A:

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.

RELATED FAQS
  1. I would like to invest in either an IRA or CD. Any recommendations?

    I'm getting ready to receive a WC settlement of approx. $125k. I am 52 and disabled but I can't collect on any disability ... Read Answer >>
  2. I have $15,000 to invest. What should I do?

    Should I put the money into a CD.  ... Read Answer >>
  3. If I want to have some cash in a liquid account for unexpected emergencies, what ...

    It's always a good idea to keep some money set aside in a liquid form, but it's a double-edged sword, because the more liquid ... Read Answer >>
  4. Are certificates of deposits different from money market demand deposits?

    What are the differences? ... Read Answer >>
  5. How much money should I have in a savings account?

    Read a brief outline of the purpose of savings accounts, emergency funds and how to determine how much money to store for ... Read Answer >>
  6. What are my risks of buying a house?

    I am 21, free of any kind of debt, and have saved up 120k for a down payment. I will still have some emergency fund after ... Read Answer >>
Related Articles
  1. Personal Finance

    Why You Absolutely Need An Emergency Fund

    What is an emergency fund, and why is it often the first component of sound financial planning?
  2. ETFs & Mutual Funds

    10 Ways To Prepare For A Personal Financial Crisis

    Life is unpredictable, but if there's anything you can do to stave off disaster, it's to be prepared and be careful.
  3. Personal Finance

    Get the Best Savings Interest Rates For You

    How do you choose between market deposit accounts, CDs and traditional savings accounts?
  4. Personal Finance

    The 7 Best Places To Put Your Savings

    You work hard to put your money away for the future, but where you should you keep it?
  5. Personal Finance

    8 Financial Tips For Young Adults

    You don't need an MBA to learn how to save money and invest in your future.
  6. Personal Finance

    How Much Cash Should You Keep In The Bank?

    With its barely-there interest rates, which portion of your money belongs in a bank, not somewhere else?
  7. Personal Finance

    Protect Your Savings From Their Greatest Threat - You

    Watch your savings magically grow as you make withdrawals a headache and deposits a breeze.
  8. Personal Finance

    Are CDs Good Protection For The Bear Market?

    Certificates of deposit promise stable income in any market, but do they deliver?
  9. ETFs & Mutual Funds

    Money Market Mutual Funds: A Better Savings Account

    An good alternative to the traditional savings account is the money market mutual fund. It's easy, safe and has better returns.
  10. Personal Finance

    7 Ways to Save Money for an Emergency Fund

    An emergency fund is critical for unexpected expenses. Fortunately, there are several was to save for one.
RELATED TERMS
  1. Emergency Fund

    An account that is used to set aside funds to be used in an emergency, ...
  2. Financial Asset

    An asset that derives value because of a contractual claim. Stocks, ...
  3. Savings

    According to Keynesian economics, the amount left over when the ...
  4. Penalty Repricing

    An increase in a credit card’s interest rate that occurs when ...
  5. Credit Card Arbitrage

    Borrowing money at a low interest rate from a credit card then ...
  6. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. ...
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center