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It's always a good idea to keep some money set aside in a liquid form. 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. So, what to do?

When considering where to put your emergency funds, make sure you'll be able to access the money quickly, easily and without penalty when you need it. Most 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 generally a poor choice for similar reasons, though they can be less volatile than stocks. Dave Ramsey, the longtime host of a financial advice radio show, author of several personal finance books, and designer of programs to help individuals get out of debt, recommends that individuals keep three to six months’ worth of expenses in an emergency fund in a checking or money market account that has debit card or check-writing privileges so you can quickly and easily pay for an emergency expense.

The problem is, money in a traditional checking account at a brick-and-mortar bank will earn little or no interest in today’s low interest rate environment. When you’re not earning interest, you’re actually losing money to inflation every year. Ideally, your emergency fund would at least be earning 2% to 3% per year to keep pace with inflation, but when even savings accounts are barely paying any interest, this is a difficult task. So how can you get as far away from 0% and as close to 2% or 3% as possible while still keeping your emergency fund highly liquid and not putting it at risk?

Favoring money market accounts over checking accounts may help. 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 conventional savings accounts; one leading online bank, Synchrony, pays 0.85% on money market accounts as of November 2017. They also come with debit card and/or check-writing privileges, which give you instant access to your funds.

A high-yield online savings account is another option for your emergency fund. Online accounts typically pay more interest than brick-and-mortar accounts, since online banks don't have the overhead expenses that traditional banks do. Just make sure you know how to access your money in an emergency, since you won't be able to walk up to a bank teller and make a large withdrawal. Ally Bank, for example, which pays 1.25% on online savings accounts as of November 2017, says you can access the money through an online funds transfer, outgoing wire transfer, telephone transfer or check request.

If you can trust yourself not to spend your emergency fund on things it wasn’t intended for, keeping it in a high-yield savings account at a bank where you also have a checking account should allow you to instantly transfer funds from savings to checking, so you can access them via debit card or check in an emergency. Other methods of accessing emergency savings in an online account may take several days, and you may not be able to wait that long.

Money in an online savings account is FDIC-insured. As of November 2017, you can earn up to 1.30% APY in an online savings account with no minimum deposit at Synchrony; Ally offers 1.25%. But of course, the more you deposit, the more you'll earn.

Make sure the account you’re considering doesn’t require you to have a higher balance than you plan to maintain to get the interest rate you’re looking for. If you only have $1,000 to put in your emergency fund, an account that only pays high interest on balances above $5,000 won’t do you any good. Another thing to watch out for is that some accounts have high introductory rates, which can be a great way to boost the interest earnings on your emergency fund in the short term, but will you want to keep your cash at that bank once the rate reverts to normal? How competitive is its regular rate?

Consider a certificate of deposit to earn potentially even more interest. The problem with keeping an emergency fund in a CD is that you must pay a penalty to cash out a CD before it matures, and the CDs that pay the highest rates have the longest maturities, usually five years (60 months). For example, the early withdrawal penalty on a five-year CD might be six months’ worth of interest. Cash out the CD before you’ve even earned six months’ worth of interest and the bank may take the penalty out of your principal. But keep your money in the CD for, say, three years before you have to cash it out and you may still earn more interest after the penalty than you would have with an online savings or money market account, depending on the rates each account is paying.

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 does let you earn interest while still keeping your fund liquid. CDs are FDIC-insured, too. Creating a CD ladder, where you buy several smaller CDs that mature at different intervals instead of one large CD, can help you avoid or minimize early withdrawal penalties. (See How to Create a Laddered CD Portfolio and How to Earn the Most from CDs When Interest Rates Are Low.)

As of November 2017, the highest-yielding 5-year CDs are paying 2.40% APY. The highest-yielding one-month CD with a reasonable minimum deposit of $500 is paying just 0.01%. For the same minimum deposit, you could earn 1.65% on a one-year CD.

You could invest your emergency fund in stocks and bonds to try to earn a higher return, but your money would be less liquid and subject to considerable risk. It can take several days for a sale to settle and the cash to be transferred to your checking account, where you can spend it. Also, you never know if the market will be up or down when you need to sell. Putting some of your emergency fund in a less liquid, higher risk place might make sense only if you have a very large emergency fund and wouldn’t need to access all the money at once. (For further reading, see How to Use Your Roth IRA as an Emergency Fund and Emergency Funds That Are Right for Your Tax Bracket.)

Another thought: If your emergency account has several months' worth of expenses, as Ramsey recmmends, 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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