Being frugal is only one part of personal finance success. At some point, you run out of easy and painless ways to cut back your monthly expenses.

Less talked about is the earning side of the equation. One of the best money decisions I made last year was to move my emergency fund from a traditional savings account to a high-yield savings account.

U can’t touch this!

It took a couple years, but I had finally achieved one of my big goals: saving six months of expenses toward that much-talked-about emergency fund.

We’re taught to forget about this money, don’t use it for anything except emergencies, etc.

To quote MC Hammer: “U can’t touch this.” (The jury is still out on whether MC was talking about emergency funds.)

This is good advice, but it lends itself to a do-nothing, stuff-it-under-the-mattress approach. Which means…

I had my money stored in a traditional savings account that offered an awful 0.03% interest rate. This earned less than $5 a year, which adds new meaning to the phrase “get rich slowly.”

Whether you’ve got a full six-months of expenses saved up or are building your emergency fund right now, there’s a better way.

High-yield savings

online banks

Many online banks offer high-yield savings accounts that will at least keep better pace with inflation and, better yet, provide you with proof that you’re moving the needle on your savings. This was the first place I looked.

As of January 15, 2018, the best rate is 1.55% at CIT Bank.

Ally, a well-known online bank, has a 1.25% rate.

Synchrony checks in with a 1.45% rate.

(UPDATE: In fall 2022, high-yield savings accounts at online banks are yielding more than 3% — and climbing — as a result of the Federal Reserve raising interest rates to fight inflation.)

Better than CDs

These online banks all offer another option, called certificates of deposit.

You probably know about traditional CDs, or certificates of deposit. Open one up, pick a term (6 months, 12 months, etc.), deposit your money, and wait for the term to be over before capturing your interest earned. Take the money out before the term is over, and you pay a penalty.

While the penalties are usually fairly small, worrying about paying a penalty is the last thing you want to do if you’re tapping your emergency fund during an actual emergency, so avoid traditional CDs for this purpose.

Two big differences between CDs and savings accounts: you can’t add money to a CD during the term, and the interest rate is locked in. With savings accounts, you can make deposits and take advantage of interest rate increases when rates are going up.

Easy process

The process to open either type of account is simple and should take about 15 minutes.

  • Choose a bank and go to its website
  • Click the “Open Account” button
  • Decide which type of account you’d like to open
  • You’ll have to specify what your opening deposit will be (like your entire emergency fund)

Then, you’ll have to say how you’re funding your account. I did this by providing a routing number to my external checking account. Once that’s established, the online bank can fund your new account.

You should keep your existing checking account open, because many of these online banks don’t provide debit cards. Nor do they have physical branches with ATMs. Think of this new account as a place to stash your extra cash, not as an account to pay your bills.

The extra interest

At 1.45%, a $10,000 emergency fund will earn $145 a year in interest. At 3%, it nets $300.

Hopefully, we’ll never need the money in our emergency funds. No emergencies. It’ll sit there forever.

While it’s doing that, you might as well put the money to work and get something for doing the hard work to build up that emergency fund in the first place.