You’ve read our blog on establishing an emergency fund, understand why it’s important, and have even set aside that cash for a rainy day.  Now that your emergency fund has been established, here a few tips to make sure you are putting it to good use.

Make sure you’re earning a competitive interest rate

After years of savings accounts earning next to nothing, the Fed has raised rates, and those increased rates should be giving a boost to your savings account.  Unfortunately, not all banks pass this rate increase on to you.  In an FDIC insured account, you’ll likely earn the highest rate in a savings account or CD.  However, accessing a CD in an emergency might mean paying back some of the interest credited to you, so I would recommend keeping your emergency fund in interest bearing savings account.

When looking for a parking spot for my emergency fund, I only care about a few things: a good rate, good customer experience, and FDIC insurance on these funds.  When I checked my savings account, I noticed I was earning a measly .08%/year on my emergency fund.  It was time to start looking for a new parking spot.

A quick google search helped me find a few banks that don’t have a brick and mortar location in my area, but do offer rates above 1%, no withdrawal penalties, and a user-friendly website.  In addition, a few of these banks have promotional offers for my first deposit.  I was able to find one that offered $200 of interest in addition to the competitive interest rate, as long as I kept a balance in my account for 3 months.  With a $20,000 emergency fund, changing banks will earn me about $400 of interest over the next year.  Not bad for an hour’s worth of work!

Consider taking on more risk elsewhere

Having an emergency fund better prepares you for financial emergency such as a job loss or other type of financial emergency.  Most of the “other types of financial emergency” can fall into the “something broke” category.  If you have a fund in place to pay for something breaking, you may want to consider “self-insuring” against these risks, rather than paying for this insurance.

Having an emergency fund can allow you to save on monthly expenses by passing on an extended warranty, increasing the deductible on your homeowners and auto insurance policies, or even increasing the deductible on your health insurance, which may allow you to take advantage of a Health Savings Account.

In conclusion, having an adequate emergency fund is a great start, but once this fund is set up, you need to make sure your emergency fund is working for you by earning a competitive interest rate and self-insuring the smaller financial risks in your life.


—Adam Glassberg CFP®, CIMA®