where to put EF?

[lennygaudy]

Hi everyone,

I recently devised my debt payoff plan with the help of this forum (thanks again). One question I had though is where do you suggest I put the money I will start allocating to my EF? In a savings account, money market, CD, other?

I already have a savings account linked to my Bank of America checking acct. (although there's no money in it right now). And I'm only going to put a little bit in each month at first since I'm trying to aggressively pay down my debt first. By my calculations I should have about $3,600 by the end of the year and hopefully build it up to a 3-month EF by early next year (about 12-13k). And later a 6-month EF.

Thanks in advance for your advice

[project15]

Online savings account. Or you could ladder them in CD's. Put about 1/6th of it in a 6 month cd one month. Put another 1/6th into it the next month and so on. This way, you have the ability to lock in rates when they're higher unlike an online savings account.

I personally have mine in EmigrantDirect. When I started two years ago, the rate was around 5%, but now it's dropped to 1.85% and still dropping just like all other online savings accounts. It's not supposed to be an aggresive (risky) money making vehicle, it's an emergency fund and any risk free interest you can earn on it is money in the bank!

[boosami]

Originally Posted by project15

Online savings account. Or you could ladder them in CD's. Put about 1/6th of it in a 6 month cd one month. Put another 1/6th into it the next month and so on.

6 month CDs that mature every month is a little too often for my taste... I have a ladder that matures quarterly (four 1 year CDs), and I'm getting tired of that as well. I may retire it and syphon all that money into my annual CD ladder (five 5 year CDs) ladder. Better rates the longer the term--My 5 years are still earning up to almost 6% interest while current rates are under 2%.

To address the question, though... Save in a online bank savings account. Decide on a CD laddering strategy (e.g. four 1 year CDs), and start to open them when you'll have enough to fund $1,000 minimum per CD. Continue saving into the online savings account, and as the CDs mature invest the money built up in the savings into them and renew. Effectively, this is what I do and it's worked out well.

[Phatphoeater]

Doesn't the need for liquidity of an EF outweigh the desire for potential earnings? 1 yr CD ladders (or even 6mo for that matter) seem to defeat the purpose of an EF since you won't have access to the cash for potentially 3mos depending on where you are in the ladder.

edit: I'm fairly risk tolerant with a stable job so I've spread my EF into online savings, money market fund (tax-exempt), long term state muni bond fund (tax exempt) and a short term bond fund (tax-exempt). The last 2 investments have check writing capabilities which helps with liquidity.

[jIM_Ohio]

Originally Posted by Phatphoeater

Doesn't the need for liquidity of an EF outweigh the desire for potential earnings? 1 yr CD ladders (or even 6mo for that matter) seem to defeat the purpose of an EF since you won't have access to the cash for potentially 3mos depending on where you are in the ladder.

edit: I'm fairly risk tolerant with a stable job so I've spread my EF into online savings, money market fund (tax-exempt), long term state muni bond fund (tax exempt) and a short term bond fund (tax-exempt). The last 2 investments have check writing capabilities which helps with liquidity.

I use a CD ladder.

The fees to get access to a CD are usually 3 months interest.
How often does a person need access to WHOLE emergency fund at one time? Usually EF covers loss of job or health care issue, both of which do not require all money needed within 24 hours.

My CDs have a 10 day look back- meaning when they mature on the 1st, I can get them on the 10th without penalty. 20 or 21 days later I have another CD maturing, so the window where I am paying any penalty is minimal.

[kork13]

Originally Posted by Phatphoeater

Doesn't the need for liquidity of an EF outweigh the desire for potential earnings? 1 yr CD ladders (or even 6mo for that matter) seem to defeat the purpose of an EF since you won't have access to the cash for potentially 3mos depending on where you are in the ladder.

I use a CD ladder as well, but I also hold 1-2 month's worth of expenses in an OSA as well. That way I have the necessary liquidity for a while without having to break open a CD early. And if I'm in such dire straights that my OSA cash stash (plus what I keep in my checking, MMF, and other quick-access accounts) isn't enough, I really think the LAST concern for me would be the penalty fee of pulling out of a CD early.

