Where To Stash Your Rainy Day Fund

Everybody needs emergency cash reserves for the unpleasant day when your expenses unexpectedly exceed your income. By stashing your reserves in the right place, you should ideally be able to fund your life – rent, food, transportation, utilities, and any other fixed expenses – for at least three months. The Washington Post has a few tips to keep inflation from eroding the value of your pot of emergency cash.

The goal is to balance the need for precious liquidity with a need for steady growth. Consider using the following:

  • High Interest Saving Accounts: Our personal favorite, these accounts allow you to keep your money completely liquid while providing a risk-free APY that usually exceeds 4%. The accounts usually limit you to no more than 6 transactions per month.
  • CDs: Higher rates can be found with long-term CDs, but penalty fees can undermine liquidity, which makes them less than ideal for rainy day funds. To get around the limits, you can ladder your CDs so the funds become available at regular, staggered intervals.
  • Money-Market Accounts: Traditional money-market accounts are usually constrained by fees and minimums, but money-market mutual funds can provide a slightly high rate of return for the more adventurous – just watch out for fees.

Where do you stash your reserve cash? Tell us in the comments.

Where to Stash Your Emergency Cash [Washington Post]
(Photo: 4ever30something)

Comments

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  1. calldrdave says:

    I disagree about CDs. The odds should be you won’t use this money. That penalty, which is usually never more than the interest you earned, will serve as a slight deterent to dip into the reserves. If it’s less than 50% likley you’ll need to dip into it, might as well play the odds and get better interest.

    If it’s a non-penalty withdrawl account, then you are very tempted to dip into it. We have a 9-month cd we roll over on a regular basis. We had that problem. Spousal unit would see the statements and think it’s cash to spend.

  2. IRSistherootofallevil says:

    The difference between high yield savings vs. a CD is minimal, usually under .5% so unless your emergency fund consists of $200k in cash there’s not much of an appreciable difference in interest.

  3. catcherintheeye says:

    @IRSistherootofallevil: I agree – at this point in the game, high yield savings is the way to go – very low minimums compared to CDs, and you get to maintain liquidity. The benefit to CDs of course is you are guaranteed an interest rate and you can get a tax break on the early withdrawal penalty, but not enough to offset potential losses from the penalty.

  4. caj11 says:

    Most brokerage houses have some sort of decent yielding money market fund (the one at mine yields 4.78%) where they sweep any excess cash, i.e. dividend payments and equity sales proceeds and you can add to it yourself as well. The fees are low – just a 0.57% expense ratio and although you have to start with a $2500 balance, if you withdraw from the fund and fall below that balance there is no penalty. But then again, this is an emergency fund, so you do want to keep three-to-six months worth of expenses in it, which for most of us would be well more than $2500.

  5. IRSistherootofallevil says:

    Schwab offers 4% interest checking and brokerage account package…unlimited ATM refunds and no minimum balance, sounds good to me. ETrade requires $5k for interest checking.

  6. SOhp101 says:

    CD all the way. Like Calldrdave said, this money should not be used regularly and might as well get as much interest from it as possible. The very small penalty that comes with CDs, if anything, will discourage you from using it for nonessentials. There are also plenty of CDs that last for 6 or even 3 months.

    Re: High interest savings accounts,

    Savings accounts don’t ‘usually’ limit you to 6 transactions/month, it’s an ‘always’ situation. Any more than that and you get hit with a stiff fee.

  7. XTC46 says:

    the limits to 6 transactions are actually imposed federally. The reason has something to do with limiting electronic transactions to prevent fraud or something and because most high yield savings are dealt with online, not in a bank all will have this limit. I remember getting a notice in the mail from my bank because for a few months I would go over that limit. I was doing free lance work and would put half of every check into my savings immediately, but I was getting 10-15 checks a month. Now I just have preset transactions take place a few times a month.

  8. royal84 says:

    I say it definatly depends on what your income level is. These are all great choices. However if your a person like me (full time college student, full time hourly worker) I think the high interest savings account is the way to go. Right now im earning around 4.2% at ING. That being said I dont have enough cash to open a CD yet (usually around a $500 minimum), and definatly not enough for a high interest Money Market account (usually a $2500 min. limit for the lowest rate). Eventually, the plan is to convert funds from the savings into a CD if I can find a rate that is better than what I’m already getting with my ING Savings acct. In fact my ING account earns a better rate than all of our CD rates at the bank I work for. E-Banking…the way of the future I’m guessing.

