How to best store those funds, while still earning interest on those sums, can vary.
MaxMyInterest works to connect your bank accounts together to find the best rates for your cash. The highest rate the company currently offers is around 1.61 percent, with online banks typically providing the highest rates, according to Halloran. MaxMyInterest does not require a minimum balance to invest and charges .02 percent per quarter on the cash it manages.
Investors who decide to go it alone should look to online savings accounts for yield, according to Ken Tumin, founding editor of bank account comparison website DepositAccounts.com. Those accounts are FDIC insured (meaning losses up to $250,000 are covered), and typically respond quicker to Federal Reserve rate hikes than brick-and-mortar banks, Tumin said.
Another riskier option is money market funds offered through a brokerage account, according to Tumin. Those funds also respond quickly to Fed rate hikes, but don’t provide FDIC insurance. It is important to note that they are not the same as money market accounts, a type of savings account, Tumin said.
High-yield checking accounts provide yet another alternative. These accounts work by offering a certain yield up to a specific limit. For example, the account may offer a 3 percent return up to $10,000, while anything above that gets a lower yield. Those accounts usually come with certain rules, such as a required number of debit card transactions per month, Tumin said.
Certificates of deposit typically offer a higher yield than savings accounts, but the downside is that you will face early withdrawal penalties if you need the money in a pinch, he said.
You may also want to park your cash in a post-tax Roth IRA, Tumin said, particularly if having an emergency fund will put a dent in your ability to save for retirement. But keep in mind that while you can withdraw contributions without incurring a tax penalty, the same does not go for any gains on the investments.
“I would consider that a last resort,” Tumin said. “It would be much better to do a bank account or savings account approach for your emergency fund.”