The Emergency Fund

A lot of financial gurus and bloggers advocate saving at least $1,000 before doing anything else such as paying off debts, investing, etc. For me, getting the 1,000 isn't hard. The hard part is keeping it. I definitely enjoy having a high balance checking account, but part of the problem is that the money is just too accessible. The question becomes, where do I park my money? What's the best way to safely keep my emergency fund? Certificate of Deposit? Savings Account? Mutual Fund? Savings Bond? Mattress?

Keep in mind I am only talking about starting an emergency fund and keeping it at least $1,000 -- one should  obviously save much more than this, but the goal is just to get 1,000 saved and not touch it.

With the goal in mind let's take a look at some of the ways we can safely keep our Emergency Fund.

1. Certificate of Deposit: Not a bad option, the purchase amount can sometimes be as low as 100 and the rate of return averages somewhere around 0.30% for a 12 month $1000 CD.

Pros: money is moderately accessible -- might take 1-5 days to access funds; earns interest

Cons: if you need the money you likely will have to sell the entire CD; penalty for early withdrawal (penalty varies by institution)

2.  Savings Account: It's definitely good to keep some cash in your savings account, but a lot of times your savings account will be a mouse click away from your checking account and just one swipe away from your debit card.

Pros: money is very accessible; earns interest.

Cons: money is too accessible; interest rates are terrible for savings accounts at most banks.

3. Mutual Fund: Definitely risky, but the rewards could be good.

Pros: money is accessible (if you have a bank account with your brokerage), potentially high returns

Cons: value of funds could shift widely-- the original 1K may lose value; there is also a lot of time and research required to choose the appropriate mutual funds.

4. U.S. Savings Bonds (Series I): Similar to the CD, but there are some distinct advantages.

Pros: money is moderately accessible -- 1-3 days; denominations can be as small as $50; earns fairly good interest-- 1.73% at the time of this article; earns interest for up to 30 years.

Cons: early withdrawal penalty (last 3 months interest forfeited if withdrew before 5 years); money cannot be accessed for the first 12 months.

5. Mattress: Just a bad idea all around. Leave a $20.00 under your mattress. Next time you move you will have pizza money.

For me? My choice is this: 500 in savings bonds and 500 in a non-linked savings account that does not have a debit card attached to it. I would advocate if you can afford to put away the first 500 in bonds you should do it because there is no way for you to get to that money in the first year and it will be money saved. And it will be money earning good interest. It will be earning such good interest (at the moment) that you may get excited and buy more, which is not a bad thing if your debt is under control (eliminated or shrinking).