  9. velocipenguin says:

    Interesting article, but I have to disagree with this part:
    “You might as well throw cable into the calculation and the average amount you spend eating out or for entertainment.”

    Only an idiot would waste money on frivolities like cable TV and restaurant meals during a financial crisis. If you can still afford to squander cash that way, it’s not an emergency.

  10. BigNutty says:

    I understand this article is about maintaining value of your emergency cash (we have both CD’s and a savings account) but doesn’t anybody keep any emergency cash at home in a fire proof safe anymore?

    Who can predict what a future emergency might be?

  11. spinachdip says:

    @velocipenguin: With early termination fees, cancelling cable during a financial emergency might not be a realistic option, especially if the emergency is only short-term and the ETF is higher than the billed amount during that period. Plus, if you have a bundled service with phone and internet, the communication services could be essential for, say, a second job or job hunting.

    Agreed on other non-subscription entertainment costs though.

  12. spinachdip says:

    BTW, just last week, I was contemplating picking between a high-yield savings account and CD.

    I ended up going with the ING Direct Orange savings account. Like others said, the liquidity outweighted the marginal difference in interest rate.

    While I can understand how an easily accessible fund might be tempting, for me, the extra step of going online to move the money and the waiting period (not to mention the guilt) would be enough of a deterrent against impulse savings-raiding.

  13. Trackback says:

    Last week I wrote about how our local Urgent Care sent us to collections for a medical bill that wasn’t actually overdue. And then Friday night I slipped while helping set up some stuff for a school function and sliced my knee open on a metal grate.

  14. ANon55 says:

    Keep $1000 in $20 bills stashed somewhere safe in your home. In case of catastrophe (earthquake, hurricane, flu pandemic) you may not be able to get cash out of any bank. You may need ready cash for food, gas, lodging as you get out of town.

  15. Earth-Byte.com says:

    I use an ING account because they are easy to use, have a decent interest (enough to not make me want to switch around everytime another online bank raises their rates), and it’s so easy to create additional accounts to categorize my money.

    I also recommend stashing a small amount of cash somewhere in the house or near it though, just as a last precaution.

  16. jakesprincess says:

    @BigNutty:
    I do! I keep one month’s worth of expenses in our safe. You just never know when financial systems might fail and you won’t be able to access your funds.

  17. anatak says:

    Part of the benefit of having an emergency fund is the piece of mind from knowing its there when you need it. I would never dream of putting even part of my emergency fund into CDs.

    This is not an investment.

    Again, this is not an investment.

    A rate of return matching or just above taxes and inflation (~4%) will do just fine. You want to put savings above and beyond the emergency fund into CDs? go for it. Maybe you’d like to replace your car in 2 years. A CD is a fine place to park that money and add to it when each term is up.

    But for an emergency fund? For a God-only-knows fund that you should plan to need, which is why you have it in the first place? A small percentage in a traditional savings account for quick access and the majority in an MMA. This doesn’t have to be complicated.

  18. savvy9999 says:

    @jakesprincess: and a little bit o’ the silver and gold (in small coins/bullion). Shiny trinkets also work well in a truly dire barter situation.

  19. Shadowman615 says:

    CDs? I prefer to invest in MP3s these days. You guys really need to get with the times!

  20. wHATEver says:

    @IRSistherootofallevil: I agree on Schwab — I have money split between a Schwab Investment Checking account (4.00% interest) and a Emigrant Direct Savings account (currently 4.75% interest). The Schwab account lets me write checks and even do ATM and debit card transactions in real-time while the slightly-higher rate Emigrant account gets me a little better interest longer-term.

    The only downside to the Schwab account is that they are not guaranteeing this rate for “low-balance” accounts indefinitely. But, they haven’t indicated that they’re going to yank it away either. So as long as they’re giving this to me, I’ll take it.

  21. spookyooky says:

    Unfortunatley the hard part is coming up with the emergency fund in the first place, where to stash it– bank, online, sewn into mattress, becomes the secondary problem for most people.

    Also, if there is ever such a big emergency where the banking system collapses and we are forced to go to gold coins and barter maybe the best investment for your emergency money might be a few rifles, shotguns, and ammo.

  22. O RLY? says:

    and canned food!

  23. iaintgoingthere says:

    @Shadowman615: My kind of humor. NICE ONE.