Where you put your rainy day fund matters

  • The value of money in cash or traditional savings accounts will decrease over time due to inflation, now hovering around 2 percent according to the Bureau of Labor Statistics.
  • To protect the value of your emergency fund savings, look for a high yield account.
  • High yield savings accounts "are literally available to every household in America," said Greg McBride, chief financial analyst at Bankrate.com.
millennial saving money retirement
Jamie Grill | Getty Images

When the air conditioning unit that Melissa Perry, 25, and her husband relied on needed to be replaced suddenly, they were proud that they didn't have to put the purchase on a credit card or use a payment plan.

The young couple was able to dip into their "rainy day fund" and cover the total cost of the new unit and installation.

"It was 'cool' to pay in full," Perry said. "We did feel accomplished."

Having an emergency fund should be an important financial consideration for any household. But there is more planning to make the most of your money than just budgeting to save an extra cushion.

Protect your money from inflation

There are three things to consider when deciding where to keep your emergency fund, said Greg McBride, chief financial analyst at personal finance website Bankrate.com.

The first is that your fund needs to be protected from loss. The second is that the account needs to be liquid, meaning that it is readily accessible. Third, you need to earn a return that preserves the buying power of that money.

"Inflation is eroding the buying power of money every day," McBride said. "If you work hard to put aside $1,000, you want it to be able to buy 1,000 bucks when the time comes."

The current rate of inflation is around 2 percent, McBride says. Over the last year, prices of goods such as food, shelter and gasoline have risen 2.9 percent, according to the Bureau of Labor Statistics.

Your best bet for keeping your money accessible, safe and growing is to keep your emergency fund in a high-yield savings account or a bank money market deposit account, McBride said.

Let interest work for you

In today's environment of increasing interest rates, it's a particularly good time to make sure you're getting the most from your money, said Warren Hogarth, cofounder and CEO of Empower, a mobile personal financial assistant.

"If you've got money sitting around, it's zero effort to have it work for you," Hogarth said. Every time the Federal Reserve raises interest rates, he said, the banks raise rates, as well.

Millennials are determined to set aside savings, especially after seeing how their parents got in trouble with debt, said Hogarth. "They're trying to make strides earlier on."

"If you've got money sitting around, it's zero effort to have it work for you." -Warren Hogarth, cofounder and CEO, Empower

They are also more hesitant about investing after living through the financial crisis and a majority (66 percent) feel the safest keeping most of their savings out of the market, according to a recent study by Bank of the West.

About 20 percent of Empower users are able to save by switching money to a high yield savings account, Hogarth said.

Perry and her husband are just one example. Aside from being diligent about keeping a budget to put as much as they can towards retirement and other savings, they also recently switched their emergency fund into a high-yield savings account, Perry said.

Melissa Perry and her husband, pictured above, were able to pay for a new air conditioner in full thanks to their emergency fund. Source: Melissa Perry

They made the decision to move their account from Wells Fargo after seeing that they could get a higher interest rate at Ally Bank, she said. Ally offers a 1.75 percent interest rate with no minimum balance.

Staying on top of their money and having it work for them allows them to have more fun as a family, said Perry. The couple live with their two young children in Fort Worth, Texas.

"We can save up for a family vacation or get zoo passes for the year because we know we have enough saved in other regards," Perry said.

Research your options

There are many resources for finding the best high-yield savings account or money market deposit account for you. Mobile applications such as Empower can help you compare different banks, and there are a bevy of online resources that compare accounts, as well.

When you're looking at what kind of account you should open and at which bank, look for accounts that are federally insured and completely liquid. Then, make sure you know if a certain account has an initial deposit amount, an account minimum or charges fees if you dip below a certain level, Bankrate.com's McBride said.

In addition, McBride says to be aware that most accounts will limit the number of withdrawals you can make each month and some do not have check writing capabilities.

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High,yield savings accounts "are literally available to every household in America," McBride said. There are also plenty of accounts that have no minimum deposit.

Even if you have only a small amount of money to set aside, it's better to start saving earlier rather than later.

"Now is a good time to be saving," said Hogarth at Empower. "We haven't really had a downturn in the economy for over 10 years now, so history will suggest that another will come in the near future."

"You'll need an emergency savings account throughout your financial life. It's not something you're going to outgrow," said McBride of Bankrate.com.