E-Fund in CD a Good Idea?

[LizfromtheBronx]

I currently have no EF, and it's driving me nuts. I should be receiving a total of around $2500 back as a tax refund. Of that $2500, I plan on taking $1k to create a starter EF. I've tried this before, but the money was just too accessible to me.

What are your thoughts on putting this $1k into a CD? Right now, GE Capital has a 1% APY CD, min opening balance is $500, and early withdrawal penalty is 90 days of interest.

I also plan on using $500 of the refund as a checking account "buffer amount", which in a sense will operate as the first line EF - it would have to be a true emergency to tap into the $1k. The money is still accessible if I truly need it, but having consequences for withdrawal (other than the obvious one of using money that is for emergencies and then not having any of it left ) might act as a deterrent.

Does this seem like a good place to try to "hide" it from myself?

Just for the record, I definitely plan on adding more to this EF - still trying to work up the nerve to post a budget, but I have a lot more spending tracking to do before I can do so.

[TheKayla]

That makes very little sense to do so. I used to have the same problem of tapping into what savings I could scrape up, but setting yourself up for a disaster of fees and whatever else if you do need to use it is not the answer. Changing the habit of dipping into it is the answer, and resolving the problem at its core.

I'd build up a bigger cash buffer first, that may help to better manage your budget for the not-so-regular expenses and small unexpected expenses. Also make sure your budget is reasonable: budget for irregular expenses, budget within reason, and give yourself some wiggle room for mistakes or misinterpretation of costs. If it is in order, and you're still dipping into you e-fund, you have a spending problem -- plain and simple.

Once your spending/budget is in line, feel free to put it somewhere that will be difficult to get a hold of. While I have about $1000 sitting in my bank account that is 100% easily to access that day, I also have started keeping a bit in a SmartyPig account. It takes a few days to close so I don't have the rush of 'immediate money.' Plus, because it's goal-inspired, it makes it that much harder to close a goal before it's finished, especially for something that is truly not an emergency.

[LizfromtheBronx]

Thanks for the response, Kayla...I recognize that 90% of the EF issue is behavioral, and that's something I'm working on (and not quite ready to go into here)...but for right now, I just need to make sure I get this $1k out of my clutches, but still have it accessible enough to tap if necessary (also recognizing that I need to much more clearly define the line between necessary and "want").

I do have to do more research into it, but my understanding of the penalty is that I don't lose any of my own money, just that I will forfeit some of the interest. If I'm having an emergency, I don't know that the $10 I will earn on this in a year will be make or break.

I guess my question was less about whether or not I should put this somewhere more inaccessible than my day-to-day bank accounts, but rather since I feel this is something that would help me, if a CD was a good answer.

[kork13]

CD's can be a great choice for an emergency fund. Typically, you want to set it up as a CD ladder, where you have multiple CDs that mature every [defined period -- every month, quarter, 6 months, year, whatever]. Would you be able to devote more of your refund to your starter EF? If you use $2k of it, you could open 4 $500 CDs: a 3-month CD, 6-mo CD, 9-mo CD, and 1-yr CD. This would still lock away & protect your EF, but it would be more available to you if you truly needed it. As each of the shorter CD's matures, you could roll it into a 1-yr CD, and just let it keep going. That way, if a true need arises, you've got a CD maturing every 3 months, or if you have to break one early, you will lose less of your earned interest. Another option (if you can't make a $2k EF work right now) would be to use just 2 $500 CDs, starting with a 6-month CD & a 1-year CD, again rolling them into 1-yr CDs as they mature.

With all of that said... I won't belabor the habits/behavioral aspect of the problem you're describing -- you seem fully aware of that, so I'll let it be. I will caution you, however, that although using CD's will effectively keep this money "locked away" from you, you can effectively cancel that benefit if you are too willing to bust into your EF at a moment's notice. Alternately, you might find yourself driven to using credit cards you can't immediately pay off, which would be even worse than spending the EF. If any of that is your tendency, I think you would be better served to simply get a regular savings account at either an online bank (totally separate from wherever you currently hold your accounts), or a at local brick-and-mortar bank/credit union without online or ATM access (and again, not the same place you currently have your accounts). This way it's physically & mentally separated from your monthly cashflow, but it's still more available to you (and without penalty) if something truly arises & you need access to this money.

