Six Figures Under

Personal Finance Made Public

  • About
    • Our Story of Paying Off Six Figures of Debt
    • We’re Debt Free!
    • Contact
    • Favorites
    • Guest Posting
  • FRUGAL LIVING
    • at HOME
    • FRUGAL FOOD
      • cooking from SCRATCH
      • growing & PRESERVING
      • Grocery Shoppping
      • Food Storage
      • other ways to SAVE on food
      • Quarantine Food Storage Challenge
    • with KIDS
    • SPENDING wisely
    • NO-SPEND month
    • Feats Flops & Funnies
    • ATTITUDE is everything
    • Holidays
  • FINANCES
    • Budgeting
    • Guide to Getting a Month Ahead Financially
    • Our Financial Situation
    • Personal Finance Made PUBLIC
    • Financial Safety Nets Series
  • DEBT
    • Smash Debt GUIDE
    • Getting STARTED
    • MOTIVATION
    • SPECIFIC Situations
    • Debt Smash-athon
    • Staying ON TRACK
    • OUR Repayment Updates
  • EARNING EXTRA
    • Start a BLOG
    • More on BLOGGING
    • Earning on ETSY Series
    • Earn Gift Cards with Swagbucks
    • AIRBNB Hosting
    • OTHER Ways to Earn Extra
  • Shop
You are here: Home / FINANCES & BUDGETING / Where Do You Keep Your Emergency Fund?

Where Do You Keep Your Emergency Fund?

June 4, 2018 by Stephanie 11 Comments

With the rate of inflation more than double the interest rate for our emergency fund, we're actually losing money. Where can you keep your emergency fund so that it's accessible but not shrinking?

We need help with our emergency fund.

Not to reach our goal of $25,000 before the end of the year. I think we’re actually going to be ahead on that (you can see details in our budget report coming Wednesday).

The question is where to put the money.

Right now, our emergency fund earns 1.0% interest in a Capital One savings account. That’s nowhere near the heady days of the 5.5% interest you could earn on a savings account in 2006, or the 10% interest in 1987, but it’s more than the near zero rates we’ve seen since the recession.

The problem is that inflation is about double that–projected at 2.5% in 2018 and 2019. It’s true that our $25,000 will increase one percent over the year to become $25,250. But if everything costs 2.5 percent more, it will cost $25,625 to purchase what is worth $25,000 today. With our interest rate lower than the inflation rate, we’re actually losing $375 of purchasing power.

We’re thinking about putting the emergency fund into a Capital One money market account, which currently earns 1.6% interest. At 1.6% interest, our $25,000 becomes $25,400 in a year, so we’re only down $225 of purchasing power each year. That’s better, but it still means we’d need to contribute about twenty dollars a month to just keep from losing value in our emergency fund.

We could find slightly higher rates at a few banks, but for a minimal rate increase, it might not be worth it. It’s really convenient to have all our savings accounts in one place. It’s also nice that opening the money market account and transferring the money would take two minutes and require no paperwork. We’ve had accounts there for nearly 15 years (starting back when it was ING Direct) and creating accounts and transferring funds has always been a matter of a few clicks.

So, friends, what do you suggest? What’s the best place to put our emergency fund? There are really only two rules. It has to be somewhere we can reach it easily and quickly–you know, in an emergency. It also has to be somewhere safe. If the stock market crashes and the economic stress takes our jobs, we don’t want our emergency money to have been in the stock market, erased with our income stream.

I know, asking for safe money and higher returns at the same time is hard. Maybe 1.6% is the best we can reasonably do. But maybe it’s not.  I suspect we’re not the only ones with this question, so a discussion in the comments could be helpful for pretty much anyone with emergency money set aside somewhere.

What’s your best advice? Where do you keep your emergency money?

Filed Under: FINANCES & BUDGETING, Our Financial Situation

« Money-Saving Kids’ Closet Organization Hack
Transparent Family Budget Update — May 2018 »

Comments

  1. Shake says

    August 16, 2019 at 3:42 am

    Great post and advice….This is always a good reminder on inflation and how to manage the emergency fund….I will be utilizing this guidance going forward in my personal finance situation

    Reply
  2. Cath says

    June 7, 2018 at 7:15 pm

    My/our emergency savings is considerably smaller, but I have it in an 18 month CD ladder at 3 month rungs with Capital One. (our Disneyland savings is with a credit union since they were offering a special 2.2% on 14 months.) It’s unlikely that an emergency would require more than one or two rungs if we needed to break it, and depending on the timing/amounts we could even float it on a credit card until the next one matures. It doesn’t quite keep up with inflation, but it was the closest I could get while also balancing liquidity and safety.

