An emergency fund has one job, and earning the highest yield on the screen is not it. Its job is to be there, in full, the day something goes wrong. On a recent episode of the Scholar Wealth Podcast, we put one question to a few of our advisors: “Emergency fund, where are you putting it? In a high yield savings account or a brokerage account?” We did not all land in the same place, and I think the disagreement is more useful to you than a single tidy answer.
The Case for a Treasury Money Market in Your Brokerage Account
The argument for the brokerage account starts with a pattern we see in client accounts: high yield savings rates that were promotional, then quietly expired. A year or two later, the account has been earning less than you were promised, and you have lost purchasing power without noticing.
A money market fund inside a brokerage account avoids the promotional trap. If you pick a Treasury money market, the fund holds T-bills and other US government debt, which is about as safe as cash gets. You also stop caring which bank has the better rate this quarter. If you change banks, the reserve does not have to move.
The cost is speed. Moving money from a brokerage account to your checking account can take one to three business days.
The Case for a High Yield Savings Account
The argument for the savings account is access. Rates at large online banks have recently been in the range of 3% to 3.5%, and those are variable rates, not teasers that vanish after twelve months. That is close enough to money market yields that the difference rarely decides the question.
What does decide it for many people is instant transfer. Your checking account is the account most exposed to everyday transactions and fraud, so you want a month or so of spending there and the rest somewhere else. If you walk onto a lot, find a car you like, and have not planned to finance it, a same-day transfer from savings means no loan and no line of credit.
Where We All Agree
Three things were not in dispute. First, avoid any rate that expires. Second, if you choose a savings account, keep it at the same bank as your checking account. A savings account at one bank and a checking account at another gives you the same multi-day delay you were trying to avoid with a savings account in the first place.
Third, FDIC insurance covers up to $250,000 per depositor, per bank, per ownership category. A reserve larger than that deserves a second look at where it sits.
Questions to Answer Before You Choose
Do you already bank in one place that offers a competitive savings rate? How large is the reserve compared with the $250,000 FDIC limit? How quickly might you need the money, and how likely is it that you will want it in checking the same day? And are you the kind of person who will check a rate every few months, or would you rather set it and forget it?
Your answers will usually point to one account or the other. If they split, the hybrid is a perfectly good answer, and it is one we help clients build all the time. We can walk through your numbers with you, your advisors, in about an hour.
A Split Reserve, Worked Out in Dollars
Here is an illustration, not a recommendation. Say your reserve is $500,000. You could keep $250,000 in a high yield savings account at the same bank as your checking account, fully inside the FDIC limit and available the same day. The other $250,000 could sit in a Treasury money market fund in your brokerage account, where it takes a day or two to reach you and does not depend on any one bank’s promotional rate.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on where to hold your cash reserve, watch the full podcast episode here.