It’s common knowledge these days that everyone should have an emergency fund. Not only that, but it should be stocked with enough cash to keep you afloat for a minimum of six months in case you should come up against any immediate hardships. It’s amazing how few people plan for the worst, and when it comes around it can often have a devastating financial impact. Then there is debate on where you should keep your emergency fund stashed! Should it be in a bank account, if so, what kind? Perhaps you should invest it so it earns more interest. Or there is even a school of thought that you should freeze it in a block of ice in your freezer!
I’ve always thought the safest and most reliable place to store cash in your own personal account. A bank often yields a little interest while providing a virtually risk free environment to store your cash. It’s highly liquid, which means you can access it at the drop of a hat. This is precisely the characteristics that any emergency fund should have, after all, that’s why they call it an emergency…it’s quick and unexpected! Bank accounts are typically federally insured up to a certain amount, and most likely well above your emergency fund balance, so you don’t need to worry about losing the money to a failing bank.
There are some people out there who promote investing your emergency fund in an IRA account, or even an after-tax brokerage account. These options will certainly earn you a good deal of higher interest, but because you are investing the money they come with a much higher risk. Also, accessing funds from these types of accounts can come with fees and penalties, often making them more difficult and costly to access in case of an emergency. These accounts are a necessity in order to save for retirement, but not a vehicle in which to place your emergency funds.
Then there is the camp that is deathly afraid of even the most miniscule risk, and prefer to keep all of their cash under a mattress or in their freezer. The problem with this is that you earn zero interest, thus losing a great deal of your money to inflation. You also risk losing money to a house fire or theft. In fact, I would consider holding cash in your house as a great deal more risky than putting it into the bank.