    Reply
    • Mr. SixFiguresUnder says

      June 14, 2018 at 9:49 am

      Thanks Cath. It sounds like you’ve reached a good balance. With at 12-month CD at Capital One currently yielding 2.25%, building a CD ladder there makes a lot of sense. The rates on 6-month, 9-month and 18-month CDs right now are surprisingly low, so we’d add another CD every 3 months and build the ladder over a year.
      It would take a real (and really big) emergency for us to need more than 25% of our emergency fund cash at once, so 3-month rungs are absolutely reasonable. In the unlikely case of a real emergency, the penalty to break out the cash prematurely would be a negligible cost, while the likely interest earned in all those months we don’t have a real emergency would about keep up with inflation.

      Reply
  3. Anon for this says

    June 5, 2018 at 12:23 am

    We try to keep around $20,000 to $30,000 in our savings account, and anything above that we transfer into an assortment of Vanguard ETFs. We diversify in line with our investment profile (we are both fairly comfortable with risk, which helps.) You can find quizzes on-line to help you determine your risk profile; if you aren’t both on the same page then you’ll have to work out a comfortable compromise.

    Don’t be afraid of the stock market. Sure, it goes down, but if you ride it out, it always goes back up. Bonds are very secure, though, if stocks scare you.

    It can take about a week to get funds out of Vanguard. That doesn’t bother us – worst case scenario we can put it on our credit cards. But it may be a consideration for you.

    Reply
    • Mr. SixFiguresUnder says

      June 6, 2018 at 1:52 pm

      Thanks Anon (for this). I’m completely with you on the stock market. Stephanie and I both have Vanguard accounts where we’ve rolled in old 401ks and consolidated our traditional and Roth IRAs. Our long term investment strategy is pretty simple — buy and hold low-cost index funds at Vanguard, and don’t worry about what happens in the short term.

      For the more focused question of our $25,000 emergency fund, we’re looking for something beyond the savings account that at least keeps up with inflation. We appreciate all the comments, both here and in email, with advice.

      I don’t think we’ve ever talked in any detail about investments or net worth on the blog, but we’ll get around to it. Posts on the blog mostly follow our own family finances as Stephanie and I discuss topics that we think might be interesting or useful for folks following along. With student loans repaid and our home on accelerated repayment, investments might be showing up more often.

      Reply
      • anon for this says

        June 6, 2018 at 7:55 pm

        We probably do have too much cash in the bank. We do want to gradually bring it down to around $10,000; but at the moment there are a few things we’re working towards doing, so we want to have easy access to the cash. As for keeping up with inflation, we aren’t really worried about that, because the return on our other investments is well ahead of inflation. The stock market isn’t doing fabulously well these days; but with dividends, we’re still ahead.

        Reply
  4. MH says

    June 4, 2018 at 3:41 pm

    I’d check out your local credit unions. The ones I have looked into (both physical and online) have savings and CD rates that are much better than most banks. We keep some in savings and some in a CD.

    Reply
    • Mr. SixFiguresUnder says

      June 4, 2018 at 6:33 pm

      Thanks MH. I grew up with a credit union account and that was my first thought too. The first place I looked was at our local credit unions. I couldn’t find one that paid over 0.7% for a cash-equivalent account or over 2% for a CD. That’s better than the local banks, but online banks like Capital One and Ally seem to really be pulling ahead on interest rates.

      So far, I think a savings or money market deposit is the best place for some completely liquid cash that we need in a hurry, with a second tier deposited in a higher-earning account to help keep up with or beat inflation. We’ll let you know exactly how we end up splitting the money, where we put it, and why we decided here in the near future.

      Reply
  5. Mike B. says

    June 4, 2018 at 9:13 am

    Keep a lower tier (a few thousand) in a cash equivalent – a savings account (Ally is paying 1.6% last I looked), money market, etc. Put the rest into CDs. You can probably find a decent rate. You’ll be able to access it quickly but pay an early withdrawal penalty, and in the more likely case that you don’t need the second tier you get a better rate.