[feh]

Some people have tiers to their EF...some money easily and quickly accessible, and some money earning a higher rate that's harder to get to. This strategy assumes that you'll have more frequent needs for some immediate cash, and only occasional (hopefully never) occasions where you'll need several months of living expenses.

In that sense, CDs can be part of an EF, but they should not be the first tier. I agree with the others - address the issue of spending your EF when it's not necessary.

[LizfromtheBronx]

If any of that is your tendency, I think you would be better served to simply get a regular savings account at either an online bank (totally separate from wherever you currently hold your accounts), or a at local brick-and-mortar bank/credit union without online or ATM access (and again, not the same place you currently have your accounts). This way it's physically & mentally separated from your monthly cashflow, but it's still more available to you (and without penalty) if something truly arises & you need access to this money.

This is something I am looking into...I live in NYC, so while we do have local banks, it tends to be a little bit overwhelming. There's a bank that only has a few branches, and one of them happens to be in my mom's neighborhood, so easy to get to if need be. Never thought of just not setting up the online access. I may go this route, depending on their rates.

Thanks for all of the input.

BTW, I don't think I'll be able to stretch the starter EF to $2k, but may be able to do $1500. (Including the $500 that's staying in my checking as a buffer, this I suppose technically puts it at $2k).

[snafu]

Sorry, I have so many questions...Do you need a $ 500. buffer in your checking account because you are being charged overdrawn or NSF costs? What is your criteria for an emergency? How would you use a $ 1K EF fund and what sum would you commit each pay to add to it? I can't see the point of all the paper work for a CD for such a paltry rate of return. Since there would be no real penalty, for cashing out a CD why wouldn't you use it to reward yourself after a difficult day?

I suggest you request your income tax with hold be adjusted so that you get your money rather than give the government a free loan to spend your money. I'm guessing that you have not yet worked out a budget that covers your needs and reflects your spending. It's really the baby step that put you in control of your money. Wishing you well and believe 2014 can be your year for successfully working through and solving your financial issues.

[LizfromtheBronx]

Sorry, I have so many questions...Do you need a $ 500. buffer in your checking account because you are being charged overdrawn or NSF costs? What is your criteria for an emergency? How would you use a $ 1K EF fund and what sum would you commit each pay to add to it? I can't see the point of all the paper work for a CD for such a paltry rate of return. Since there would be no real penalty, for cashing out a CD why wouldn't you use it to reward yourself after a difficult day?

I suggest you request your income tax with hold be adjusted so that you get your money rather than give the government a free loan to spend your money. I'm guessing that you have not yet worked out a budget that covers your needs and reflects your spending. It's really the baby step that put you in control of your money. Wishing you well and believe 2014 can be your year for successfully working through and solving your financial issues.

Hi snafu...thanks for your questions and response. I decided to put the buffer into place because while I am not often charged NSF fees, the balance gets uncomfortably low at times. The $500 is a cushion to get me through to the next paycheck, and have some peace of mind. This will be less of an issue once my budget is better developed, which is a work in progress.

It's hard to say what my criteria for an emergency is....the only other time I've had a real EF, it was while I wasn't working, so I ended up using to pay bills. I'm working now, and making decent money, so it'd have to be something a little more dire. The only thing I can honestly think of at the moment is if I had to move suddenly, and needed to pay for moving expenses. Other than that - don't own a car or house (so no repairs on either would be an issue)...family is all local (so no unexpected flights to deal with death or illness)...job is as secure as jobs in NYC are (well, except for city workers, but let's not get political)... can't say as of yet how much I can commit to building it up per check, as that's again part of the budget development. Because of my situation, I don't think it would get very high, as there are other things I'd like to save for as well...so that's all being pondered.

I know the prevailing thought around here is to adjust withholding so you don't get a refund during tax time, but for many years, I had a second job which did not tax my wages, so I needed to make sure the first job tax withholding covered the second job's taxes as well. I left that job in December, and am hoping to find another second job soon, so I am hesitant to make the change until I know what the tax situation will be at any new job. I also don't mind lending the government my money all year...getting a refund is always exciting, even though it's my own money.