Step 1: Keep 1–3 Months of Expenses in Your Checking Account
The first layer of your emergency fund should live in your checking account.
This money covers expenses that can’t wait—medical bills, emergency travel, or sudden repairs. You don’t want delays transferring funds or worrying about settlement times when something urgent happens.
Checking accounts don’t usually earn much interest, but this portion isn’t about earning—it’s about speed and convenience.
Step 2: Store the Rest in a High-Yield Savings account or Money Market Funds
The next layer of your emergency savings—money you don’t expect to touch often—should still be safe and liquid, but it can work a little harder for you.
Two common choices are:
- High-yield savings accounts – like Discover, Ally, CIT Bank or Marcus by GS
- Money market funds
These options currently yield around 3.50% (rates are variable and DO change over time), which is far better than traditional bank savings accounts yielding .01%. Funds remain accessible within a day or two, making them ideal for rainy-day reserves.
The goal is simple: keep funds safe, accessible, and earning something while they wait.
Step 3: What About CDs?
Over the past few years, Certificates of Deposit (CDs) were attractive because one-year rates often paid 4–5%. Locking in those rates made sense for savings you were unlikely to need immediately.
However, as interest rates have (and will continue to) decline, CDs have become less appealing. Locking money away for months or years doesn’t make as much sense when the yield advantage shrinks—and emergency funds should never be hard to access.
The rule of thumb is that the 1yr. CD rate should be more than the inflation rate. With CPI at about 3% currently, CDs may still make sense – for a while. As rates decline below 3%, your money is not keeping pace with inflation, and you should look for other options.
Step 4: Using Short-Term Bond Funds as Rates Decline
As rates begin to fall, we’ve started using short-term bond funds for portions of savings that clients don’t expect to use frequently but still want accessible.
Short-term bond funds invest in high-quality, short-maturity bonds and aim to provide modest income while reducing sensitivity to interest rate changes compared to longer-term bonds.
These funds do fluctuate slightly in value (they can rise but can also fall), so they aren’t appropriate for money needed immediately. But for savings that may sit untouched for extended periods, they can offer better long-term returns than cash alone while still keeping risk relatively low.
We like the very low cost, but solid Vanguard ST Bond ETF (BSV).
How Much Should You Keep in an Emergency Fund?
The right amount varies by household, but general guidelines are:
- Three to six months of expenses for dual-income households with stable jobs
• Six to twelve months for single-income households or those with variable income
• Larger reserves for business owners or individuals in cyclical industries
Job stability, income variability, and personal comfort matter more than rigid rules. The right number is the one that lets you sleep at night.
The Bottom Line
Emergency savings should prioritize access and safety first, then earnings.
A simple structure works well:
- Immediate cash needs in checking
- Rainy-day reserves in high-yield savings or money market funds
- Longer-horizon reserves in short-term bond funds when appropriate
This approach keeps money available when you need it while allowing unused savings to earn a reasonable return.
The best emergency fund is the one that lets you handle surprises calmly—without turning to credit cards, loans, or panic decisions.
And the best time to build it? Before you need it.
If you would like help establishing a solid working budget and savings plan, we can help! You can schedule a strategy session to talk about your unique situation and how we might be able to help. If you are a current client, contact us for a personal review of your situation at info@astifinancial.com.
Next week we will discuss our ‘bucket strategy’ we use with our clients for future income planning. Stay tuned!