    Also consider rotating the money into I-Bonds, which pay a real return (inflation plus the stated rate); you can withdraw the money anytime after the first year, so this is something you wouldn’t do all at once.

    Reply
    • Mr. SixFiguresUnder says

      June 4, 2018 at 6:23 pm

      Thanks for taking the time to reply Mike!

      It looks like Ally and Capital One are both paying 1.6% on their respective savings and money market deposit accounts. Ally applies this to every account, and Capital One only to accounts of at least $10,000. Smaller accounts get 0.85%.

      Funny thing though. While Ally and Capital One are showing pretty much equal CD rates, Ally has a balance requirement for the highest rate and Capital One applies the highest rate to any balance. As of today (June 4) these were 2.25% for 12-month CDs, 2.35% for 24-month CDs, until at 60-months Ally pays 2.6% and Capital One pays 2.8%.

      On the other hand, the early withdrawal penalty is tiered at Ally (smaller for shorter term accounts) and fixed at six months of interest at Capital One. If only one bank could agree to be the best at everything, it’d make these decisions really easy.

      I really like the idea of I-Bond. Self-adjusting inflation-protected savings exactly addresses our question in the original post. Right now they’re offering 2.52%, which beats all but the 5-year CD rates at Ally or Capital One. I think we might consider rolling a portion of the emergency cash in over time, since there’s a 12-month period where we couldn’t withdraw at all.

      So look at that! If we go from a full $25,000 at 1.6% (per the original post) and just put $7,500 into a 1.6% cash equivalent account and the remaining $17,500 into a 2.35% 3-year CD, our blended interest rate jumps to 2.125%, which about keeps us up with inflation.

      If the worst thing happens and we have a true emergency before the three years is up, we break the CD open early and pay $206 in early withdrawal penalty. Or we ladder the CDs and get a little lower blended rate and a little more liquidity, and add some cash into I-Bonds to get started with inflation protected savings.

      Not a bad deal at all. Treat yourself to an ice cream sundae, or if you’re in town, I’ll treat you to one.

      Reply
      • Mike B. says

        December 15, 2018 at 11:16 am

        IIRC, you’re down in California, and I don’t get down there too often. (We’re up in Washington.) But if I do, I might take you up on that! Happy to help. 🙂

        Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Search

  • Facebook
  • Instagram
  • Pinterest
  • Twitter
  • YouTube

Our Big Goal

Want to start a money making blog?  You don't need to be a tech wizard!  Here's the step-by-step photo tutorial!  You can do this!

Top Posts

  • 10 Little things you can do to save electricity in the summer
    10 Little things you can do to save electricity in the summer
  • 🥛 7 Smart Ways to Use Almost Expired Milk (Don't throw it out!)
    🥛 7 Smart Ways to Use Almost Expired Milk (Don't throw it out!)
  • My #1 Garage Sale Pet Peeve-- Don't Make This Mistake!
    My #1 Garage Sale Pet Peeve-- Don't Make This Mistake!
  • Homemade Powdered Laundry Detergent with Zote
    Homemade Powdered Laundry Detergent with Zote
  • How to Dehydrate Zucchini and Yellow Squash
    How to Dehydrate Zucchini and Yellow Squash
  • Cost of Setting Up Our Airbnb Rental
    Cost of Setting Up Our Airbnb Rental
  • Thinking Outside the Bolt: How I Get Fabric Free or Cheap
    Thinking Outside the Bolt: How I Get Fabric Free or Cheap
  • 🍅Homemade Tomato Sauce from Tomato Puree 🍅
    🍅Homemade Tomato Sauce from Tomato Puree 🍅

Find it On AMAZON!

Now there is a simple and powerful way to track your blogging income and expenses to know exactly how profitable you are!

READER FAVORITES

Expert Tips to Save Money on Road Trips
How and Why to Live on Last Month's iIncome
Earning on Etsy Series
How to Set Up a Self-Hosted WordPress Blog

Copyright © 2013-2022 Six Figures Under

Privacy Policy · Copyright © 2022 ·Tasteful Theme on Genesis Framework · WordPress · Log in