Goosing Emergency Fund Earnings
I got a question about emergency funds I’d like to address:
“With rates on savings accounts like Emigrant and ING dropping, where’s a good place to put my emergency fund? I hate seeing my money sit around doing nothing. Thanks.”
My answer to this is simple. An emergency fund is not for making money. Achieving the optimal return on your money is NOT your goal. Having a stack of bills to use in an emergency is.
Putting your emergency fund in a savings account or equivalent achieves the three things an emergency fund is supposed to achieve:
- It keeps your money readily available
- It keeps the value of your money constant over time
- It keeps your money safe
Your emergency fund is not supposed to do anything else, including add to your net worth. Looking for another quarter point in interest should not be your goal. Having the money you need, when you need it, should. Do not make the mistake of losing sight of the objective of an emergency fund.
My first-line emergency fund sits in a money market earning barely over inflation. And that’s just where it will stay.
November 1st, 2007 at 10:07 am
I don’t disagree with the principle that the emergency fund is not to be screwed around with, but as long as your money is in a highly liquid, easily accessible account, who cares if you do a little rate chasing?
November 1st, 2007 at 10:55 am
Dan - Nothing. If you’re into trying to find the absolute best rate for a FDIC-insured bank to put savings in, do it. The person I was talking to wasn’t thinking that way. He was talking about vehicles other than savings accounts (or equivalent).
November 1st, 2007 at 1:17 pm
Good interest on savings is excellent–unless you begin to see the fund as an investment, not a fund. Then it’s a problem.
November 1st, 2007 at 2:49 pm
I agree with Dan. a .25% is worth chasing, especially since ING is so quick to the gun in lowering its rates. They are currently .97% lower than igobanking.
I also agree with KMC, that the poster seemed like he wanted to find something with more gain. I agree that the purpose of an emergency fund is not investment money or retirement money. however, you should be able to mix between 7-day t-bills, FDIC insured money market accounts, and cd’s. If you are counting on 6 months or more for an emergency fund, then you will not need all 6 months right away. I think if you want higher rates than current high yield savings rates, then go with rolling 7 day t-bills and laddered cd’s maturing every other month (taking your situational need into account).
November 1st, 2007 at 3:11 pm
A typical person might have a $10,000 emergency fund (actually typical is probably far lower than that). Chasing a .25% difference in rates for a $10,000 account equates to $25 over the course of a year.
$25.
How much money is your time worth? Mine’s worth a lot more than $25 for the time it would take to open a new account, transfer money, and so on. Furthermore, keep in mind that you lose interest every time you transfer money. You deal with more tax paperwork. Higher chance of identity theft. Blah blah blah.
I wouldn’t advocate keeping your money in a 1% local bank. I’d recommend opening an account at an institution that consistently provides competitive rates, and leaving it there.
For me that account is at Vanguard. The Admiral Treasury MMF provides a good return exempt from state taxes. For a low-tax state the Prime MMF might make more sense.
November 1st, 2007 at 4:05 pm
@ anonymous - I couldn’t agree more. We’ve had our first-line emergency fund in the same MMF for years. Even though it doesn’t have the ‘optimal’ interest rate, who cares? Like I said, if your thing is to find that extra little bit and get the absolute best rate, then go for it. It’s just not what I do.
November 1st, 2007 at 10:20 pm
I’m with KMC on this… find a reasonable place to park the emergency fund and leave it be. Over the years you’ll probably get more value out of spending the time learning and researching options for your investment and retirement accounts rather than chasing .25% for the emergency fund.
November 5th, 2007 at 9:14 am
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November 18th, 2007 at 6:06 pm
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