This Might Be the Perfect Bank Account for Your Emergency Fund

Building an emergency fund is perhaps the kindest thing you can do for your finances. Life is full of unplanned expenses, and if you live paycheck to paycheck, you can be forced to rely on credit cards to cover those surprise bills. And as I know from experience, that gets expensive fast -- according to the Federal Reserve Bank of St. Louis, the average rate on credit cards charged interest is 22.63%.

But having cash in the bank for emergencies can spare you from taking on the financial hit of high-interest debt. You might assume a savings account is the best place for an emergency fund, and while it certainly fits the bill, you might have a better option. Let's take a closer look at money market accounts (MMAs) and see why they could be just what you're looking for.

What's a money market account?

Money market accounts are an interesting type of bank account, with features of both savings and checking accounts. For starters, they earn interest like a savings account. APYs on deposit accounts of all kinds are up across the board thanks to the 11 federal funds rate hikes implemented by the Federal Reserve between 2022 and 2023. These rate hikes have benefitted savers, as now we're earning a lot more money on our saved cash. The best MMAs were paying APYs in the 4.00%-5.00% range as of late July 2024.

But unlike a savings account, you can have one-step access to your money in an MMA. Many of these accounts automatically come with a debit card, and if you like using paper checks (no judgment here!), you can also often order them for your account. In some cases, you automatically get those checks.

This MMA is worth considering

If I've already sold you on money market accounts, here's a great one to consider. The Discover® Money Market account earns a solid APY of 3.60%-3.65% (the lower number for balances under $100,000 and the higher number for balances above that). It comes with a debit card for one-step spending (more on that below) and you can also write paper checks on the account.

It requires no minimum deposit to open, and you don't need to maintain a high balance to earn APY or keep the account in good standing once it's open.

Why are MMAs so good for your emergency fund?

In a few words: easy money access. When speed counts (say, your car has broken down and you need to pay an auto mechanic for the repairs), having to transfer money from a savings account to a checking account might take longer than you want. And this is especially true if your emergency savings account is at a different bank from your checking account -- in this case, it could take a couple days for that cash to move.

With a money market account, you get access to your money in one easy step, via the checks or debit card that came with your account. And as long as the money is sitting in the account, you're earning a high APY on it, which means it's growing.

When is a savings account better?

The one potential issue with opening an MMA for your emergency fund is that if you're very early in the process, you might struggle to find a good account that doesn't have a required minimum deposit or balance requirement. Rome wasn't built in a day, and emergency funds aren't, either.

So if you're starting out with $0 and intend to save money steadily over time to build that fund, it might be a better idea to start with a high-yield savings account. The best ones have no minimum balance requirement, either to maintain the account or to open it. And the APYs on them are comparable with that of MMAs right now, thanks to those same actions by the Federal Reserve that we discussed above.

Your emergency fund is a major cornerstone of your personal finances -- it can get you out of a jam and even help you sleep better at night. Do yourself a favor and choose the right account to keep it safe and available.