Where to Hang Your Rainy Day Fund to Dry

Everyone needs cash reserves for unexpected expenses or gaps in income. Where's the best place to keep those funds?

Financial advisors recommend that everyone should have three to six months of income or living expenses stashed away. After all, you never know when the next hurricane or tornado might turn towards your home and create destruction. You also never know when your company may downsize, or you decide to tell the boss to take a hike. These scenarios can create a financial storm in your life.

The first course of action to take now is to build a stash of cash for a rainy day. But then what? Sure, there's a mattress that could use some stuffing, and a backyard just begging for buried treasure; but those aren't your best options. Your emergency fund could and should work for you, rain or shine. That means generating some interest. Safe, secure, dependable interest.

The stock market may look tempting, but it's a volatile place for money you might need at a moment's notice. Fluctuation is a fact of life in the stock market, and regardless of your holdings' long-term growth prospects, your investments could lose value at any time.

Savings galore

If you want safety plus growth, turn to traditional savings vehicles, like savings accounts, money markets, or certificates of deposit (CDs).

1. Traditional savings accounts: Your favorite bank is the most obvious place to find this tried and true option. You'll be able to write checks against the account, it's unlikely to carry annual fees, and you're already familiar with the institution. On the downside, the interest is generally low, often 1 percent or less. At that rate, inflation will grow faster than your savings.

2. Money market accounts: There's also a plethora of money market choices available. While they come with check-writing restrictions-and sometimes fees-the yields are much better than traditional savings accounts. It's easy to find money markets with 2 percent interest rates or better, with some online banks offering as much as 5 percent or more.

3. Certificates of deposit. The CD is a more complex choice. The highest-yielding 6-month CDs today offer even better terms than the top money market accounts-and longer-term certificates get even higher interest rates. On the other hand, you'll face penalties if you liquidate the CD before its term is up.

A few banks have come up with "safe" CDs, where you get attractive rates without the early withdrawal penalties. In return for that flexibility, the minimum opening balance is steep, generally $10,000 or more. However, since we're talking about saving several months' worth of paychecks, that might not be a problem, making a risk-free CD a great choice for emergency fund parking.

There are plenty of good places to grow your funds safely, depending on where you fall on the convenience-to-earnings scale of preferences. Whatever your choice, you'll sleep soundly, knowing that you'll be ready for any emergency-all the while richer if your financial weather picture is nothing but sunny skies.