When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money quickly, easily and without penalty, when you need it. Financial professionals don't recommend investing your emergency fund in the stock market because stocks are volatile. You don't want to have to sell an investment at a loss to access your emergency fund. Bonds are a poor choice for similar reasons.

Dave Ramsey, long-time host of a financial advice radio show, author of several personal finance books, public speaker and designer of programs to help individuals get out of debt, recommends that individuals not invest any of their emergency savings. He advocates keeping a $1,000 emergency fund in cash in your home in a place where you can't easily access it. Making the money difficult to access prevents you from grabbing it out of convenience for non-emergency purchases. Keeping the money in cash in your home means it will be available at a moment's notice if you need it, so you won't resort to charging your emergency to a credit card and accumulating debt. Ramsey says that if you insist on keeping the $1,000 in the bank, it should be in a savings account that isn't linked to your checking account, so it can't be used for overdrafts or easily transferred.

For amounts in excess of $1,000, Ramsey recommends a money market account with check writing privileges. Money market accounts are safe (many are FDIC insured, and the ones that aren't generally have pristine records) and tend to pay more interest than checking or savings accounts.

An online checking or savings account, rather than an equivalent account at a brick-and-mortar bank, is another good option. These accounts typically pay more interest, since online banks don't have the overhead expenses that traditional banks do. Just make sure you have a debit card and/or checkbook that allows you to quickly access the money in these accounts, since you won't be able to walk up to a bank teller and make a large withdrawal.

The problem with keeping an emergency fund in certificates of deposit is that you must pay a penalty to cash out a CD before it matures. This penalty discourages people from using the CD, even if the penalty is significantly less than the interest they might pay if they charged the emergency expense to a credit card. It's important to understand that we don't always make rational decisions regarding money, so we need to put systems in place to force ourselves to make the right choice. Some banks offer no-penalty CDs that let you withdraw your money without sacrificing any of the interest you've earned. You may earn a lower interest rate than you would with a regular CD, but a no-penalty CD lets you earn interest while still keeping your fund liquid.

  1. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
  2. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  3. Can mutual funds only hold bonds?

    While some mutual funds include bonds in addition to other asset types, certain funds, aptly named bond funds, hold only ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  6. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
Related Articles
  1. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  2. Financial Advisors

    Ditching High-Yield Bonds for Plain Vanilla Ones

    In a low-rate environment, it's tempting to go for higher yield bonds. However, you might be better off sticking with the plain vanilla ones.
  3. Bonds & Fixed Income

    What is an Indenture?

    An indenture is a legal and binding contract between a bond issuer and the bondholders.
  4. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  5. Bonds & Fixed Income

    Junk Bonds: Everything You Need To Know

    Don't be fooled by the name - junk bonds may be for you if you know how to analyze them.
  6. Investing

    Understanding High Yield Fund Performance

    For exchange traded fund, not all high-yield ETFs are the same. So, we take a look at one high yield investment in particular to set the stage for you.
  7. Savings

    Being too Safe with Your Money Could Turn Risky

    Find out why playing it safe with your retirement savings can actually turn risky, including the basics of inflation risk and interest rate risk.
  8. Mutual Funds & ETFs

    The 3 Best and Most Popular Vanguard Index Funds

    Learn about three popular Vanguard Index Funds. See how index funds provide an easy way for investors to gain exposure to the market with low costs.
  9. Mutual Funds & ETFs

    Are Vanguard ETFs a safe investment?

    Learn about safe ETF funds available from Vanguard. Learn why bond funds have low volatility, but still do have certain risks for investors.
  10. Mutual Funds & ETFs

    These 4 Funds Haven’t Lost Money in a Decade

    If you’re looking for relative resiliency to challenging economic conditions while picking up a little yield, consider these four funds.
  1. Par

    Short for "par value," par can refer to bonds, preferred stock, ...
  2. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  3. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  4. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  5. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  6. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center