Guide to Long-Term Emergency Funds

Based on a true story.

John had been working for a government contractor for the last three years. It wasn't his typical choice for employment, but after working at startups for the previous 10 years, he was tired of getting furloughed and laid off due to a lack of funding and company buyouts. He was ready for a little more stability.

His wife, Chelsea, also appreciated the consistent paychecks, which allowed their family to plan for things like birthdays and vacations. Life seemed to be going pretty well for them.

However, one day, the CEO at John's company announced that the government was making deep budget cuts and that government agencies and government contracts were being affected. That meant that John's company would likely have to furlough employees.

"What?!" John thought, "The biggest reason why I took this job was for the stability. How could this happen?!" He was certain that those days of being furloughed or laid off were behind him. But as it turns out, even a seemingly stable job like working for the government or a large company isn't immune to the ups and downs of the economy.

Month after month went by. Each Friday, the CEO would announce how many of John's colleagues would be furloughed. This went on for several months. Eventually the furloughs slowed and then stopped completely. John was safe! Or so he thought.

A few months passed and John had nearly forgotten about all those budget cuts. But on a Thursday afternoon John's boss called him into his office. "Hey John, do you have a minute to chat?" John had a sinking feeling. "Oh, no! Is this another round of furloughs?" he wondered.

It was. This time the furloughs hit John too. He was given two weeks' notice that his position was being eliminated due to new budget cuts.

As John and Chelsea evaluated their next steps, they realized that they only had one month's worth of expenses saved up in a checking account. Unfortunately for them, John was let go during a bad job market. They were worried that it was going to take John a long time to find another job and they didn't have enough money to get through that time.

A few days later, however, John and Chelsea realized that they had plenty of money in their Roth IRAs to cover their expenses for quite a while, as long as the stock market didn't completely collapse. It wasn't ideal to withdraw from their retirement accounts because those funds were supposed to be for retirement, but they were glad that they had the money in case they needed it.

It took John longer than usual to find another job, but eventually he landed a new position. John and Chelsea were glad that they had enough money in their retirement accounts to help them through an extended period of unemployment.

The following questions and answers can help as you plan your long-term emergency fund:

How much money should I have?

Most experts suggest that a complete emergency fund should be between 3 to 6 months worth of essential expenses. However, if you have a reason to save more, then you may need to consider saving between 6 to 12 months of essential expenses. For example, if you have unstable income, a specialized or hard-to-replace job, or health concerns.

Where should I save my money?

Where you save your emergency funds is up to you, but we will talk about some pros and cons of various options in the next section.

When should I use my short-term vs. long-term emergency funds?

Short-term funds often come into play when you need to access your money quickly and can't wait for funds to be transferred from a long-term emergency fund into your bank account.

If you decide to use CDs, bonds, stocks, or retirement accounts as part of your long-term emergency fund (or as a backup to your long-term emergency fund), then your short-term funds can provide you with the money that you need for a few days until you are able to transfer the funds from your long-term emergency fund into your bank account.

Long-term emergency funds can come into play if you have large, unplanned expenses that exceed your short-term funds (e.g. major auto or home repairs, major medical expenses).

Emergency funds may seem complicated, but talking through some of the available options might help to simplify things. Ultimately, the decisions for managing your emergency funds will depend on your personal preferences and what you are comfortable with, but here are some options along with the pros and cons of each.

Cash On-Hand

Keeping physical cash at home is the most immediate form of emergency money. It is useful when digital systems fail (e.g. during major power outages), cyberattacks, or natural disasters when you may not be able to access your bank account or use a credit card.

Pros:

• Instant access: No bank transfers or ATM needed — it is there when you need it.
• Works when systems fail: Physical cash is the only option that works when digital payment infrastructure is down.
• No minimum balance requirements: Keep as much or as little as you want.

Cons:

• Earns no interest: Cash sitting at home earns nothing, which means inflation slowly erodes its purchasing power over time.
• No federal insurance protection: If your cash is stolen, lost, or destroyed in a fire, it is gone. Unlike money in a bank or a credit union, there is no insurance.
• Easy to spend: Having cash on hand can make it tempting to dip into your emergency fund for non-emergencies.

If you use this option, it is recommended to keep only a small amount of your total emergency fund as physical cash at home (e.g. a few hundred to a few thousand dollars).

