If I want to have some cash in a liquid account for unexpected emergencies, what is best? A savings account or another type?

By Yolander Prinzel AAA
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. What is the most effective way to write a successful budget?

    Learn the best way to create a successful budget. Learn how to cut unneeded expenses without impacting what you need for ...
  2. Should I use a deferred tax asset for all of my retirement funds?

    Look outside tax-deferred accounts for retirement savings that are worthwhile now and later. Invest a portion in after-tax ...
  3. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ...
  4. What Canadian banks offer the best savings accounts?

    Learn about different savings accounts in Canada. Explore different interest rates and fees as well as accounts that are ...
RELATED TERMS
  1. Automatic Bill Payment

    A money transfer scheduled on a predetermined date to pay a recurring ...
  2. Debit Card

    An electronic card issued by a bank which allows bank clients ...
  3. Account Minimum

    The minimum balance required to be maintained in an investment ...
  4. Average Revenue Per User (ARPU)

    A measure of how much income a business generates, given the ...
  5. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
  6. Compound Interest

    Interest calculated on the initial principal and also on the ...

You May Also Like

Related Articles
  1. Investing Basics

    An Investor's Guide To Bank Stress-Testing

  2. Stock Analysis

    How Wells Fargo Became The Biggest Bank ...

  3. Stock Analysis

    Why Wal-Mart Needs To Expand Into Financial ...

Trading Center