Emergency Savings Accounts:
Where to Stash Your Cash

How would you pay for rent or mortgage, utilities, food, transportation, and other essential living expenses if you suddenly lost your income stream? In the time it takes to find another job, many people would have to turn to expensive credit instruments to make ends meet - meaning that even when they do find employment, they also have debt to repay. Which is why an emergency savings account is so important. It allows you to concentrate on getting back to work rather than worry how vital bills will be covered.

How much to have in reserve should be based on the number of people who depend on you for support, the length of time it would take to get back on your feet, and your personal comfort level. Most financial planners recommend three to six months worth of living expenses be set aside.

When deciding where to keep this money, bear in mind that the account should react minimally to market fluctuations, come with penalty-free withdrawals, be insured or guaranteed, and the funds be easily and quickly accessible. Here's a guide to some of the different places to safely keep your money in case of emergency.

Passbook savings: A traditional savings account is FDIC insured (up to $100,000, as with all FDIC insurance) and will allow you to withdraw funds penalty-free at any time. In exchange for total liquidity and stability, passbook savings usually provide very low investment returns.

Money market deposit account: The interest rates for money market deposit accounts tend to be slightly higher than passbook savings accounts while providing a similar function. Though these accounts are FDIC insured and withdrawals are penalty-free, the number of allowable transactions is limited to a certain number per year.

Money market mutual fund: While not FDIC insured, the investments in money market mutual funds mature in 13 months or less, and so are low-risk accounts. They provide immediate access to funds without early-withdrawal penalties, and typically offer higher rates of return than passbook savings and money market deposit accounts.

Certificate of Deposit: There are penalties associated with early withdrawals for these three-month to six-year loans to financial institutions, but the investments are FDIC insured. The longer the loan, the higher the interest, a CD is a good place to keep your money if you know you won't need it for a specific period of time (which, in some cases, defeats the purpose of an emergency account).

Treasury bills: Because treasury bills are short-term investments (they mature in under a year), they can be used as emergency savings accounts. The return on T-Bills can be attractive because gains are exempt from state and local taxes, and though not FDIC insured, the principle is guaranteed by the U.S. government.

An emergency savings account is a safety net everybody should have. And though the recommended amount may seem unattainable, by setting aside just a little every month you can get there in less time than you might think.