How High Yield Savings Work for Emergency Funds

If you're looking for somewhere safe to store your emergency savings and still earn a meaningful return, it's hard to go wrong with a high yield savings account that's FDIC-insured.

Online savings accounts with high annual percentage yields (APY or how much interest you may earn in a year, taking into account how frequently interest is compounded) work especially well for rainy day funds since they're flexible enough to quickly withdraw money in a pinch; yet separate enough from your checking account to discourage mindless spending.

But are high yield savings accounts always the best choice for both building and preserving a longer-term emergency fund? As with most savings account options, the answer depends on your personal circumstances, as well as how soon you think you might dip into those savings. Here's some guidance on where to keep your emergency fund, as well as tips on saving for an emergency.

Pros and Cons of High Yield Savings Accounts

High yield savings accounts are great for storing money that you want to keep liquid—meaning you can withdraw funds from the account at any time, without paying a penalty. But they're not necessarily the best choice for all emergency savings, including more substantial sums that are intended to cover pricier emergencies, such as job loss or disability. Depending on your circumstances, you may even find you're better off trading some liquidity for a better return on your investment or choosing an account with more flexibility.

With that in mind, here's a closer look at some of the pros and cons of using a high yield savings account for your emergency fund.

Pros

• Flexible access. Unlike a certificate of deposit (CD), a high yield savings account doesn't require you to wait months or years for fee-free access to your money. You can tap into the funds right away if a situation arises. So you're covered if your car breaks down or your furnace needs fixing.
• Offers higher rates than other savings options. For example, you'll typically get a better return with a high yield savings account than with a money market account (which is also a close contender for the best account for an emergency fund). High yield savings accounts also dramatically outperform more traditional savings accounts, which have a reputation for paying puny rates. Some online savings options, such as Synchrony Bank's High Yield Savings Account, may even offer higher rates than you can get on a short-term CD.
• Ideal for keeping your funds safe and siloed from everyday spending.  One key benefit to an FDIC-insured savings account, such as a high yield savings account, is that your funds will be insured for up to $250,000. So you can rest assured that if your money is under the insurance limit it will never vanish if a bank goes under. But unlike some competing options, high yield savings accounts aren't designed for everyday usage. For example, you can't usually write checks from a high yield savings account or link it to your debit card. So it's great for storing money that you hope to seldomly use.
• Easy to build up over time. Another perk is that you can start small and continue to funnel money to it over time. So if your emergency fund isn't where you'd like it to be, you can bulk it up with regular automatic transfers or occasional contributions.

Cons

• Rates may not compete with some savings options. For example, you could likely earn significantly more interest if you put your emergency savings into a longer-term CD. Even a 12- or 24-month CD is likely to net you more interest over time than if you left your money in a high yield account.
• Access to your money won't necessarily be instant. Although you'll typically be able to withdraw money from an ATM, you may have to wait a bit for electronic transfers. With a money market account, by contrast, you could write a check right away, potentially making it a more useful tool for an emergency loan, rent payments or large bills.
• Interest rates are variable, so they could go down with time. One of the biggest arguments against storing a lot of money in a high yield savings account is that the variable interest rates could crater in the future if the economy takes a turn for the worse and winds up pushing interest rates down with it. So you may want to limit how much money you put in a high yield account with a variable APY.
• Not for everyday banking. You can't write checks or pay bills from a high yield savings account. However, this also prevents you from spending the money that you aim to save.

Best Bank Accounts for Emergency Funds

Before deciding where to keep your emergency fund, it's important to consider:

• How big of a cash cushion you'd like to save
• How much you have on hand already
• How much room is in your current budget for both big and small emergencies

READ MORE: Personal Finance 101: Emergency Funds

When a High Yield Savings Account Makes Sense

If your budget is already stretched thin by debt payments, an uptick in your cost of living or ongoing expenses that your income barely covers, then you'll want to keep a healthy cash cushion easily accessible—just in case you need it to pay a surprise bill.

In that scenario, a high yield savings account is likely your best bet – especially if you only want to keep track of one account for your emergency fund. You'll be hard-pressed to find such a liquid savings account with a comparable return.

Similarly, a high yield savings account is also a good choice if your emergency savings fund still has a long way to grow. Being able to easily add to your emergency fund from month-to-month or even week-to-week could make a real difference to your bottom line.

For example, if you add just $20 a week to a high yield savings account with a $2,000 starting balance and a 1.8% APY, you'll end the year with more than $3,000 in your emergency fund. If you keep it up, you could grow your savings to more than $5,300 by year three. Use Synchrony Bank's Savings Calculator to see how much your fund can grow.

When to Consider Other Types of Savings Accounts

If your budget still has plenty of room left in it to cover the occasional surprise expense, such as an unexpected medical bill or a sudden home repair, then you may want to consider other options for your emergency fund. For example, if you're mostly worried about bigger life catastrophes that might take months or years to recover from, then it could make sense to prioritize earning a bigger return over keeping all your funds completely liquid.

In that scenario, you might consider putting a portion of your emergency savings into one or more higher-rate CDs. Generally, the longer it takes for a CD to mature, the higher the penalty for withdrawing money early. But APYs tend to be higher and are also fixed, so you don't have to worry about them declining over time. Depending on your situation, it could be worth the risk of paying a fee for early access if you can also earn a much higher and more predictable return.

Alternatively, consider building a CD ladder where you open multiple CDs with staggered maturity periods. That way, you can structure your ladder so that you maintain ongoing access to your funds. Or, if you'd rather stick to one account, a 12- or 24-month CD could work well for you. The penalties on shorter-term CDs tend to be smaller. Plus, some options, such as Synchrony's No-Penalty CD, don't charge for early access.

A short or medium-term bump-up CD could also work well in this scenario—especially if you're not ready to commit to a traditional CD's fixed APY. Unlike a traditional CD, a bump-up CD, such as Synchrony Bank's 24-month bump-up option, won't lock you into the same APY for the CD's entire term. Instead, you can request a one-time rate increase if your specific CD's fixed APY goes up after you purchase it. Check out Synchrony's CD calculator to see what you can earn with a CD.

The Bottom Line: Spread Out the Savings

You don't have to stick with just one account for your emergency fund. In fact, diversification of your savings is a smart way to build a buffer and protect your savings. For example, if you don't mind juggling accounts, you could put some emergency savings into a high yield savings account, some into a money market account for expenses that require a check and the rest in a high-earning CD.

Regardless of the strategy you choose, do your homework to make sure you know what each account type can offer you. A particularly fun way to educate yourself about different account options is to try Synchrony's Savings Quiz, which is designed to help you settle on the best account for you.

READ MORE: 5 Smart Money Saving Tips for Young Female Savers