They always have one of the highest interest rates. Their customer service is top notch, and they don’t have high minimum opening deposits. That means you can open your account with $0 – opposed to a lot of other high yield savings accounts that require you to have at least $2,000 to $5,000 just to open the account. This is great news if you’re starting from scratch! They also make it so easy, you can easily open an account today. Read more about How to choose a savings account!
P.S. We have no affiliation with Discover. We do not get a kickback from this. This is just legitimately who we use, so it’s who we recommend!