When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money quickly, easily and without penalty, when you need it. 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 a poor choice for similar reasons.
Dave Ramsey, long-time host of a financial advice radio show, author of several personal finance books, public speaker and designer of programs to help individuals get out of debt. recommends that individuals not invest any of their emergency savings. He advocates keeping a $1,000 emergency fund in cash in your home in a place where you can't easily access it. Making the money difficult to access prevents you from grabbing it out of convenience for non-emergency purchases. Keeping the money in cash in your home means it will be available at a moment's notice if you need it, so you won't resort to charging your emergency to a credit card and accumulating debt. Ramsey says that if you insist on keeping the $1,000 in the bank, it should be in a savings account that isn't linked to your checking account, so it can't be used for overdrafts or easily transferred.
For amounts in excess of $1,000, Ramsey recommends a money market account with check writing privileges.
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 savings accounts.
An online checking or savings account, rather than an equivalent account at a brick-and-mortar bank, is another good option. These accounts typically pay more interest, since online banks don't have the overhead expenses that traditional banks do. Just make sure you have a debit card and/or checkbook that allows you to quickly access the money in these accounts, since you won't be able to walk up to a bank teller and make a large withdrawal.
The problem with keeping an emergency fund in certificates of deposit is that you must pay a penalty to cash out a CD before it matures. This penalty discourages people from using the CD, even if the penalty is significantly less than the interest they might pay if they charged the emergency expense to a credit card. It's important to understand that we don't always make rational decisions regarding money, so we need to put systems in place to force ourselves to make the right choice. 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 lets you earn interest while still keeping your fund liquid.