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.

RELATED FAQS
  1. 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 >>
  2. What determines the interest rate in my money market account?

    Placing funds in a money market account may provide a higher interest rate than a savings account due to the underlying securities ... Read Answer >>
Related Articles
  1. Retirement

    How To Start Saving For Retirement

    If you establish these money-saving habits and patiently allow your wealth to build, you will be taking some huge steps forward in making your financial future more secure.
  2. Retirement

    Anytime Is The Right Time To Start Saving For Retirement

    If you're looking to start building your nest egg but don't know how to do it, read on. We give you a few easy tips on how to save.
  3. 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.
  4. Personal Finance

    Why An Emergency Fund Is Important

    Emergency funds are vital in case you lose your job or perhaps have an expensive medical emergency, but why do so few people have emergency funds?
  5. 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?
  6. Financial Advisor

    Why Cash is King When Markets are Volatile

    After the past several years, you might be addicted to equity. But when markets turn volatile, cash is the best option. Here's why.
  7. Personal Finance

    4 Savings Accounts for Investors

    Curious about the best saving accounts and which ones suit investors?
  8. Retirement

    Laid Off? You Can Still Retire

    Joblessness is temporary, but neglecting your retirement savings has permanent consequences.
  9. Investing

    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.
RELATED TERMS
  1. Savings Account

    A deposit account held at a bank or other financial institution ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal ...
  3. Linked Savings Account

    Any type of bank savings account that is linked by account number ...
  4. Emergency Fund

    An account that is used to set aside funds to be used in an emergency, ...
  5. Retirement Money Market Account

    A money market account that an individual holds within a retirement ...
  6. Near Money

    An economics term describing non-cash assets that are highly ...
Trading Center