So You Have an Emergency Fund — What’s Next?

03/23/2017 05:30 pm ET Updated Mar 24, 2017

By Veronica Ramirez

All those personal finance articles begging you to build up an emergency fund have worked, and now you have a robust balance. But your stash of cash keeps growing — past your three to six months of living expenses — and adding to your low-interest savings account no longer seems productive.

Maybe you’re not ready to try your hand at the stock market, but it’s smart to put that money somewhere it’ll grow. Here are a few places to start.

  • Lock it in a certificate of deposit. If your emergency fund is now more of a long-term savings account, consider putting some of that money in a certificate of deposit. This option accrues interest at higher rates than savings accounts; the average three-year CD rate is 0.50%, while the average rate for savings accounts is 0.06%. But there’s a twist: You can’t withdraw the money before the term length is up without incurring a penalty. If you’re prone to dipping into your savings for purchases you don’t really need, a certificate of deposit is a great way to make sure that money stays off-limits.
  • Stash it in a money market account. If you have a nest egg approaching five figures and you want a higher interest rate without the restrictions of a CD, a money market account may be the perfect middle ground. Some offer rates of over 1% a year, but minimum account balances may be as high as $10,000. Money market accounts can also offer debit cards or checks, meaning that if you need to access the money in an emergency, you can.
  • Seal it away in a retirement account. If you have an eye toward the future, a retirement account may be the best home for your hard-earned cash. When it comes to interest rates, savings accounts can’t compare with a 401(k)’s compounded interest rates. Of course, no investments are guaranteed, and it’s possible to lose that money if the economy tanks. If your employer doesn’t offer a 401(k), consider a traditional or Roth individual retirement account. Retirement accounts aren’t designed for early withdrawals, though, so don’t contribute money you may need for emergencies.

The place you put your money should reflect what you intend to do with it, so keep your long-term goals in mind when making a decision. Whether you’re saving for your next big purchase or just want cash available when you need it most, it’s a comfort to know that your money is where it belongs.

Veronica Ramirez is a staff writer at NerdWallet, a personal finance website. Email: vramirez@nerdwallet.com. Twitter: @veraudrey.

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