moneybagOnce you’ve made up your mind to begin building an emergency fund and you’ve set your savings goal, the next step is figuring out where to put it. Stuffing your extra cash under the mattress is a safe bet, but putting it in the bank or investing it generally yields a better rate of return. If you’re not sure where to stash your emergency savings, comparing the different options makes it easier to narrow down your choices.

1. High-yield savings account

Online banks are growing in popularity for a couple of reasons. For one thing, they tend to carry much lower fees compared to traditional brick-and-mortar banks. That’s a plus if you sometimes run into trouble with overdraft or it’s difficult to meet high minimum balance requirements.

More importantly, however, online banks typically feature higher rates for savings accounts and other interest-bearing products. At some traditional banks, the APY for a regular savings account may be as low as 0.01% whereas certain online banks offer rates ranging from 1 to 2%. That comes out to an extra buck or two you’ll earn for every $100 you deposit, which isn’t a huge amount but it’s preferable to mere pennies.

The one drawback of online banks is that you can’t walk into a branch to make a deposit, but there are some ways to get around it. You can build your emergency fund by using mobile deposit services for checks or scheduling recurring transfers from a linked account at another bank. If your employer offers direct deposit, you can elect to have part of your pay funneled directly into your savings, which guarantees that your balance keeps growing.

2. Certificate of deposit

Certificates of deposit are designed to be short- or long-term investments, depending on your preference. You put a certain amount of money into the CD and agree to leave it alone for a specific period of time, during which it earns interest. Once the CD matures, you’re able to withdraw the cash along with the interest or roll it over for a new term.

Compared to stocks or mutual funds, a CD is one of the safest investments around. Banks tend to pay the same kind of interest rates that you’d get with an online savings account and the longer the term, the higher the rate will be.

Using a CD to hold some or all of your emergency savings is somewhat risky, however, since you’ll generally pay a penalty if you have to tap it before the maturity date. The penalty normally comes to six months’ worth of interest. On the other hand, you can offset some of the risk and still get a higher rate by creating a CD ladder.

When you set up a ladder, you’re saving in multiple CDs at once but the maturity dates are staggered. For example, you could have one CD that matures in 6 months, another at the 9-month mark, one with a 12-month term, and so on.

If nothing major crops up you can just keep rolling the CDs over into longer terms to take advantage of the highest rates. Breaking it up minimizes the penalties if you need to cash out one of the CDs for an emergency and the rest of your savings continues to earn interest in the meantime.

3. Money market account

Money market accounts are similar to high-yield savings accounts in terms of the interest rate but with one key difference–you also have the power to write checks on the account if needed. That’s much more convenient than having to wait three or four days for a transfer to clear if you need to move money from an online savings account to an account at a brick-and-mortar bank.

One thing to keep in mind about money market accounts is that even though you’re able to write a check, you’re still bound by the same Federal Regulation D restrictions as you would be with a savings account. That means transfers or withdrawals are limited to six a month. If you go over that amount, your bank may charge you a fee or convert the account to regular checking.

The other thing to think about is how dangerous the convenience of check-writing can be. An emergency fund is designed to be used only for emergencies, not to treat yourself to dinner or splurge on a new pair of shoes. If you think having a checkbook or debit card for the account is too tempting, you’re better off sticking with an online savings account or CD so it’s not as easy to dip into the money frivolously.

4. Roth IRA

A Roth IRA is traditionally thought of as a tool for building your retirement nest egg but there are some benefits to using it as your emergency fund. In terms of growth, there’s the potential to see much bigger returns since you’re able to invest money in a Roth in a variety of mutual funds and other securities. If you’re earning 10 or 15 percent annually, that’s a substantial jump from what you’d get with a savings account.

The tricky part about using a Roth as an emergency fund is navigating the tax rules. As long as your account’s been open for at least five years, you can withdraw your contributions at any time without a penalty. If you pull any earnings out before age 59 1/2, you’ll have to hand over 10 percent to the IRS. That’s a pretty decent premium to cover an unexpected expense.

The other issue is how it would affect your retirement strategy if you did have to make a withdrawal. While you can add the money back eventually, you won’t be able to recoup the lost earnings you would miss out on by reducing your balance. If you’re pulling out a large amount, that can put you at a disadvantage down the road as you get closer to retirement.

Final word

Finding a suitable place for your emergency savings requires a little homework and a careful evaluation of what your goals are. If you’re after bigger earnings and you don’t mind gambling a little, a Roth might be the way to go. On the other hand, if you prefer to play it safe then an online savings account, CD or money market offers the peace of mind you’re after with the added benefit of higher interest.

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