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Last updated on April 10th, 2025 at 10:27 am
Editor’s Note: This post was originally published in August 2022 and has been updated for improved clarity, updated insights, and relevance to our evolving mission.
Knowing how to invest your emergency fund properly is essential to wealth building. Having money set aside can and will make life less stressful in the event something unfortunate happens. Things go wrong all the time! A freak accident like slipping on a banana peel and ending up in the ER could put a damper on your wallet… I’ve been there before, believe me (I really haven’t, but that would be an incredible story, lol).
All jokes aside, having an emergency fund is a MUST. Most financial experts recommend that you sock away around 3-6 months of living expenses for that ‘rainy day’.
💡 Quick Check: Do you know exactly how much you’d need to cover 3–6 months of expenses? If not, take 5 minutes to calculate that now—and start setting a target for your emergency fund.
Why Bank Savings Accounts May Not Be The Best
Most people believe the best way to stash their emergency fund is in a savings account at a bank (well duh… Brandon?). Although this logic is not wrong, I’m here to give you a different perspective on why there may be better alternatives.
First, here are some reasons I disagree with just throwing your stash in just any ole bank savings account:
- Your emergency fund is most likely losing money to Inflation
- Lower interest rates offered by banks
- Your emergency fund may be TOO accessible
🚨 Don’t settle for 0.10% interest. Take 10 minutes today to shop around for better options—you’ll thank yourself a year from now.
Your Emergency Fund Is Losing Money To Inflation
“Prices are changing all the time, but we don’t say there is inflation every time we see a price increase. Instead, we say there is inflation when the prices of many of the things we buy rise at the same time and then continue to rise. Explained another way, inflation is ongoing increases in the general price level for goods and services in an economy over time.”
–Federal Reserve Bank of Cleveland
If you put your emergency fund into a traditional bank savings account, inflation will eat away at its value. That’s because banks pay interest rates based on the rate of inflation. However, your interest rate will likely not keep pace as inflation rises. This means that your emergency fund will lose its purchasing power every year.
You may not see the effects of inflation on your emergency fund in one year. But, throughout a couple of years, this can put a SERIOUS drag on your wealth! The annual Inflation rate is 2% on average. So, the further your money is from collecting 2% interest, the more money you lose.
According to the FDIC (Federal Deposit Insurance Corporation), the average interest rate for savings accounts is a stellar 0.10%! Yes, that is indeed awful!!! At this rate, you would lose 1.90% of your purchasing power annually with normal inflation!!!
When this post was written, there was nothing normal about inflation right now. The annual inflation rate as of July 2022 was 8.5%, based on data from the BLS (Bureau of Labor Statistics). This inflation rate is just a reflection of the times. Unfortunately, no safe investment would yield an interest rate anywhere near that… Yeah, that inflation rate made my stomach turn, too.
📉 ACTION STEP: Log into your savings account and check the interest rate. Is it beating inflation? If not, it’s time to compare alternatives like high-yield online savings or CDs. Start your search with NerdWallet or Bankrate.
Lower Interest Rates Offered By Banks
In contrast, there are investment accounts with a high yield (or return) that can offer higher returns than a regular savings account. Accounts such as money market funds, CDs, or even online savings accounts typically offer higher yields. Some may also have lower minimum balances required to open them.
Since there are so many places for you to put these funds and collect a higher interest rate, why on earth should we limit ourselves to one bank? I will dive into said places later in the post, but if you haven’t been convinced to look outside of your bank already, LOOK!
You’re a customer in the bank’s eyes… Wanna know how I know? I WORKED AT ONE!
What do customers do when they are looking for the best deal? THEY SHOP!
So, how are you going to shop in this situation? EASY, you’re going to shop around for the highest interest rate you can find!
Your Emergency Fund May Be TOO Accessible
If you’re putting your emergency fund into a bank savings account, then you might as well put it in a checking account, too. This means that you’ll have access to it 24/7, so there’s no need to worry about losing track of it. However, if you do decide to invest your emergency fund, make sure you choose a low-risk option.
We all know that not everyone has the restraint to fight the temptation of dipping into their emergency fund. Every so often, there is that costly item of interest that can draw your attention. Whether that costly item is a ticket to the Cayman Islands, a Gucci bag, or the latest pair of Yeezy’s, I’m certain that your EMERGENCY FUND wasn’t intended for this!
There are plenty of banks/investment institutions out there for your money to sit with. I would say the phrase ‘out of sight, out of mind’ could be the best solution to this problem.
👀 Ask Yourself: Could you resist tapping into your emergency fund if it’s just one click away?
If not, consider moving it to a less accessible but still liquid account—like an online high-yield savings account or money market fund.
Where Can You Invest Your Emergency Fund?
There are plenty of ways to invest in your emergency fund, but I want to emphasize that it needs to be a low-risk option. You should avoid stocks, bonds, and other investments that fluctuate wildly in value.
Your emergency fund is your safety net when your finances are getting dicey. So, it wouldn’t make sense to risk your safety net, right???
