Your emergency fund should be liquid, fairly easy to access and separate from other accounts.
To start with the basics, an emergency fund is money you have set aside only to be touched in dire circumstances. It's not for new tires for your car or to be used at Christmas because you didn't save enough. Those are things you can (and should) budget for. It is there for… drumroll... you guessed it, emergencies.
Once you are out of debt and have built up a healthy emergency fund (a minimum of 3-6 months starting out), you should have a fairly substantial amount of money sitting in front of you. Now what? You don't want to sit $10,000 in a checking account and earn $0.18 cents per year on your money. However you don't want to invest it in the stock market and wake up in two months to find out your $10,000 suddenly looks a lot like $8,000, or worse, less. I know most financial advisors will say that your emergency fund isn't there to make money, it's there to protect you in the case of an emergency. Why not do a little of both?
We have researched many options and found a safe way you can earn extra money on your emergency fund. We recommend searching your local credit unions for offers they run for Christmas/Vacation Club accounts or money market funds. Reputable credit unions are part of an organization that offers the same protections as the FDIC. Christmas/Vacation Club accounts are a lot like savings accounts but they are a little more restrictive. You may be penalized if you make a withdrawal, but not to the point where you will lose more than a few dollars.
At a local credit union in our area, you can earn 2.5% interest per year for your first $3,000 in a Christmas Club and Vacation Club account. The average savings account in the U.S. is earning less than 0.1% interest right now. So that is a difference of about $72. I know $72 isn't a ton of money but if you can fill up both accounts for the entire year you can earn about $150. I'll gladly take $150 instead of $6.
If the Christmas Club account isn't offered, money market accounts can earn you around 1% which is still much better than 0.1%. Online banks such as Ally, Discover, and American Express, among others, also offer a respectable interest rate on their savings accounts. Be sure to check around and hunt for your best interest rate!