Are you ready to save more money? This is the second post in the series of three about saving more money and building your emergency fund. In the first post 5 Tips To Setting Up A Stellar Emergency Fund I showed you how to set up your emergency fund.
In this post I’m going show 3 places where you can stash your emergency fund cash. I’m also going to go in depth about each option and show you how each place may or may not benefit you.
1. Laddering A Cd
This is probably one of the first places that most people will go. In fact none of these 3 options are the wrong one but they all have there advantages and disadvantages. In fact people will tend to ladder them into a series of reoccurring accounts.
What I mean is if you want to ladder a 6 month CD you would put money in a new 6 month CD every month for the next 6 months. For example if you would put $1000 into a new 6 month CD every month for the next 6 months you would have 6 Cd’s with $1000 in them totaling $6000. This way you would have a CD coming due every month.
A couple of things that makes Cd’s a great emergency fund are:
- Harder to get to the money. All Cd’s have time periods for accruing interest. It may be 1 months up to 5 years in most cases.
- Interest is guaranteed. All Cd’s will be assigned a specific rate for it’s time period. In most cases the longer the Cd period the higher the interest rate.
- The Money is liquid. With Cd’s being liquid they can be accessed if need be. There will be no tax penalties.
- Decent interest rates. Cd’s will usually range between 3% and 4%. Though almost all banks rate vary from one bank to the next.
However to every advantage there is a disadvantage:
- Most Cd’s need around $1000 to $5000 to fund them. If your living paycheck to paycheck this option is going to look very unattractive to you.
- If you pull the money out early you will face an interest penalty. If your trying get some growth on that emergency fund cash but you constantly need to dip into it you will be facing some big interest penalties.
2. Money Market Funds
Some great advantages to having a money market fund as your emergency fund:
- Money is liquid. Again just like the Cd’s they have this great benefit of being easily accessible.
- Usually has a check writing feature. The great thing here is you don’t have to go to the bank to get the money you can just write a check.
The Disadvantages:
- Usually need $1000 up front to start an account. Again if you live paycheck to paycheck this is not an attractive feature. In fact if you want to add money to the account your minimum payment has to be at least $50 a month.
- In order to write a check it must be for $500 or more. This can be an issue if you just need a little bit of money. It may also temp you since you had to take the extra money out to spend it instead of putting it back into the fund.
- No Guarantee on the interest. With money market funds their are no guaranteed interest rates. In fact most times rates aren’t very attractive usually around the 1% to 3% range at best.
3. High Yield Savings Accounts
This is actually my favorite place to save money for an emergency fund simply because it has the most flexibility. Although it still has a few advantages and disadvantages.
- Decent interest rates. With these they typically hover around the 3% range. Not bad for an emergency fund.
- Rates are fixed. Unlike the money market funds these rates are fixed and stay they same.
- Easy to get to but not to easy. With these types of account they may link to your checking account so you will have to notify the bank to transfer funds.
- In some cases no minimum amount to start an account. I can’t say every account is like this but some are. You just have to look for the right one.
The Disadvantages:
- These type of accounts are sometimes just Internet based. Some banks just have an online presence and have no brick and mortar buildings. This is really a personally preference here.
- May require certain amount a cash upfront to start the account. This isn’t always the case some do require $1000 or so to start the account. You’ll have to shop and compare.
Where Do You Save Your Emergency Fund Cash?
Do you save your money in one of the three areas that I talked about above or do you have another great place to save your money that you would like to share in the comments below. Any good ideas are welcomed.
{ 6 comments… read them below or add one }
I have some of my EF in an online savings account ($1500+) and the majority of it in a Money Market account ($12000+).
Smart saving Gypsie. You are in a position many are not. Hope to here more from you and check out part 1 of the series and check back Monday for part 3 of my Save More Money Series.
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Deborah
http://termlifeinsurance2.com
I think you have some great stuff on your blog but it’s getting harder with falling interest rates to get decent returns.
I would have to agree with you on that Michelle. I’ve been watching ING Direct and their rates have been dropping a lot. Just like anything you have to keep looking for the deals.
I am not required to file a 1040 with the IRS because I draw Social security. Social security is not taxable unless the taxpayer gets an amount like $53,000 after all expenses are paid. If I put $1500 in an interest account and I get 3%, I will get $45 and I will have to pay $45 to have a tax preparer figure my income taxes, I will break even, plus gas to town and the hassle. It is not worth the trouble. Plus trying to find a 3% rate. Keeping up with it all the time. My time is worth more than that. I have weak eyes. I can’t do all of that reading.
{ 2 trackbacks }