Let’s look at a few alternative ways to invest your emergency fund:
- Certificate of Deposit
- Online High-Yield Savings
- Money Market Funds
💼 Don’t wait for a perfect solution—start with a better one. Pick one of these three options and begin moving a portion of your emergency fund today.
Certificate of Deposit
A certificate of deposit (CD) is an investment vehicle that lets you borrow against the value of your money. You make regular deposits into the CD, and when you withdraw the funds, you pay back the principal plus interest. Banks and credit unions offer CDs.
The FDIC typically guarantees CDs up to $250,000. FDIC insurance is essential because it protects you if the bank goes bankrupt. The federal government would repay your money if this happened.
Although these investment vehicles may pay more interest than a regular savings account, they are typically purchased on terms. Before buying a CD for any term, make sure you won’t need the money during that time. There are generally penalties involved when withdrawing the funds prematurely, which can reduce the potential interest you could collect.
Terms can vary from three-month, six-month, nine-month, or one- to five-year CDs. The links provided are sourced from Investopedia and compile some of the best available CD options. At the time of this writing, the highest interest rate for a one-year CD is 3.10%. That is pretty good if you ask me!
🧠 Pro Tip: Use laddering. Instead of locking all your funds into one CD, split them into multiple terms (e.g., 3-month, 6-month, 1-year) to increase flexibility while earning higher interest.
Online High Yield Savings
Online savings accounts allow you to set up a regular payment schedule so you can automatically transfer funds from your checking account to your savings account. These accounts usually offer higher interest rates than traditional savings accounts as well.
These accounts are outstanding since you can access them whenever you need to. They operate just like the regular savings account at any bank but have higher interest rates and lower fees. Online banks can typically shave some costs by not operating out of a physical building.
You should rest assured that the FDIC typically insures up to $250,000 per depositor for these banks. So, there is no need to worry if the bank collapses suddenly. However, the odds of this happening are slim since the FDIC usually monitors bank performance over time!
These are also great accounts for the ‘out of sight, out of mind’ mentality! Online banks offer apps and sites to access your account, so you won’t see these funds when you log into your regular bank account. You can set up automatic transfers and pay bills from it if you would like.
At the time of this post, interest rates are as high as 2.10% for these accounts, with no minimum terms to lock up your money. See this link, which contains some of the best-paying online savings accounts from Nerd Wallet.
📲 Next Step: Choose one online bank that offers >2% interest and set up automatic monthly transfers—even $50/month will get you in the habit of growing your emergency buffer.
Money Market Funds
Money market funds are mutual funds investing in short-term, low-risk debt. They are the lowest volatility when it comes to investment in the financial markets. These funds are liquid (meaning you can get in and out of them whenever you like) and have interest rates that adjust depending on the market. These funds’ interest is usually far more significant than any traditional bank savings.
A downside is that the FDIC does not back money market funds since they are investment vehicles. But the US government does guarantee some of the securities that money markets invest in! That’s right, a nation that has never defaulted on a debt.
Brokerages like Charles Schwab, Vanguard, or Fidelity offer money market funds. This is my favorite way to invest my emergency fund since I like keeping all my investments with my brokerage. A simple way to benefit from some of the best interest rates available without moving a finger!
🏦 Explore your brokerage options: Already using Vanguard, Schwab, or Fidelity? Search for their money market offerings and see if they align with your risk tolerance and liquidity needs.
In Conclusion
A bank savings account isn’t necessarily the wrong place to save money, but if you don’t plan to touch that money for a while, let the money work for you. The primary key to wealth-building is making your money grow! As you can hopefully see now, there are many ways to continue growing your money without it sitting on the sidelines completely!! Be the customer you are and shop!!
🎯 Final Thought: Your emergency fund is not just cash sitting around—it’s a tool. Make it work for you.
👉 Revisit your current setup today, and choose one action to start optimizing how your money grows—without taking on unnecessary risk.
DISCLAIMER: The above references an opinion and is for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Do your research; this content is intended to be used and must be used for informational purposes. It is important to do your analysis before making any investment based on your circumstances.
🔄 From Traditional Savings to Digital Stability
While traditional tools like savings accounts and CDs have long been used to store emergency funds, blockchain-based solutions are emerging as stable, decentralized alternatives. Some DeFi platforms now offer interest-bearing stablecoin accounts that are accessible 24/7 and aren’t tied to banks.
At WealthImpact Journal, we believe DeFi isn’t a replacement for TradFi—but a bold new parallel track with its own opportunities and risks.
⚠️ Note: DeFi may not be the best choice for emergency funds due to volatility and smart contract risk—but we’ll explore when and how it could responsibly fit into a broader financial strategy.
🎉 Coming Soon: WealthImpact DeFi Series
Learn how to invest, earn yield, and stay safe in the decentralized financial world.
👉 Join the waitlist or subscribe for updates!
I found the information in this article very insightful and well-written. Investments are tricky at best, but using the technics listed will place even the novice in a better frame of mind when contemplating saving for a rainy day. Thanks so much for the valuable information.