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.