Savings Accounts

Some people consider a high-yield savings account (HYSA) to be the best place to park a traditional emergency fund. Unlike a regular savings account — which might earn as little as 0.01% APY — a HYSA earns significantly more interest while keeping your money just as accessible. Some HYSAs earn around 4% to 5% APY.

Pros:

• Federally insured: If you keep your money in a federally insured bank or credit union, then your money is protected up to a certain amount.
• Competitive interest rates: HYSAs earn significantly more than traditional savings accounts, and the best rates can help offset inflation.
• Easy access: You can withdraw or transfer your money at any time without a penalty.

Cons:

• Variable interest rates: Interest rates can change at any time in response to Federal Reserve decisions. So the interest rate for an HYSA may not be the same as when you opened the account.
• Interest is taxable: Any interest you earn is taxed as ordinary income.
• Withdrawal limits: There may be withdrawal or transaction limits.
• Limited growth: Even at 4%, a HYSA will not grow your emergency fund the way investments can over the long term.
• Fees: Some HYSAs may charge monthly fees, especially if your balance falls below a certain threshold.

Money Market Accounts

Money market accounts (MMAs) are a hybrid between a checking and a savings account. They typically offer interest rates comparable to high-yield savings accounts, but with added flexibility like debit card access and check-writing privileges, which means you can access your money without first transferring it to a checking account.

Pros:

• Federally insured: If you keep your money in a federally insured bank or credit union, then your money is protected up to a certain amount.
• Flexible access: Many MMAs come with a debit card and check-writing privileges, making it easy to access funds in an emergency.
• Competitive interest rates: Rates are often on par with high-yield savings accounts, with some accounts earning up to 4.0% APY.

Cons:

• High minimum balance requirements: Some accounts may require high minimum balances to earn the highest advertised rates, and balances below the minimum may incur monthly fees.
• Fees: Some banks may charge monthly maintenance fees, which cut into your earnings.
• May have withdrawal limits: Some banks limit the number of withdrawals per month, though this varies by institution.

Note that money market accounts are not the same as money market funds. Money market accounts are a bank deposit account and are federally insured, while money market funds are an investment product and are not federally insured.

Certificates of Deposit (CDs)

A certificate of deposit (CD) is a savings product where you agree to leave your money on deposit for a fixed term — anywhere from a few months to several years — in exchange for a guaranteed interest rate. Because CDs lock up your money, they work best as a supplement to a more liquid account rather than as your only emergency fund option.

Pros:

• Guaranteed, fixed rate: Unlike a HYSA or MMA, your interest rate will not change during the term — even if the Fed cuts rates.
• Federally insured: If you keep your money in a federally insured bank or credit union, then your money is protected up to a certain amount.
• Often higher rates than savings accounts: CDs can offer better rates than HYSAs, especially for longer terms.

Cons:

• Money is locked up: You cannot easily access your funds without incurring an early withdrawal penalty — typically a few months' worth of interest.
• Not ideal as a standalone emergency fund: Because your money is not liquid, CDs are generally not recommended as your only emergency fund option.

One possible strategy is CD laddering — splitting your money across multiple CDs with staggered maturity dates (e.g., 3 months, 6 months, 12 months). This gives you access to a portion of your funds on a rolling basis while still earning higher rates than a savings account.

Bond Mutual Funds

Bond mutual funds pool money from many investors to buy a diversified portfolio of bonds. They are generally less volatile than stock mutual funds, but they carry more risk than a savings account and are slower to access.

Pros:

• Diversification: Owning shares in a fund spreads risk across many bonds, reducing the impact of any single bond defaulting.
• Higher return potential than savings accounts: Over the long run, bonds have historically outperformed savings accounts — though this is not guaranteed.
• Professional management: Fund managers can access parts of the bond market that individual investors cannot easily reach on their own.

Cons:

• Not federally insured: Bond funds can lose value. In high-inflation or rising interest rate environments, bond values tend to fall.
• Slow to access: After you sell shares from your bond mutual fund, it may take three or more business days before the money is transferred to your bank account.
• Not recommended for your primary emergency fund: The combination of market risk and slow access makes bond funds a poor fit for money you may urgently need.

A similiar option to bond mutual funds are bond exchange traded funds (ETFs). But in terms of emergency funds, bond ETFs share many of the same pros and cons as bond mutual funds.

Stock Mutual Funds

Stock mutual funds pool money from investors to buy shares of companies. They offer the highest long-term growth potential of all the options listed here — and also the highest risk. For that reason, most financial experts advise against keeping a traditional emergency fund in stocks.