[Phatphoeater]

Originally Posted by boosami

I have a ladder that matures quarterly (four 1 year CDs), and I'm getting tired of that as well. I may retire it and syphon all that money into my annual CD ladder (five 5 year CDs) ladder. Better rates the longer the term--My 5 years are still earning up to almost 6% interest while current rates are under 2%.

this is what i was referencing. depending on your monthly expenses, waiting a quarter for your CD to pay out seems like a loooong while to wait.

[kork13]

Originally Posted by Phatphoeater

this is what i was referencing. depending on your monthly expenses, waiting a quarter for your CD to pay out seems like a loooong while to wait.

Still the same case as I mentioned above. If I were to go the quarterly route, I would just keep 3-4 months in a savings account. Yea, the rate might stink, but it's liquidity that's important with an EF. However, by pairing the liquidity of a savings account with the higher returns of CD's, you can (IMO) have a good compromise--the best of both worlds.

[Phatphoeater]

I just read about these high yield checking accounts with upwards of 5.25% on up to 10k. The requirement to receive this rate is the use of their debit card at least 10 times a month. FDIC insured, principal preservation both covered. I use my credit card for all small purchases so can cover the 10 debits per month on this type of account. I'd still go with my CC for big $ purchases for the cashback reward.

What do people think about this?

High Yield Checking Deals - Reward Checking: High Yield Reward Checking Accounts Available Nationwide

[lennygaudy]

Thanks to everyone for your input! Looks like the general consensus is for me to use an online savings account, at least at this stage of the game since I am only starting to build an EF. Then later once I have enough I should shift some $ over into CD's and/or money market.

Can anyone recommend a site(s) where I can research/compare different online savings account companies?

[kork13]

Try this one. Sweeps has been keeping this list updated for a while, it's got a fair few that you can at least start looking at. You can also find some through Bankrate.com.

[LivingAlmostLarge]

Money market account because I'm lazy.

[lennygaudy]

Originally Posted by kork13

Try this one. Sweeps has been keeping this list updated for a while, it's got a fair few that you can at least start looking at. You can also find some through Bankrate.com.

Thanks for the link-Sweeps has done a great job with that thread, definitely one to bookmark. I'll refer to this once I have my first EF allocation ready to deposit. Thanks again

[lennygaudy]

Originally Posted by LivingAlmostLarge

Money market account because I'm lazy.

I'll have to do a little research to figure out the difference between the online savings acct and the money market (I know it's sad how uninformed I am when it comes to finances) ...but lazy definitely sounds right up my alley

[sweeps]

Originally Posted by kork13

Try this one. Sweeps has been keeping this list updated for a while, it's got a fair few that you can at least start looking at. You can also find some through Bankrate.com.

Actually poundwise is the one that maintains that thread. (And does a very good job I might add.)

Originally Posted by lennygaudy

I'll have to do a little research to figure out the difference between the online savings acct and the money market (I know it's sad how uninformed I am when it comes to finances) ...but lazy definitely sounds right up my alley

Lenny, the difference between "savings account" and "money market account" has become blurred in recent years. I wouldn't get hung up on the names. The biggest factor to look for is if the account has FDIC coverage.

Note that "money market fund" is definitely different. MMFs are usually offered by brokerages and do not have FDIC coverage.

[deadgoon]

My only problem with online savings accounts is that you don't have immediate access to the money. So I'm doing ING Direct. I keep it in an ING savings account and I also have an Electric Orange checking account with a debit card. If I need the money I can do an instant transfer from savings to checking and use the debit card. I also keep about $100 in the checking account for immediate emergencies. I also try to keep a nice pad in my brick and mortar bank's checking account.

[kork13]

Originally Posted by sweeps

Actually poundwise is the one that maintains that thread. (And does a very good job I might add.)

haha sorry about that.... my memory fails me--for some reason I have trouble separating sweeps from poundwise, also jim ohio from broken arrow, and LAL from SNS. clearly, my mental associations make perfect sense.