I've always been pretty good at saving money. Case in point: When the roof of my house turned out to be a complete disaster last summer, I didn't have to whip out a credit card to replace it. But the experience depleted my savings account — and left me looking for ways to (very quickly) replenish our rainy day fund.
In other words: It was time to open a proper emergency savings account. Here's what I learned on my quest to find one.
1. Liquidity is important ...
Low-to-moderate risk investment accounts, like an individual retirement account or 401(k), are a great way to save for retirement, but the funds in those accounts are practically on lockdown. You can make withdrawals ... for a steep price. IRA withdrawals made prior to age 59-and-a-half are generally subject to a 10% tax penalty, for instance. Certificates of deposit, too, impose fees if you try to tap funds before the CD fully matures.
Given you're looking to tap emergency savings for emergencies, you need to opt for an interest-bearing account that won't penalize you any time you take money out.
2. ... but you don't want too much of it
There needs to be some friction so you're disinclined to tap emergency funds for a non-emergency. The easiest way to create some? Open a savings account with a financial institution you're not currently patronizing. That way, it'll take a few days for transfers to go through — which is helpful, especially if you're trying to curb impulse buys.
3. Go APY shopping
Even with interest rates on the rise, traditional banks aren't offering much when it comes to the annual percentage yields (APYs) on their savings accounts. Federal Reserve data puts the average national APY on traditional savings accounts at 0.09%.
But high-yield savings accounts — essentially any savings vehicle that offers an APY close to 2% or higher — are making a comeback at small banks, credit unions and online financial institutions. Policygenius’ partner Even Financial can help you compare current savings and money market account offers.
4. You'll need to make the minimum
Some savings account only allow you to earn the maximum APY if you make and maintain a minimum deposit. Be sure to check for these minimums when you're comparison-shopping APYs. Sometimes, the highest return comes with a $10,000 caveat.
5. Check for fees & restrictions
Given this is a backup account, you don't need a lot of features, but it's still important to know what you are — or aren't — paying for. Some financial institutions charge savings accountholders for monthly maintenance, check writing, excess withdrawals, paper statements, wire transfers and other incidentals.
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