Pros:

• Highest growth potential: Historically, the stock market has outperformed every other option on this list over long periods of time.
• Diversification: A broad market index fund spreads your investment across hundreds or thousands of companies, reducing the risk of any single company's failure.

Cons:

• High volatility: Stock values can drop significantly — and the worst time to need emergency money is often during a market downturn. You could be forced to sell at a loss.
• Not federally insured: There is no guarantee on your principal — you could lose a significant portion of what you put in.
• Slow to access: Selling mutual fund shares typically can take two to three business days (or possibly more) for the money to be be transferred to your bank account.

Roth IRA

Roth IRAs are retirement accounts that have a unique property that could make them useful as part of your long-term emergency fund strategy: you can withdraw your contributions — the money you personally put in — at any time, tax-free and penalty-free, for any reason. Only the investment earnings are restricted until age 59½.

We emphasize that Roth IRAs could be useful as part of your long-term emergency fund. They should not be considered for your entire emergency fund. As with all investment decisions, we recommend that you speak with a qualified financial advisor who can help you weigh the pros and cons of using a Roth IRA for part of your long-term emergency fund strategy.

Pros:

• Tax-free and penalty-free contribution withdrawals: Since you have already paid taxes on the contributions for a Roth IRA, your contributions are accessible at any time without taxes or penalties — unlike a traditional IRA or 401(k).
• Growth potential: Money invested in a Roth IRA grows tax-free. An initial contribution of $5,000, for example, could grow to be much more over time, whereas the same $5,000 kept in cash would remain $5,000 — and lose purchasing power to inflation along the way.
• Dual purpose: Money you do not end up needing for emergencies continues to grow toward retirement. So every dollar you contribute could potentially serve two goals at once: emergency savings and retirement savings.
• Simplifies competing financial priorities: If you are trying to build an emergency fund and save for retirement at the same time, treating your Roth IRA contributions as your long-term emergency fund removes one of those competing goals. You can focus on contributing to your Roth IRA — one action covers both retirement savings and long-term emergency preparedness.

Cons:

• Investment earnings are off-limits before 59½: If the market has done well and you need more than you contributed, you cannot touch your earnings without triggering income taxes and a 10% penalty.
• Annual contribution limits: You are limited by how much money you can contribute to an IRA each year. So it can take time to build up a meaningful balance. Check the current IRS guidelines for IRA contribution limits.
• Income limits: High earners may not be eligible to contribute directly to a Roth IRA. Check the current IRS guidelines for income phase-out thresholds.
• Market risk: If your Roth IRA is invested in stocks or bonds, its value can decrease — and a market downturn is often exactly when people need their emergency fund most.
• Best used as a secondary fund: Because of market risk and restricted access to earnings, a Roth IRA works best as a secondary, or backup, option to other short- and long-term emergency fund options that are more stable and liquid. Roth IRAs should not be used as a primary option for long-term emergency funds.

If it feels like there is no perfect option to save your emergency funds, then you are not alone. Every option involves some trade-off between safety, accessibility, and growth. But here is a useful way to think about it: personal finance is not about finding the perfect option — much of it is about minimizing risk while maximizing potential returns. The same principle that applies to investing applies here: diversification.

Diversifying your emergency funds can help you find the right balance between safety, accessibility, and growth. For example:

You might think that the safest and most accessible option for your emergency funds would be to put everything in a bank account, but consider inflation. The average inflation rate from July 2021 to July 2026 was 4.11%. If your money did not grow by at least 4.11% per year during that period, then you lost purchasing power. For example, $10,000 kept in a bank account making 0.10% during that period would be worth about $8,200 at the end of the period — a loss of $1,800 in real value after only 5 years!

And what about the issue of growth? For example, if you had saved enough money to cover 6 months of expenses, then it would not be unusual to have $30,000 or more in your long-term emergency fund. Are you comfortable letting $30,000 sit in a high-yield savings account that is barely keeping pace with inflation? It would be nice if at least some of that money could grow while it is sitting in your account. But then if you kept all of your long-term emergency funds in stocks and the market crashed, it could wipe out a significant portion right when you need it most.

No single option is ideal on its own, which is why combining a few of them might be the smartest move. As always, consider speaking with a qualified financial advisor who can help you strategize and determine the right mix and amounts for your emergency funds.