Where do you keep this emergency fund you’re establishing? Our recommendation at this time is to keep the bulk of it in an online savings account.* This is where interest rates start to become your friend instead of your enemy.
Online banks offer interest rates over 10 times of those of the banks you can walk into or drive up to (with the economic instability the pandemic has unleashed, interest rates started going down a few months ago, and may continue to fluctuate until everything gets back to normal. But online banks continue to outpace local banks by a wide margin). If you’re like us, you barely ever go to the bank anyway, so moving to an online bank should not feel much different, but will earn you much more money.
Let’s do a comparison.
As of this writing, my current local bank is offering a 0.08% interest rate on all their savings accounts (the best rate they offer is 0.12% on a money market account that has over $100,000 in it). The best online rate currently is 1.11% at Vio Bank (this does require a minimum of $100 balance to start the account. There are other online banks offering rates of 1% or higher with no minimum balance requirement, if that is your preference. My preference is the highest interest rate, so we’ll use Vio for the example).
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Let’s say, you have saved up $10,000 for your emergency fund, and you don’t touch it for a year. At the local bank, 0.08% earns you $8 in that year. Better than nothing, but not a whole lot. At the online bank, 1.11% earns you $111, more than 13 times what you’d earn at the local bank. For simply keeping your money in a different place.
Let’s take it further out, and see how much more you get when the interest starts to compound (interest earned on interest) over several years. If you managed not to touch that emergency fund for 5 years, at the local bank, your account would contain $10,040.06, $40.06 in interest – that $0.06 is the compounding part. At the online bank, your account would hold $10,567.46, $567.46 in interest – $12.46 is the interest on the interest, which may not sound like much, but it’s 200 times the amount earned at the local bank.
Ultimately it is up to you where you keep your money*. But you’ll be leaving money on the table if you don’t go for the higher interest option.
Kat
*Admittedly, any savings account is not going to earn you a huge return on your money. There are other options, like CDs and money market accounts, neither of which are offering higher interest rates than an online savings account at this time. There are also potentially higher interest rates to be had in things like I Bonds, but they lock your money in for a year before you can access it, and we prefer to keep our emergency fund very accessible, and very safe (meaning there is no potential to lose money, like with the stock market), should the need arise to use it.
**Always always always look into the hidden fees and costs associated with any account you start anywhere. Earning more interest means nothing if they fee it all away from you. In our experience, the local banks we have used have been far more heavy handed with fees than their online counterparts, but each bank is unique, so do your due diligence before signing up for anything.
