Newbie - How to build an emergency fund

[userind]

Would like to build an emergency fund and hence would like to know where I can invest my money into. Is it okay if I put the money into my Savings Account or into CD or into Money Market accounts?

Thanks.

[sweeps]

I would recommend a high-yield savings account.

Fortunately Poundwise has already done the work for you:
Online Savings Accounts & Current Rates

[userind]

Thanks for replying back.
Is it prudent to invest in CD and in MMA with the current rates?

[Reldon]

I believe it is better than keeping the money in a Checking Account making 0% interest. This is an emergency fund so you might need the money shortly. If that's the case, a MMA or CD is the best place to put the money in.

[userind]

MMA and CD's doesn't seem to provide the expected rate percentage. Would like to know who provides a better rate% for MMA, banks or Credit Unions. And CD's do have a lockin period. Would also like to know the Banks or Credit Unions who provide good 1 month CD.

Thanks.

[creditcardfree]

The money is for emergencies, not an investment. If you are making an investment you would look for the best return...but would end up with more risk. Putting your emergency fund at risk for better returns defeats the purpose of having an emergency fund.

[disneysteve]

You can research CD rates at bankrate.com, but I think you'll find that MMA rates are better than 3-month CDs.

[Broken Arrow]

Originally Posted by Reldon

I believe it is better than keeping the money in a Checking Account making 0% interest. This is an emergency fund so you might need the money shortly. If that's the case, a MMA or CD is the best place to put the money in.

WELLLL....

I agree with speed and liquidity, but I don't see why you can't make some interest off of it either.

My credit card is my short term emergency fund. It's also quick and I usually have more than enough time to transfer my money from a savings or MMA and have it paid off online. (I'm currently using a 5% checking, but that's beside the point.)

However, I also don't carry a balance, and I never charge more than I have in my bank account. So, this method may not be perfect for everyone.

There are other kinds of emergencies, such as natural disasters, where cash is probably the way to go.... But for everything else, there's MasterCard.

[scfr]

Originally Posted by Broken Arrow

WELLLL....

I agree with speed and liquidity, but I don't see why you can't make some interest off of it either.

My credit card is my short term emergency fund. It's also quick and I usually have more than enough time to transfer my money from a savings or MMA and have it paid off online. (I'm currently using a 5% checking, but that's beside the point.)

However, I also don't carry a balance, and I never charge more than I have in my bank account. So, this method may not be perfect for everyone.

There are other kinds of emergencies, such as natural disasters, where cash is probably the way to go.... But for everything else, there's MasterCard.

But you do have funds available in a MMA, correct? Just want to make sure you aren't advocating solely relying on your cc to be your EF. In my much more conservative opinion, that would be giving too much power to the credit card companies since they can close your account at any time.

My suggestion would be to start out keeping your EF in a high-yielding MMA. Once the balance is built up a bit, you could consider laddering CDs.

[Broken Arrow]

Originally Posted by scfr

But you do have funds available in a MMA, correct? Just want to make sure you aren't advocating solely relying on your cc to be your EF. In my much more conservative opinion, that would be giving too much power to the credit card companies since they can close your account at any time.

My suggestion would be to start out keeping your EF in a high-yielding MMA. Once the balance is built up a bit, you could consider laddering CDs.

Yes. Hence the lines, "However, I also don't carry a balance, and I never charge more than I have in my bank account. So, this method may not be perfect for everyone."

[fruitbowlk]

I keep mine in a high yeild savings account that is connected with a checking account in case of an Emergency I can transfer funds when needed.

[jIM_Ohio]

CDs will work better if rates are dropping. MMA will work better when rates are going up. Over time they will both beat a savings account.

Liquidity is important.

A good way to create an EF is to add a line item in your budget to pay yourself 10% or 15% from each check. Send this money to a different account.

For example, if you sent $600/month (assuming you made $6000/month gross) to an IRA, that IRA would be maxed out in 8 months. The other 4 months let that money go into a CD, MMA or seperate account for emergencies.

[noppenbd]

Originally Posted by scfr

In my much more conservative opinion, that would be giving too much power to the credit card companies since they can close your account at any time.

Not to mention that you can't charge your mortgage to your CC without a cash advance, which can be ridiculously expensive.

[jIM_Ohio]

Back to OP's question- main issue with an EF is that it be in cash based investments which have liquidity.

In some of the specific examples mentioned here (needing a mortgage payment) that transaction has a given date. The other 29 days per month give some flexibility before that date hits.

In other specific examples here (use a cc to cover the expense) that can work on any of the other 29 days of the month too.

The issue is having the cash (assets) to cover both of the above, and to have the assets under YOUR control.

If you use an online MMA, check the transaction fees and compare to the APR on the account. See how reliable the APR is (it will fluctuate, just compare how it fluctuated to similar accounts). If fed drops rates, a MMA will drop the APR soon after (within a day or week).

If you use CDs, check the banks hours. Can you get access to bank 7 days per week? My bank has hours all 7 days. CDs will lock in rates, so if fed drops rates, the CD is paying you the rate which was locked in, not the current rates.

Others might mention using Roth deposits, a HELOC, a credit card, a mattress or something similar.

Weight the pros and cons of each method and emphasize having the assets in your name, with cash you have already made in the account.

I lived for 9 years without an EF and used cc until I saved enough cash to open my EF (and I keep this cash in CDs now). Others here will tell you I lived on the edge. Do what makes sense for you (I maxed out my IRAs and had a high 401k contribution those 9 years, so tell me if I made a bad decision).

[sweeps]

To summarize, it depends on your definition of emergency fund. An EF designed to get you through a natural disaster is different than an EF designed to get you through a job loss which is different than an EF designed to get you through a small problem like an unexpected car repair.

[lehresman]

I keep mine in my ING Direct savings account (www.ingdirect.com). They give very good rates, currently 3% but earlier this year it was over 4%. Let me know if you're interested and I'll refer you. If I refer you and you make an initial deposit of over $200, you'll get $25 and I'll get $10.

[userind]

thanks guys for all the info!!..thats was a real eyeopener

[LuxLiving]

Originally Posted by lehresman

I keep mine in my ING Direct savings account (www.ingdirect.com). They give very good rates, currently 3% but earlier this year it was over 4%. Let me know if you're interested and I'll refer you. If I refer you and you make an initial deposit of over $200, you'll get $25 and I'll get $10.

OR, you could open one w/a referral from SavingAdvice.com and help keep this forum up and running!