$10,000 Emergency Fund - Just let it sit in the bank?

So I have my $10,000 emergency fund now, which should be sufficient to cover 7 months of expenses should I lose my job. Should I just let it sit in the bank or put it somewhere else? I have an ING savings account earning 1.3%. Also, I should just let the interest accrue in the account?

Yes.

I actually just moved all my cash into a regular savings account upon realizing that the current yield on my money market had fallen to 0.18%, below the 0.80% yield on my FDIC-insured account.

Don't go out taking more risk with your emergency fund to get another 1% return. You could find yourself getting burned. That is essentially what happened to a whole bunch of people in 2008 who kept buying more and more risky assets because they were no longer satisfied with the return on T-bills.

And remember, inflation is still negative... -1.29% in September. The real return on your savings account is ~2.6%.

Speaking of inflation, it's important to let the interest continue to accrue. Otherwise, 20 years from now, you'll find that your $10,000 no longer covers 7 months of expenses.

Tim

Thanks Tim, I was just making sure there wasn't another option I wasn't aware of that is safe, liquid, and has a higher return.

Personally I think it makes sense to divide your EF into parts with varying risk. Chances are that you don't need the whole $10,000 at once for the "typical" emergency. So it might make sense for you to put $5,000 into a high yield savings account and the other $5,000 into tax free municipal bonds (for example Vanguard's VWAHX). It's as liquid as a savings account and currently pays federal tax free 4%. Of course, there's the risk of losing part of your principal. So IF another 2008 financial crisis comes along and IF you suddenly need the money at that particular time, you might discover that your $5,000 shrank down to $4,000. Of course, you will have to decide for yourself how big of a risk this is and if you're willing to take it. It might help to think about different scenarios. For example, you total your car and need a new one, could you replace it for $5,000? If you lose your job, will you get unemployment benefits? I wouldn't recommend the above tactic at all if you're self-employed and your monthly income varies a lot for example.

My feeling is that an emergency fund is just that: the amount of money you're likely to need for an emergency. If you don't think you'll ever need $10,000 in an emergency, then you don't need a $10,000 emergency fund. But if, for example, you want to keep food on the table a roof over your head for several months if you lose your job, $10,000 is probably going to come in very handy. So I wouldn't gamble with that money or lose its liquidity just to gain a few bucks in interest or investment income. You want all that money available whenever you need it. So I'd keep it in ING or another "high interest" savings account, and let it grow with interest.

ING is a good place for it. It safely stored and at the same time a bit of a hassle to get. This way you won't be spending it if it was sitting in your checking account and at the same time is safe and sound.

Good job on putting those money aside.

In my opinion , an emergency fund is not something you divide up and parcel into risk diversification. It is your parachute. Throw it in a liquid account and leave it be.

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I agree - your emergency fund should be kept very acessible

We keep about 2/3 of our emergency fund totally liquid (ING savings account) and the rest in a CD ladder (also at ING). Each CD in our CD ladder is earning between 2-3.5% which gives us a little more interest but since it is a ladder, every other month one of our CD comes up for renewal. We sweep the interest we earn on our CDs into our ING savings account and renew each CD assuming we don't need the funds, if we needed the funds we would not roll over the CD. And if we really got into a bind we could cash out the CD and take a penalty, three months interest.

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I've also heard of people using a CD ladder and having it set up so that 1 month of expenses come up for renewal every month. I still think this is not liquid enough and like the previous poster's method of keeping 2/3rd in a savings account. This would better cover you for sudden large emergencies as well.

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I think that your emergency fund should be accessible and secure, but there should be some pain in getting to it so that you don't use it for things that really aren't emergencies. A CD with a 3-month interest penalty for early withdrawal (probably at most a $10-$15 fee at current rates) seems to be the best combination of safety/security/accessibility while not being too tempting to reach for to make a big discretionary purchase.

I think taz makes a good point about creating a barrier to withdrawal in case you are the type to be tempted. Becaause Murphy's Law says that you will get laid off unexpectedly 3 days after you spend your emergency fund for a wild weekend in Vegas.

You want it to be relatively liquid and easy to get at otherwise. If you had a year EF I might go with laddering in 3, 6, 9, and 12 month CDs or T-Bill maturities just to avoid missing out on return. But at current rates it's not worth the hassle. Go with a regular savings account or a money market account unless you need the spending insurance offered by a CD.

I hate to say it but at current rates a stack of $100 bills in a safe deposit box may not be such a bad thing. Even under the matress works if you have good fire insurance. (kidding about the last part)

My credit union offers a checking account with 4.01% APR. So I dumped my EFund there are keep it separate in a paper ruler. (I should prob make a backup!)

Check out http://www.sacfcu.com

Ian

Just having our emergency fund at ING makes it painful enough that I rarely transfer out money, that 3 day wait period for a transfer is enough to give me pause (I do keep $1000 in our Wachovia savings account as immediate e/r fund).

Mr. Sam is always asking why we can't transfer some of that money out Laughing

which is why he has no access to it (in a real emergency, all of the account numbers and pass codes are in our safe).

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Sam

http://adventures-of-sam.blogspot.com
(Follow Sam's financial and real estate adventures.)

Sam wrote:

We keep about 2/3 of our emergency fund totally liquid (ING savings account) and the rest in a CD ladder (also at ING). Each CD in our CD ladder is earning between 2-3.5% which gives us a little more interest but since it is a ladder, every other month one of our CD comes up for renewal. We sweep the interest we earn on our CDs into our ING savings account and renew each CD assuming we don't need the funds, if we needed the funds we would not roll over the CD. And if we really got into a bind we could cash out the CD and take a penalty, three months interest.

I do something like this also.

If you lose your job; you won't need all 7 months (or whatever) of expensive on zero day of unemployment. Also if you do happened to need the "lump sum" at one time, then taking a small hit on the CDs is probably the least of your worries.