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?