One of the highly debated topics I see in the personal finance community is where to keep the money for your emergency fund. Some think you should put the money in a Roth IRA since you can withdraw your contributions penalty-free.
Others think you should keep the money in a high-yield savings account and some people don’t think you should even have an emergency fund and instead take a line of credit out on your home equity.
Honestly, I didn’t really know what the best answer was. I can see the argument for each option. It wasn’t until recently when I came across some posts from Kevin at Financial Panther that I decided the high-yield savings account was the option for me.
Kevin shared how he was able to get 5% interest from putting money into certain bank accounts which sounded too good to be true. Thankfully, it’s not, and I decided to see for myself if I could get a guaranteed 5% rate on my emergency fund.
Savings Accounts with 5% Interest are out There
I won’t write a guide on how to set these bank accounts up since Kevin already did that so be sure to go check out his site. I just wanted to share my experience with getting these accounts set up.
You’re probably wondering what the catch is. Why do all the “best high-yield bank accounts” posts only show banks that give you around 2% interest? The main reason is probably that the sites that write those posts are earning nice commissions whenever someone clicks through to sign up for an account. That’s a topic for another day though.
Getting access to the accounts that give 5% takes a little work upfront, and that’s probably the reason these aren’t more popular. I had never even heard of a bank giving 5% interest before coming across Kevin’s posts on the subject.
To start with, the banks that give 5% on savings only do so on the first $1,000 you deposit. Thankfully, you can open over 10 of these accounts if you’re married (six if single) to have a total of over $10,000 earning 5% interest.
And that’s where I think I’ll lose most people. Opening 10+ accounts sounded terrible to me and I’m sure it does to you as well. After thinking about it for a while, I decided it was worth it to see if I could, in fact, earn 5% on my emergency fund.
Getting Past the First Bit of Friction is the Hardest Part
As I go through life and have more experience, I find a common thread when it comes to trying to better myself. Most things worth doing require a little friction upfront, but once I get past the first bit of struggle, things get easier.
Opening up these 5% interest accounts was no different. It required me to learn a little bit upfront and take action on what I learned, but now that I’ve done it, I have $10,000 earning 5% or $500 every year without me doing much of anything.
I’d say a very generous estimate of the time it took me to set these accounts up was 5 hours. For 5 hours of my time, I will now earn $500 a year and all I have to do is transfer that money to another bank account if I so choose. So I’m basically earning $100 an hour from this one little trick and even more than that if these banks don’t change their interest rate in the coming years.
I will say that I was already very organized with my finances before opening up these accounts, so that helped make things easier.
Why is 5% a Good Return for Emergency Funds?
Before I get into what I did, let’s go over why these 5% interest accounts are an awesome place for an emergency fund.
The safest and simplest way to store your emergency fund is to put it all in one savings account. I had mine in an Ally Bank savings account for a while and it was earning around 1.6% interest. I liked the simplicity of this method and knowing my money was in one account I could easily check and make withdrawals from was reassuring.
After doing some more research on the topic, I thought about moving my emergency fund over to my Roth IRA at Vanguard. Since you can withdraw your contributions to a Roth without penalty, the money is still easily accessible. Since my Roth is invested in an index fund, the contributions I make will earn interest depending on the stock market. The average rate of return on stocks is about 7%, so there’s potential that putting an emergency fund into a Roth is the highest-earning option.
The downside of putting an emergency fund into stocks is that you never know what the market is going to do. You could invest $10,000 and if the market were to drop, that $10,000 could go down to $8,000 in a day. The whole point of having an emergency fund is to have money when you need it, so putting it in stocks is risky.
I decided not to put my emergency fund in my Roth and then I learned about an account with Betterment. The Betterment account was 60% stocks, 40% bonds and bonds are a bit more dependable than stocks, so this account is a little less risky than a 100% stocks account.
I figured the Betterment account was worth giving a shot, so I moved my money from Ally to the Betterment account. Since the market was on a record-breaking tear, my emergency fund grew a decent amount in a short time period.
Once I found out about these 5% interest accounts, I decided that they were the best place to put my emergency fund. I don’t have to worry about the stock market going up and down and still get a guaranteed 5% return. As long as these accounts continue to give this rate anyways.
To make it clear why a 5% savings account is so great, most banks only offer 2% interest or less and you’re never guaranteed a certain return from stocks or bonds. As long as the banks offer this 5% rate, I can count on my money earning that amount each month without having to worry about the market.
If the banks stop offering 5%, I don’t lose any money and all I have to do is transfer it to another account.
The Painful Part: Account Set Up
Here’s my personal experience with setting up the 5% savings accounts:
I transferred my emergency fund from Betterment to Ally Bank. Then, I opened up a prepaid debit card with NetSpend. Once I got the card in the mail, I activated it and connected the account with my Ally checking account. I transferred $1,000 to the debit card, and then I enrolled in the 5% savings account and transferred the $1,000 on the debit card to the savings account.
After that, I set up a scheduled transfer of $1 from my Ally account to the Netsped account that recurs every 2 months so I don’t get hit with an inactivity fee.
I repeated this process opening up 4 more prepaid debit cards that are associated with Netspend. These cards were Ace Elite, HEB, Western Union, and NetSpend MLB. On top of these accounts, I also set up an account with Digital Federal Credit Union who actually offers an interest rate of 6.17% on the first $1,000 deposited.
I then went through this same process with my wife to make her separate accounts so we could get the full benefit on over 10 accounts.
The only issue I ran into was with the HEB card. I was able to create an account just fine, but for some reason, the card wouldn’t activate and I have yet to get the issue resolved. I only have a $10,000 emergency fund at the moment anyway though so the 4 other NetSpend accounts and Digital Credit Union accounts are enough for now.
This probably sounds like a lot of work, but it wasn’t that bad. Now that I’ve got the accounts set up, all I have to do is check them every now and then and transfer the interest earned if I want to. I’ll probably spend 30 minutes a year on these accounts moving forward.
If you’re willing to put in the upfront work, these accounts are a great way to earn a better return on your emergency fund while not having to worry about the stock market. The reason these banks are able to give a higher interest rate is that they charge hefty fees if you choose to use their other services.
The only way it makes sense to set these accounts up is if you only plan to use the savings accounts and activate a recurring deposit every couple of months to avoid an inactivity fee.
I’m glad I came across Kevin’s posts on these accounts because I wouldn’t have had any idea that this was an option otherwise. It shows that continuing to read what other people in the personal finance space are doing can really help you improve your own situation.
It will be a little extra work if we end up needing the money because I will have to go through the 10 accounts and transfer the money to the debit cards, then to my Ally bank account. I'd say it's worth a little extra work though and I could always transfer the money to the debit cards and just use them if I needed it instantly.