A:

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 your money, the less it's earning. If you never have an emergency, then you can miss out on the chance for substantial earnings by keeping that money in a simple savings account.
For more aggressive growth without losing the liquidity, you can consider a money market account or a high-yield savings account. A high-yield savings account may require you to maintain a certain minimum monthly balance.

If you are concerned about liquidity but don't feel like you need your money all in cash, you can also consider bond or certificate of deposit (CD) ladders. When you create a ladder of bonds or CDs, you invest in instruments with varying maturity dates so that you regularly have funds converting to liquid cash while also taking advantage of the higher returns that these instruments offer.

Mutual funds and money market funds are another option, but these generally require liquidation and three days or so to settle and make the funds available.

It's one thing to keep a few hundred dollars sitting in an emergency savings account with a very low interest rate, but if your emergency account has several months' worth of expenses, then you might consider mixing and matching many different instruments so that your savings are still accessible (possibly on a graduated timeline), you avoid penalties for withdrawal and you maximize the growth opportunities available.


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RELATED TERMS
  1. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
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  4. Liquidity Cushion

    A reserve fund for a company or individual made up of highly ...
  5. Emergency Fund

    An account that is used to set aside funds to be used in an emergency, ...
  6. Money Market Fund

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