Should the Emergency Fund Be in Your Checking or Savings Account?

When it comes to building and managing an emergency fund, one of the most common questions is where to keep it: in a checking account or a savings account?

Both types of accounts offer different features, and choosing the right one can play a big role in helping you access your emergency fund when needed while also making sure it's growing over time.

Let's break down the pros and cons of each option to help you decide where your emergency fund should live.

What is an emergency fund?

Before we dive into where to keep your emergency fund, it's important to understand what it is. An emergency fund is money set aside for unexpected expenses, such as medical bills, car repairs, or urgent home repairs. Ideally, your emergency fund should cover three to six months of living expenses, giving you peace of mind in case of a job loss, sudden illness, or any other unforeseen event.

Checking Account for Emergency Funds: Pros and Cons

These are some of the pros and cons of keeping an emergency fund in your checking account.

Pros

1. Easy access to funds: One of the main benefits of keeping your emergency fund in a checking account is easy access. Checking accounts allow you to withdraw money whenever you need it. This can be especially helpful if you need to access your emergency fund quickly.
2. Convenience for daily transactions: If you're dealing with a smaller emergency that requires immediate payment, like a sudden car repair or a surprise medical copay, having your emergency fund in your checking account may be more convenient. You can easily pay bills or make purchases with a debit card, and there's no need to transfer money from a savings account.
3. No withdrawal limits: Unlike many savings accounts, which may have restrictions on how many withdrawals you can make per month, checking accounts typically don't impose such limits. This flexibility ensures you can use your emergency fund as often as needed without worrying about exceeding any limits.

Cons

1. Low or no interest: Checking accounts generally offer little to no interest on the money deposited. If you're keeping a significant amount of money in your emergency fund, it's unlikely that a checking account will help it grow. This means your emergency fund will just sit there without earning any extra value over time.
2. Temptation to spend: Since checking accounts are often used for everyday expenses, it can be tempting to dip into your emergency fund for non-emergency purchases. If your emergency fund is easily accessible and mixed with money for daily use, you might find yourself using it for items like shopping or entertainment—defeating the purpose of having a safety net.

Savings Account for Emergency Funds: Pros and Cons

Now, let's look at the upsides and downsides of using your savings account to store an emergency fund.

Pros

1. Earning interest: One of the main advantages of using a savings account for your emergency fund is that it can earn interest over time. While the interest rate on savings accounts may not be very high, the funds in your emergency account will still grow slowly but steadily, making it a better option for long-term savings compared to a checking account.
2. Separation from everyday spending: Having your emergency fund in a savings account helps separate it from the money you use for day-to-day expenses. This separation reduces the temptation to use the emergency fund for non-emergency situations and helps keep you focused on your financial goals.
3. More security: While both checking and savings accounts are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000, savings accounts generally offer fewer risks when it comes to potential overdrafts or unnecessary withdrawals. Having your emergency fund in a savings account can keep it more secure from accidental access.

Cons

1. Withdrawal restrictions: Many savings accounts come with a limit on how many withdrawals you can make per month (usually six, under federal regulations). If you need frequent access to your emergency fund, this could be a disadvantage, especially if you have multiple emergencies that require quick funds. While you can still withdraw more money by going to the bank in person, this isn't as convenient as having instant access via checks or debit cards.
2. Not as quick access: While savings accounts are easy to access, they aren't as convenient as checking accounts for immediate, everyday spending. If you need to pay for an emergency right away, you may need to transfer funds from your savings account to your checking account before making the payment, which could take a couple of business days.

Combining Checking and Savings Accounts for Emergency Funds

Rather than choosing one over the other, some people find it beneficial to keep their emergency fund split between a checking and savings account. For instance, you can keep a smaller portion of your emergency fund in your checking account for immediate access and store the majority of it in a savings account, where it can grow through interest. This strategy gives you a balance between accessibility and growth.

Finding the Right Place for Your Emergency Fund

Whether you choose to keep your emergency fund in a checking or savings account depends on your priorities—easy access or growth over time. A checking account offers immediate access but doesn't allow your fund to grow, while a savings account can help your money earn interest, though it may have restrictions on withdrawals. If need be, you can always consider a hybrid approach, keeping a portion of your fund in each account to balance convenience and financial growth.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees' views. Consult a financial professional before making financial decisions. Publishers or platforms may be compensated for access to third-party websites.