This is the start of a three part series. The other parts can be found here:
Since my bank closed down and I would be moving my emergency fund money over to one of the other banks I use, I got to thinking that I really need to put that money to work for me. A fully funded emergency fund ( 3-6 months of expenses), for just about anyone, is a lot of money, and having it sit in a no-yield account really seems like a waste.
Here are the requirements I came up with for ways to make your emergency fund work for you, and below, some options that meet these requirements.
Whatever the solution may be, it must be fully liquid. The purpose of an emergency fund is to cover you when you have an emergency. If the fund is tied up in some long term investment, you can’t really put life on hold while that money gets freed up. For me, the liquidity threshold for my emergency fund is between one and three weeks. It goes without question that this threshold is different for each and every one of you.
The solution must be low risk. I don’t mind having some risk involved because risk is almost always a requirement for gain. As long as the money is still fairly liquid and I understand the risk before going into the investment, I can handle moderate risk. My risk tolerance for the emergency fund is about a %10 fluctuation.
The solution must encompass only one thing, and be simple. What I mean is that I don’t want the emergency fund money to be spread out across several different short term CD’s or invested in multiple accounts. The money must all stick together and be simple to get at, on top of the liquidity time frame requirements.
So with those requirements in mind, I have come up with a couple options for my emergency fund. If any of you see any discrepancies in my choices, please let me know. I have done some research on these options, and will do plenty more before I choose something but the emergency fund money is currently without a home so I want to get it in something as soon as possible.
Lowest risk and instant liquidity: Checking/Savings
I could keep the emergency fund in my regular checking account or the attached savings account. That would give me the highest liquidity with the lowest risk, but it would also provide the least amount of gain. The liquidity with this option is also almost too much for me, as the money would be far too easy to get at and could be spent. The return here would be up to .65% interest, with an access time frame of instant.
Low risk, higher return and moderate liquidity: High Yield Savings Account
With a high yield savings account, the money would be separated from my regular checking account which helps from a mental standpoint as I would not be able to see, or spend the money without some effort. This is where my other savings sits currently, such as money saved for specific goals. The interest rate is 1.10% with no minimums with an access time frame between three and five days, which is acceptable. The interest rate is variable and could go down (or up) depending on the market.
Low risk, higher return with low liquidity: Certificate of Deposit
I know right away that this option does not fit my requirements for liquidity, but like I said, everyone here will have different risk and access time thresholds.
The shortest CD I can find is a 6 month CD which is beyond my threshold for liquidity. The interest rate for this CD is .70% which is just .5% above our Checking/Savings option interest rate. The only real plus side to a CD (and the only reason I could see anyone getting a CD right now as the interest rate on a high yield savings account is actually higher, and money more liquid) would be that the interest rate is locked in so if the market drops, that rate will be in effect as long as you keep renewing the CD.
Update: One of my commenters brought Ally Bank’s 11 month CD’s that offer early withdraw without any penalty to my attention. These offer an interest rate of 1.30% and without a fee on the withdrawal, they would be as liquid as a high yield savings account. This may be a great option for housing an emergency fund and will be included when I make my decision.
These are the most traditional options I could come up with for the time being. I have a few more on the wing that I will be posting about shortly to complete this mini-series. So far, I am still on the fence about which of these three, or the others, I will choose from…
Image by covilha
Tags: banks, choices, couple options, discrepancies, emergency fund, fluctuation, frame requirements, fund money, installments, liquidity, long term investment, moderate risk, risk tolerance, threshold, time frame, wit