After saving tens of thousands of dollars for my emergency fund, I keep it in a high-yield savings account for 2 reasons

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After saving tens of thousands of dollars for my emergency fund, I keep it in a high-yield savings account for 2 reasons
emergency fund high yield savings

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  • Experts recommend that most people save a minimum of three to six months of expenses in a savings account for emergencies, to use as their emergency fund.
  • I'm a freelancer, so I aim to save six to 12 months of expenses, just in case.
  • I keep that money in a combination of high-yield savings accounts for two reasons: to maximize interest, and to take advantage of FDIC insurance that keeps my money safe.
  • See Business Insider's picks for the best high-yield savings accounts »

According to data from the Federal Reserve, about 40% of Americans can't afford a $400 emergency from savings. At the same time, 78% of Americans live paycheck to paycheck, according to a CareerBuilder survey. An unexpected expense or job loss may be enough to shatter many financially fragile households.

If you have a steady job and a reliable paycheck, you should keep at least three to six months of savings in an emergency fund. If your household expenses are $3,000 per month, that means you should have $9,000 to $18,000 in emergency savings.

Freelancers, contractors, and people worried about the future of their job should double that to at least six to 12 months of expenses in savings. At the same $3,000 per month in estimated expenses, these people should save $18,000 to $36,000 in an emergency fund.

That might look like a big number, but it's the best way to secure your future so your family can stand up to virtually any unexpected financial emergency.

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I keep my emergency savings in high-yield savings accounts

As a freelancer, I put myself into the six to 12 months of savings group for my emergency fund. It took some time to build up tens of thousands of dollars in savings to reach my goal, but now I'm in a position where I don't worry too much about immediate costs or income changes.

I had savings accounts at big banks like Key Bank, Wells Fargo, Chase, and US Bank while growing up and going to college. But after I started earning a serious income with my first full-time job after college, I started hunting around for better rates and lower fees.

That led to the current array of accounts I have today. My primary savings accounts are held at Capital One, Ally, and Simple. I have smaller accounts at SoFi and Charles Schwab Bank (which doesn't have a very competitive interest rate, but I keep for the convenience of instant transfers to Schwab checking).

The current average interest rate on savings accounts nationwide is 0.09%. That means for every $1,000 you have saved, you'll earn just 0.90 cents over the course of a year. That's pretty pitiful. But some of the biggest banks with branches around the US pay just 0.01%. At that rate, you would get just 0.10 cents over a year. For savvy savers, those rates are completely unacceptable.

The interest rates at my various high-yield savings accounts vary (and fluctuate according to the federal funds rate), but the one with the lowest interest rate as of this writing earns 1.60% - 160 times more than what's available at big banks. The highest rate is 1.90% - 190 times more.

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If you save $1,000 for a year in a high-yield savings account at 1.90%, you would earn $19.17 over a year. That isn't life-changing money, but for an emergency fund of $20,000, you would earn $383.33 in the first year alone. That higher rate adds up fast, and the compounding effect makes it worth more and more every year as your balance grows.

FDIC insurance is much safer than under your mattress

In addition to interest, there's another key feature of a high-yield savings account that makes it a great place to store your cash savings. Virtually all of these accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor. For a joint account, you get $500,000 in coverage. Accounts at credit unions are similarly insured by the National Credit Union Administration (NCUA).

In the event a bank goes out of business, this insurance guarantees you will get your money back. I had a CD at a bank that went under during the Financial Crisis and received a check for the full account balance, including interest until the bank closed, from the FDIC.

Cash under your mattress, in a secret coffee can, or even in a fire-safe built into your wall at home isn't as secure as money in the bank. It may be useful to keep some cash savings at home for emergencies, but the bulk of your savings is safest in a government-insured bank account.

If you don't have emergency savings, it's time to get started

If you are one of the millions of Americans who live paycheck to paycheck or don't have any savings, this is your wake-up call to get started. Even saving just $5 per week puts you on track for a growing balance. At $5 per week, it'll take 80 weeks to reach a $400 balance. But as you read above, that's just a starting place for most households.

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Do your best to save at least three months of expenses in an emergency fund, or double if you don't have a stable and reliable paycheck. If you save today, you won't regret it in the future.

Personal Finance Insider offers tools and calculators to help you make smart decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you take action based on one of the recommendations listed in the calculator, we get a small share of the revenue from our commerce partners.

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