Recently, I discussed a few key reasons to have an emergency fund as well as some potential aspects to think through in deciding the amount needed in this fund. The next question that typically comes up in discussions of emergency funds is just where these funds ought to be located? Or, alternatively, how much risk is acceptable to earn a return on these funds while they sit waiting for a worthwhile reason to come along.


When using the term “cash” in this sense, I actually mean physical cash and coins stored somewhere in your possession. While this is a viable option for a portion of your emergency funds, it must be balanced with the reality that these funds will not earn any return and therefore will gradually lose spending power over time to inflation. Still, for a small piece of your emergency fund, this might be appropriate. Having some tangible cash available may give you peace of mind for potential natural disasters or other scenarios when physical versus electronic funds are more desirable.

Savings or Checking Account

Checking and savings accounts are typically the default location people think of when they consider an emergency fund, and rightfully so! Storing emergency funds in a liquid and accessible manner provided by these accounts allows them to be accessed easily and quickly should an emergency arise. This accessibility is, however, balanced by the fact that funds located in these accounts will receive minimal return. While checking accounts pay effectively no interest on their balances, savings accounts do pay a minimal amount. This small amount of interest on savings accounts may not stem the effect of inflation, though it will take a small bite out of it.

Treasury Bills & Notes

Treasury Bills, which have a maturity of one year or less, are generally considered a risk-free method of earning some interest on your funds as they are backed by the full faith and credit of the United States Government. In the instance when the interest rates on Treasury Bills is competitive with high-yield savings accounts, it’s possible that they can be a good fit for your emergency fund. Treasury Notes, which have a maturity of 1-10 years, can be similarly used. However, keep in mind that bond prices (what you can liquidate your bond for prior to its maturity) move opposite of yields. This means if interest rates go up, the value you can redeem your bills or notes may be lower than your original investment.

I Bonds

I-Bonds are a unique savings bond only offered through the US Treasury website. What makes these bonds unique is they offer both an interest rate and an inflation rate to create a compound rate of return. While the interest rate is fixed to their rate at the time of issue, the inflation rate is adjusted to the Consumer Price Index every six months. This means that I-Bonds can be a unique hedge against inflation, especially an unexpected spike in inflation. Keep in mind, each US taxpayer is only eligible to purchase $10,000 of these bonds in a single year. Still, over multiple years this could add up to a significant portion of your emergency fund.

EE Bonds

Series EE-Bonds are an odd cousin of the I-Bonds above. While they don’t have an inflation component and are currently yielding next to nothing, they do have a unique guarantee to double if held for 20 years. This is an interesting feature of EE Bonds as it creates an effective yield of approximately 3.5% if held for the full 20 years. This can make these bonds a good option for funds you hope not to ever need to use but want to ensure they’re available if needed.

Short-term Bond Funds

Short-term bond funds are mutual funds or ETFs that purchase a large portfolio of bonds to provide investors easy access to short-term interest rates. For individuals who don’t mind watching their principal balance fluctuate along with short-term bond yields (remember, yield and price moves oppositely), these funds may be a good way to earn a little yield. The short-term maturity of the bonds in these funds gives investors yield without going further out the risk curve to more volatile investments.

It’s Not All or Nothing

The easiest solution for many people when it comes to their emergency fund is to keep it in a savings account to earn a little yield and a lot of peace of mind. However, it’s worth considering that this doesn’t have to be an all-or-nothing approach. In fact, it may be worth considering splitting up your cash reserves across a few of these different options that offer a variety of benefits (and risks), which may somewhat balance each other out to help you ensure your funds aren’t impacted severely by inflation but are also available when you finally need them.