An emergency fund is exactly what it sounds like: a stash of money readily available in the event of an unforeseen emergency like job loss, medical crisis, or … malware hacking, as we learned from the Change Healthcare debacle this spring.

Most experts recommend that your emergency fund should cover approximately six months of living expenses. This would cover everything: mortgage, car payments, student loan payments, etc. Most physicians may need to have at least $100,000, and likely much more.

Funds in emergency accounts must be liquid and easily accessible, without excessive fees and taxes. For example, if you withdraw money from a retirement account like an IRAs before the age 59.5, the federal government charges penalties that amount to 10% of the withdrawal amount. And if you withdraw money from a certificate of deposit (CD) ahead of its maturity date, you will incur an early withdrawal penalty. Even selling your investments can come with significant tax burden if you’ve made money on them.

This is why high yield savings accounts (HYSA) are a great option to consider using for your emergency fund.

High Yield Savings Accounts vs. Regular Savings Accounts

The primary difference between traditional savings accounts and high yield savings accounts is the amount of interest your money earns.

As of August 2024, most high yield savings accounts offer at least a 4.2% annual percentage yield, or APY. With some accounts, it can be more than 5%. (Compare that to the average savings account interest rate of 0.45% as of July 15, 2024, according to the FDIC.)

This is a meaningful difference, especially when you consider how large your emergency fund might be. Using a HYSA allows your money to work harder for you.

For example, assume you put $20,000 towards your emergency fund in a traditional savings account with an interest rate of .45%. After 10 years, it would grow to $20,914. But in a high yield savings account that earns 4.2% interest, it would grow to $30,179. That’s a $10,000 difference!

Choosing the Right HYSA: Factors to Consider

There are many financial institutions that offer high yield savings accounts.

Here are some examples:

• Panacea Financial - 4.5% APY - is catered specifically to physicians.
• American Express - 4.25% APY
• Capital One - 4.25% APY
• SoFi - 4.6% APY

It can be tempting to simply pick the account boasting the best annual percentage yield (APY). But there’s more to a savings account besides one number. Also consider:

• Maintenance fees. Most HYSAs don’t have monthly account maintenance fees, but some do. Fees may be as much as $25/month, so check before you open the account.
• Transaction fees and limitations. HYSAs are not meant for frequent transactions like cash withdrawals and regular bill payments. Similar to traditional savings accounts, there may be penalties for exceeding a certain number of transactions each month or year. Check the terms of the account so you choose one that fits your preferences.
• Deposit insurance. Ensure that your HYSA provider is covered by FDIC or NCUA insurance for banks and credit unions, respectively. For neobanks and fintech companies that are not banks, like Panacea Financial, confirm what bank helps deliver their services. In the case of Panacea, it partners with FDIC member Primis Bank, meaning deposits should be covered if anything went south.

Bottom Line

Putting money in a HYSA is a good strategy for building an emergency fund for yourself or your practice. Unfortunately today, any one of us could be one medical bill or emergency away from serious financial challenges, so save now to be ready in case a crisis occurs. To start, calculate how much you’d need to cover at least three to six months of expenses based on your previous spending, and park it in an account that allows for easy access (no or low fees) and interest, like HYSAs.

Join the Discussion

Were you impacted by the Change Healthcare hack and had to tap into your savings or take other measures to keep afloat? What did you do and what did you wish you could have done? Let us know in the comments.