Do You Put Your Emergency Fund To Work? – Part 1

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.

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.

The solutions:

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…

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12 People have left comments on this post



» JeffNo Gravatar said: { Aug 25, 2010 - 10:08:34 }

Jesse,

I use a regular internet savings for my account at a bank that is based in utah, Zions bank. I have an internet savings account with them, and it's fairly liquid. transfers between accounts (different banks) take about a day. You should look into Zions Bank https://www.zionsbank.com/internet_portal.jsp
for your e-fund. I've never had problems with them or anything like that, and the customer service is great. Looking forward to posts to finish the series.
My recent post Wednesday Money Check-Up

[Reply]

Jesse MichelsenNo Gravatar Reply:

Hey Jeff, not sure if you caught my reply yesterday, but I actually used to work for Zions Bank (IT department). Because of that experience seeing the inside of the bank and it's management style, I have complete faith in them as a bank. I will def look into them for my e-fund. I sometimes forget that they are actually a bank, and not just a previous employer :)

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» dcjane2009No Gravatar said: { Aug 25, 2010 - 07:08:49 }

I haven't personally used these, but the 11-month no penalty CD's at Ally Bank (where I have my savings account — and I LOVE them because they answer the phone at 2am) look great! I think they meet your criterion for liquidity in that they have a no fee early withdrawal option. The interest rate right now is at 1.30% APY. The down side is that you have to withdraw the entire amount if you choose to withdraw early, but seeing as this is an emergency fund in the first place, that sort of seems a moot point because at least the money is easily accessible.
My recent post “Hypermileing Just how far can you get on a tank of gas

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Jesse MichelsenNo Gravatar Reply:

Jane, thanks for your very informative comment! I wasn't aware of the Ally Bank no-penalty CD, and have updated the post to include a little about it. That is a very viable option. Thanks for sharing!

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» dcjane2009No Gravatar said: { Aug 26, 2010 - 05:08:23 }

Happy to help! Such a coincidence that I happened to stumble upon your post immediately after reading about the CD's at Ally. Best of luck with the decision-making!
My recent post “Hypermileing Just how far can you get on a tank of gas

[Reply]

Jesse MichelsenNo Gravatar Reply:

Ya that really was. I do try and research other banks that I don't use but don't always see every promotion.

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» KNS FinancialNo Gravatar said: { Sep 1, 2010 - 11:09:43 }

Good Post! I think that a CD may be too illiquid for me – except for that "no penalty" one that you mentioned. I think the higher yield is worth checking out.
My recent post Do You Really Need An Emergency Fund

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Jesse MichelsenNo Gravatar Reply:

Thank you. It's definitely on the table as an option, but a traditional CD..I'm with you, it's too illiquid.

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