Where should I keep my EF?

[ESMonitor]

This question may be redundant as I'm sure it's been asked before on this forum.

I heard Dave Ramsey say he keeps his cash in a liguid money market account, I would imagine to hedge against inflation. He can get to it if he needs it without a penalty, he said.

I have my EF in a bank savings account...looking for more feasible alternatives.

Ideas?


Thanks,
ES

[disneysteve]

I heard Dave Ramsey say he keeps his cash in a liguid money market account, I would imagine to hedge against inflation.

A money market is not a hedge against inflation. The best ones out there earn less than 1% interest, but they are safe. That's what you want for your EF - safety. You don't want to take risk with that money and you want it to be accessible. That's why Dave Ramsey recommends it.

[ESMonitor]

Where should I put my savings account money where it is liquid, gets a better return than my savings account, and I can get to it without a penalty? Does Vanguard offer anything?

[bUU]

Half of the dirty little secret is that an EF in a deposit account loses money against inflation, these days, and therefore isn't "safe" in all the ways an EF ideally should be kept safe. The presumption is that you will continue to add to your EF from earned income, both to account for changes in your spending habits and to account for inflation. If you're having trouble making ends meet, you'll probably not do the latter, leaving you, as one of those most vulnerable to an emergency situation, more exposed.

The rest of the dirty little secret is that there is no good alternative. There is absolutely no means, whatsoever, to truly safeguard an EF from all of the myriad risks that are out there: All you can do is pick which risk you want to incur. In the default case, that risk is inflation risk, as outlined above. Most of us suffer through that. It is probably a lower risk than most, if not all, others.

[disneysteve]

Half of the dirty little secret is that an EF in a deposit account loses money against inflation.

I don't think this is a secret at all. While I consider inflation in my retirement planning, there is no need to consider it in my EF. With my EF, I know exactly what dollar amount I'm looking to cover. If 6 months of expenses is $15,000, then I want to have $15,000 in my EF. It doesn't matter if inflation is 0.5%, 3%, or 5%, as long as I keep $15,000 in reserve I'll be fine. If my expenses rise, then my EF needs to be beefed up to match.

[scfr]

ESMonitor - What is the purpose of your Emergency Fund?

Do you use it to pay the irregular expenses that we all have to pay from time to time (car or house repair, medical/dental/vision/vet bills, unexpected trip to go to a funeral, etc)? If that's the case, then I recommend keeping it in a money market or savings account where it's easily accessible even though current interest rates stink.

Or, do you already have funds set aside so you can absorb your irregular expenses in your regular budget, and your EF is for true "the-world-may-not-be-ending-but-its-close" scenarios like long-term unemployment, natural disaster, etc? If that's the case, then think about a 5-year CD where you can earn around 2%. 2% still isn't great but it's much better than what MMAs and savings accounts are paying. When I first started to build my savings, I used CDs. CDs have the double advantage of being there when you really, really need them (you won't starve as long as you have money in a CD), but you will pay a penalty for cashing them in before their maturity date. The penalty serves as a psychological deterrent to prevent you from cashing them in for anything but a true emergency.

You can poke around on one of my favorite web sites to look for the best rates in your area, both on savings/MMAs and CDs: http://www.depositaccounts.com/blog/

One thing you can do to make the lower interest rates that banks pay less painful is to work the bank promotions. Cash bonuses are often worth much more than higher interest rates. This involves keeping track of the "rules" of the promotions to make sure you meet them, and moving your money to a new bank from time to time. Some people think it's not worth the time and hassle, but I couldn't disagree more. I've done it for years and it's been well worth my time. The promo I'm currently working is BBVA Compass' Build My Savings: http://www.bbvacompass.com/buildmysavings/ You can look for promotions on the web site I mentioned above, your local paper, by contacting branches in your area to ask if they have any promos, or of course by reading the Saving Advice forums and blogs. Several bloggers recently participated in Capital One 360's Financial Independence Days Sale for bonuses (unfortunately that one ended July 3rd).

P.S. For what it's worth, I'm of the school of thought that EFs should be reserved for the latter scenarios (true dire emergencies), but I also know that when people are starting out on the road to financial independence, they may need to dip in to their EF for irregular expenses. It takes time to build up both "irregular expenses funds" and an "EF" and if those funds are co-mingled when someone is first starting to save it's understandable.

[ESMonitor]

@ scfr

Thank your for your advice and counsel. EF savings is at $18.5 K and growing. I have no debts, live in an apt, truck is paid for. I project it should be between $50 - $60K in 3 years. I plan to stay put in apt until we have restored leadership in WH, that is the new target date for move out into buying a house, next pres election.

The $ I don't touch it, but it is there if I need it for irregular expenses or for an emergency. As it grows larger, let's say 20K, I would be willing to put $10K into something like a CD and let the residual 10K continue to grow up in cash balance. That certainly is something to think about. I will also need to know how much the penalty is for it for an early withdrawl. I'm not sure about a 5 year CD but a 3 year CD would be ideal for my goal.

[scfr]

I will also need to know how much the penalty is for it for an early withdrawl.

The most common scenario is losing 3 months worth of interest, but every CD is different.

Keep up the good work. It feels good knowing that you have financial shock absorbers in place that help you handle the bumps in the road, doesn't it?

[ESMonitor]

Ok. Can I add to the balance of the CD in increments as time passes?

Yes, it is nice peace of mind. Right now the cash savings is just a pool of $. It is certainly an EF, but in addition to that it is growing into a 20% down payment for house and automobile replacement...so it's easy to see how I will be in this apt for a while yet.

I'm about to get really, really good at cooking.

[scfr]

Ok. Can I add to the balance of the CD in increments as time passes?

Every CD is different. Usually the answer to your question is "no" but in very rare cases you may find a CD that you can add to.

[amarowsky]

Would it be safe to say if your choosing CD's as your plan of savings for your EF, then to keep them as "liquid" as possible would be to Stagger them and purchase them in smaller increments. So if necessary you will have a decent amount maturing as/if needed.

[bUU]

Shorter durations basically turn CDs from "preservation" to "losing money against inflation"

[snafu]

It is very common to buy 'laddered' CDs. The sums can be what you designate like $ 1.K each or $5.K each or more. As you buy them the cash-out date changes like August 1, Sept. 1 etc or quarterly March 30, June30, Sept.30, Dec. 30. As each CD matures you have the option of renewing at the newer rate or making whatever changes you wish.

Personally, I've made different choices. I've maintained $1. K minimum balance in chequing mostly to facilitate free, unlimited services in that day-to-day a/c. I sweep any sum left over in chequing to a linked savings a/c that I can access from any ATM machine anywhere in the world that has ATM machines. Having once been evacuated on minimal notice, I discovered it's imperative to have ready cash instantly as ATM machines & CCs quickly run out or shut down due to power shut offs. We keep $ 200. in small bills in our small home safe.

Our emergency fund for catastrophic events is the sum needed for 6 months of basic expenses and held in an inexpensive Index Fund. It can be cashed out in two business days. Right now it has a higher than reasonable returns and I'm planning to cash in the 2013 Jan. - June 30th *profit* and will stream it into regular investment program. After seeing so many weather anomalies I've updated our ICE [In Case of Emergency] bin, back packs and binder.