Need a New Home for Your Emergency Fund? Consider This Account

The best features of checking and savings, in one account.

Having an emergency fund is like having the ultimate money security blanket. An emergency fund is, very simply, money put aside for emergency expenses. The typical recommendation is that consumers have enough to cover three to six months' worth of typical expenses (rent or mortgage payment, car payment, utility bills, groceries, any other costs you pay regularly). In the wake of the COVID-19 pandemic, some experts have upped their recommendation to even more, and suggest keeping up to a full year's worth of expenses. You can use an emergency fund calculator to see what your target might be if you're saving one up.

It's not enough to just have the money, you also need a place to keep it safe and accessible. Your checking account isn't a good place for it; it'll be too easy to accidentally spend, plus your checking account likely doesn't earn much (or any) interest. After all, if you're keeping a pool of money, you may as well get some return on it.

A standard savings account won't earn much interest either. A high-yield savings account is a better choice, but it might be hard to access your money if you open one with an online-only bank (no branches, and you might not get a debit/ATM card with the account).

You don't want to lock your money up in a certificate of deposit (CD) account, since you'll be penalized if you have to access it before the term is up. And don't consider investing your emergency fund (although a brokerage account is a good place for money you don't need anytime soon, say, for your retirement). There's too much risk of money loss in short-term investing.

But what about a money market account (MMA)?

Should you put your emergency fund in a money market account?

To answer this question, it helps to know a little bit more about what they are. MMAs are almost like a cross between a checking account and a savings account, as they have features of both. They're also FDIC insured, so the money in one (up to $250,000) is guaranteed to be returned to you if your bank fails. Here's why the features of an MMA make them a great place for your emergency fund.

Easy access to your money

The main thing that an MMA has in common with your trusty checking account is easy access to your money. Many MMAs come with check-writing capabilities or ATM/debit cards (or sometimes both), meaning you can directly draw on the money, rather than having to transfer it to a checking account (which could take a few days -- not ideal if your car breaks down and you need that money quickly). You will be limited to just six convenient transactions pers month thanks to Regulation D, however, so you definitely can't treat an MMA like a checking account.

Higher APYs

The ability to earn a higher annual percentage yield (APY) on your saved money is one of the features an MMA shares with a high-yield savings account. Quite simply, the more money you keep in one of these accounts, the more money your money will earn in the form of interest. Some MMAs are earning 3% or more, so this is a nice return indeed.

Incentive to keep the account funded

Some MMAs have a minimum balance requirement, lest you incur maintenance fees on your account. No one likes bank fees, and I encourage you to avoid them at all costs. However, this requirement for an MMA might actually serve as an incentive to save your emergency fund for real emergencies. It's okay to tap that money if you need it, but if you've gotten into the habit of hitting up your savings every time you're short a little cash for bills (no shame -- that was me, FOR YEARS), knowing you'll be assessed a fee if the balance drops too far might help you curb that impulse.

If you've never considered MMAs, give them a look. You might find a great interest rate along with a handy place to keep your precious emergency fund.