Should You Keep Your Emergency Fund In a Separate Bank Account?

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Building an emergency fund that you can rely on when unexpected expenses arise can be a great way to protect yourself from future financial problems. Whether you're facing an illness, a job loss, a large repair bill, or a global pandemic, adequate savings could be the difference between being able to meet your financial obligations or falling behind. 

Many financial experts recommend saving three to six months' worth of expenses in an emergency fund. If you work as a freelancer or in a high-risk industry, you might even want to have 12 months' worth of expenses tucked away. But it's okay to start smaller and build up your savings a little at a time.

You also need to keep yourself from dipping into the funds you set aside for non-emergency spending. One way to avoid spending your savings in the wrong ways is to stash your emergency savings in a separate bank account. 

Main Benefits of a Separate Emergency Account

Below are three benefits you could enjoy when you store your emergency savings with a completely different financial institution. 

1. Potentially earn more interest.

There's nothing wrong with keeping your emergency fund in a savings account attached to your primary checking account. But depending on where you bank, moving your savings to a separate bank account (especially a high-yield savings or money market account) might help your money grow at a faster rate. 

The average annual percentage yield (APY) is the rate you can earn on your money over a year and it includes compound interest. Currently, APY on savings accounts in the U.S. is 0.30% according to the FDIC (December 2022). By comparison, some high-yield savings accounts offer APYs upwards of 4.00% if you meet certain balance requirements.  

Let's say you have $10,000 in your emergency fund. Here's an example of the extra earning potential you might enjoy from a high-yield savings account:

• In an account that earns 0.30% APY, you would have $10,030 after a year (assuming no additional deposits or withdrawals occur during that time frame). 
• Putting your $10,000 into a high-yield savings account that earns 4.00% could help you end the next 12 months with $10,400. 
• If you opened a new savings account and qualified for a new bank bonus, you could potentially earn even more interest on your emergency savings. 

2. Avoid temptation.

Keeping your savings in an account at a different bank might reduce the chances of you spending that cash on a whim. With your emergency fund at a separate bank, you won't see those funds as available whenever you check the balance on your main checking account. (Think out of sight, out of mind.) 

Plus, your high-yield savings or money market account might require you to transfer the funds back to your checking to spend them. If that's the case, the extra step could give you time to rethink the situation and overcome the temptation to access those funds for non-emergency purposes. 

3. Online account transfers can be easy to manage.

When you open a separate account for emergency savings, you may be able to find an online bank with an electronic funds transfer process that's easy to manage. Some banks might even allow you to schedule automatic, recurring transfers that correspond with each paycheck you receive (or however you want to schedule your automatic savings plan). 

On the flip side, it can be just as easy to transfer funds back out of that savings account if an unexpected expense does arise. After all, it's important to have fast access to your savings in the event of an emergency.

Keeping your emergency fund in a retirement account, a brokerage account or even a certificate of deposit (CD), on the other hand, might not be ideal if you need to make a quick and unanticipated withdrawal. 

How to Pick an Emergency Fund Account

Opening the right bank account could make it easier to build a successful emergency fund (and to avoid spending your savings in unplanned ways). Yet with so many options, some people may struggle to figure out which savings account option is best for their situation. 

There's no such thing as a perfect bank account. But it is possible to find a bank account with benefits that you value. When you compare bank accounts (high-yield savings accounts, money market accounts, etc.), pay attention to the features that matter most to you. You may want to review APYs, fees, new customer bonuses, financial tools and more. 

Below are a few bank accounts you might want to consider as a home for your emergency fund: 

• Axos High Yield Savings
• UFB Direct High-Yield Savings 
• CIT Bank Money Market
• TAB Bank High-Yield Savings Account
• Citibank Accelerate High-Yield Savings
• Ally Bank Online Savings Account
• Discover Bank High-Yield Online Savings Account
• American Express High Yield Savings Account
• Alliant Credit Union High-Rate Savings Account
• Synchrony High-Yield Savings Account

Tips for Building an Emergency Fund

Establishing an emergency fund is an important financial milestone. But if you're starting from scratch (or you're out of the practice of saving money), it can be difficult to know where to begin. The following tips may help. 

1. Start with a budget. When you create a budget, you'll have a plan for how you want to spend the money you earn. Even if you're in debt, consider saving a little money each week or month. Better yet, automate your savings. It's important to get in the habit of saving some of the money you earn rather than spending it all. (Slick Tip: If you can cut expenses, you could free up more money to deposit into your emergency fund instead.)
   
2. Pay down debt. Working to eliminate your debt may seem like it would make it harder to save money rather than easier. But if you can get rid of some of your debt—especially high-interest credit card debt—you'll free up more money, in the long run, to apply toward emergency savings and other financial goals. 
   
3. Set goals. Eventually, you want an emergency fund that equals three to 12 months of your expenses. But it may be helpful to set smaller savings goals along the way. When you reach your first savings goal—say $1,000—celebrate your success and set the next milestone.