How should I invest my emergency fund so that I keep earning interest on it?

I have established a solid emergency fund. I know that it needs to remain liquid, but I still want to earn interest on the amount. Where do you suggest I invest the money?

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3 weeks ago
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I have always been a big fan of the FDIC-insured online savings accounts as a place to store your rainy day / emergency fund.  I constantly keep an eye on the various online banks and the interest rates they pay.  Since the Federal Reserve has been hiking rates a little bit for the past year or so, the rates on online savings accounts have gone up a little bit too.  Right now, the highest online savings account rate I see is at DollarSavingsDirect, at 1.5%.  Ally Bank has an 11-month no-penalty CD for 1.5%, with the one catch there being that you need a $25k minimum deposit to earn the 1.5%.  Other reputable online savings accounts include Synchrony, CIT, Purepoint Savings, GS Bank, American Express, and Discover Bank -- just to name a handful.  All of those are paying slightly less than 1.5% right now, though.  

The difference between a CD and an online savings account is that a CD has a term during which the money is locked up.  If you need to withdraw before the end of the term, there is a penalty.  The aforementioned no-penalty Ally CD is a special offer where there is no penalty to terminate the CD before the term, so it functions more like a savings account with the penalty-free withdrawal feature.  Unlike a CD, where the interest rate is fixed for the term, a savings account interest rate is variable and can change at any time, so you want to be vigilant to make sure that your bank is still paying you a competitive interest rate once your account is open there.

When you set up and fund an online savings account, you link the account to your main checking account and can transfer without penalty back and forth.  This type of transfer is called electronic ACH (Automated Clearing House) and is free of charge.  In an electronic ACH transfer, the money usually takes 2 business days to move between checking and online savings.

FDIC insurance protects you on up to $250,000 per depositor per financial institution, in the rare instance that the bank holding the money runs into financial distress.  For folks who want to store more than $250,000 in cash, I recommend that they spread it out across banks to enjoy the maximum amount of protection from the Federal government.  This protection would have been very helpful during the financial crisis in 2008.  In such a scenario, you know the Federal government stands behind your deposits even if many banks are failing.  Only go with a savings account that is FDIC-insured.

Hopefully that gets you pointed in the right direction!

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