Help! My Emergency Fund is Rotting Away

[suzukisan]

My wife and I both work in iffy fields so we feel we need six months of expenses saved in our emergency fund. For us, that comes to $20,000. Here is the problem, that $20,000 has been sitting in our local bank's money market account earning a measly 1%. Even though I realize that we wouldn't need the entire amount at once, instead withdrawing from it (theoretically) over the six months, I'd like to keep it semi-liquid. I am uncomfortable having it in any kind of stock or mutual fund due to low tolerance for risk of loss. (I have 401ks and Roth IRAs to satisfy my itch for risk!)

What, then, should I be doing with our emergency fund to ensure better returns? I've gathered from lurking on this forum that one of the first suggestions would probably be to open an online savings with HSBC Direct or something similar, which I plan to do with at least half of the money. But what else could I do that would give me a decent return on the other half of that money? CDs? Anything else I might be missing here?

Thanks,

[Broken Arrow]

Welcome Suzuki-san. I would not worry about putting all of it in an online account, because if you can find a good one, they can still offer some of the best rates out there. My local credit union is giving me 5%. Very few CDs, money market funds, and bonds can beat that right now.

Edit: I take that back. Might be worth looking into bonds that will protect your money from inflation.

[maat55]

I've got mine in an provident direct account earning 3.5%.

[DebtFreeMe2]

Zions bank online is paying about 3.5% also. I've had them for a year and it's great, write up to 3 checks a month without any fees, unlimited deposits.

Enjoy,

DebtFreeMe2

[ScrimpAndSave]

I love INGDIRECT...but right now it is only at 3%. Works for me because if I need the money, I have it in 2-3 days.

[kork13]

I agree.... as far as ease-of-use, unless you have a local bank/credit union that provides an outstanding return, there are many online savings account options available at no cost, with returns between 2.75% to over 3.5%. I use ING, which for my purposes (holding my EF and keeping it growing), it does great. 3% interest, and online transfers are a breeze.

There's a string somewhere on here that lists all of the current rates for most of the major ones--one of the more forum-savvy posters can probably direct you there.

[mrpaseo]

Ladder system with CDs, you can find them for any amount and any duration on ING Direct. Stagger them so you will have the money every few months or every few years, when they mature roll them over to a longer term CD that will allow you to cash a CD every few months or once a year. Eventually you will have all your CDs earning long term rates that will mature annually.

Just a thought,
Ray

[jIM_Ohio]

I have a 2 layered EF.

Layer 1 is 3 months expenses in 90 day CDs. 3 different CDs, each mature at 30 day intervals. Each maturity has a 10 day look back period, so there is only 20 days where there is a penalty to access this money.

Layer 2 we are currently building- we keep 3 months (or more) expenses in a moderate mutual fund (PRPFX). Purpose here is to grow the money. Fund has not had a down year in 10 years, I believe and should generate 5-6% returns without much issue year over year.

Similar funds to think about would be Wellesley or Spectrum Income (RPSIX). Both are heavy on bonds and do not have negative returns in their past. 5-6% type returns with a 4%+ yield.

In your case, maybe open 7 3k 7 month CDs. There is usually a "sweet spot" on CDs at 7 months where the apr is higher than 6 months, and both the 6 and 7 month CDs should beat the 1% you are earning now.

[Ima saver]

I have most of my cash sitting in c.d.'s earning over 4%. I keep about 100K emergency fund in a local checking that is paying 3.1% I just keep calling the banks to see which will give me the best deal.

[Joan.of.the.Arch]

We transferred the bulk of ours to a local credit union in a checking account that pays 5+% for the time being. You can't get much more liquid than a checking account. I'm also keeping an eye out for alternatives should interest that rate be decreased.