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January 07, 2011

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Last year I parked as much emergency money as I could into a guaranteed investment option of the "side fund" of my life insurance. It offers a guaranteed 4 %, it's liquid, and it's tax-deferred. Of course it's not FDIC insured. Also, you can only put in a limited amount ($30-40K) per year.

I really like vanguard short term investment grade.

I also like vanguard welesley income fund. Welesley has some stock mix in there so it is not the type of funds you are looking for.

I dislike CDs. I'd rather have my money tied up in real investments or earn less.
I used to keep a lot of my money in short term investments for emergency but personally I'd rather invest heavier in mutual funds and take the risk of my emergency be when the market is down.
I guess the point in diversification I would sell the winners in my portfolio during an emergency first

My EF is at Ally (opened when rates were much higher.) Thinking about Bank Direct, where you get American Airlines miles based on the balance each month, but I haven't researched fully yet. If an award ticket costs more than the interest I earn in a year at Ally, seems something worth looking into. Anyone have any experience with this?

I get 3.1% for balances up to $25k on my primary checking account. Yes, you have to meet certain requirements, i.e. debit card use, direct deposit. But I know that I would meet the requirements anyways.

Hey FMF - Aren't you too young to be focusing on conservative asset protection like CDs?? Last year was a good year for investing if you took any risk.

I'm using ING Direct. The yield is 1.1% on everything and 1.2% APY on balances ofer $50k which isn't great, but I'm not worried about losing principal. I'd much rather have 1.1% risk free that 1.7% with risk. Especially since we have our emergency fund and down payment money in this fund.

Hmmm, interesting! I've never played around with junk bonds yet! T. Rowe Price High Yield (PRHYX) sounds like it might be fun with a small amount of money in it!

I've been laxed with my cash to date, so it's just been sitting in low interest rate bearing accounts. But this may change soon...

"(symbol VFSTX) should fall only 2% if interest rates rise one percentage point. In the meantime, you get a 1.7% yield."

So let me get this straight you are going to risk 2% to earn 1.7%?

"high-quality debt with short maturities"

Cant disagree with this- the key is short maturities. Just remember auction rate securities were in this category two years ago.

No one is ever too young to focus on capital preservation. Rule #1 is always "dont lose money"

Jbrown- Most emergencies occur when your assets are down. Its rare that you have a financial emergency when the market is at all time highs and liquidity is high.

Alliant Credit Union (have to join a PTA, local school's, state, or national to be a member, but not a hard or costly membership) yielding 1.1% currently.

Ally yielding 1.09% currently.

INGDirect yielding 1.1% currently.

None of these is great, but you can sleep at night! Versus the worry for 1.7% or the hassle of laddering? For an account where the main objectives are Capital Preservation and Access?

The rates are insulting, but you have to stick to the master plan!

I go with the 1.1% at INGDirect. It's simple, easy, and the other options don't seem to be worth the risk or the hassle.

Plus if you open that ING account through costco you get and extra bonus - $50, I think. I, of course, knew about it and forgot to open my account that way.

I don't have an account there, but I believe Lake Michigan Credit Union is (or at least was) paying 4% on balances into the 5 figures ($15,000 if I remember correctly). I don't make enough debit card transactions to qualify, but a family of four might be able to do it - I think the minimum was 10 or 12 debit transactions per month. It's not FDIC insured being a credit union, but I think they have some kind of deposit insurance.

texashaze --

My investments are in stocks or bonds. This is for emergency fund purposes mostly.

I don't know why they even bother mentioning that vanguard short term fund. 1.7% is nothing to brag about or take any extra risk for.


I don't think I'd loan friends or acquaintances money even for 6-10% return. I hope that works out for FMF. But I'd be too worried they'd default and I'd lose my money and it would burn a friendship. If the banks won't loan someone money then thats a good enough reason for me not to risk my cash.

jim --

Just got my first 1/4 back with 7% interest (per year for two years.) Sweet!

I have become the mortgage holder for both my kids. Both they and I are getting a good deal!

DCS- Credit Union deposits are insured by the NCUA up to 250k. The 4% is very high by the way so Id look into it a bit more.

@Rockbell - that is a great strategy. I have a lot of friends from immigrant families and this is such a prevalent practice that it's the norm -- especially my friends from Asia. They never go to a bank. The bank is family and extended family. They pay rates better than the market and without the red tape. There is a very high social pressure on the family name that defaults are rare.

@FMF - this would be an interesting topic for you to explore.

I have my immediate emergency account (the first month of expenses) at Ing where I can get it quickly with my other accounts.

It's not huge, but a slight improvement of rates over that is using GEInterestPlus. It's essentially an investment in GE bonds, so it's not FDIC insured - but at the same time it's pretty safe. It acts like a money market account (check writing, electronic transfers, etc.) but has rates that guarantee to beat regular money market accounts. I keep a few months of expenses here since I haven't figured out a better place that doesn't add a lot more complexity with tracking accounts at more banks, jumping through hoops, and so on.

FMF, how does it work to have your emergency fund loaned to your friend? Or is this not the emergency fund, but rather cash that isn't invested elsewhere?

KMI --

Let's say it's a semi-liguid emergency fund. Though with the return rates, it performs more like a stock.

FMF - Glad to hear you got your payment.

Look into floating rate funds, a.k.a. bank loans. Tons of mutual fund options for this. Typically higher yields paid, short term duration, and not affected hardly as much when Fed eventually starts to raise interest rates.

Jay
@MarketFolly

Don't bet the farm on these but if you have some fun money laying around check out Phillip Morris (MO} and Fidelity New Markets Income (FNMIX). I have had them working for me for many years of good average returns. Nice check every 90 days from MO and monthly from FNMIX in both up and down markets.

If lending money to others appeals to you, you should consider peer lending networks like prosper.

@Jay
A floating rate income fund that I like is SAMBX, its dividend yield over the last 12 months has been 6%.
Its Total return, last 12 months was 9.54%, worst drawdown was -3.38%.
Its Total return, since 5/25/10 was 14.9%, worst drawdown was -0.67%.
Its expense ratio is 0.53% and at Fidelity it has a $75 transaction fee to buy, $0 to sell.
Minimum purchase is $2,500.

An Ultra Short Term Bond fund that I like is MWUSX, its dividend yield over the last 12 months has been 3%.
Its Total return, last 12 months was 9.54%, worst drawdown was -1.93%.
Its Total return, since 5/25/10 was 10.34% APR, worst drawdown was -0.25%.
Its expense ratio is also 0.53% and at Fidelity it has a $75 transaction fee to buy, $0 to sell.
Minimum purchase is $5,000.

@W A G
FNMIX has done well over the last 12 months, its return is very similar to MWUSX, MWLDX, and SAMBX, it is more volatile however and has a worst drawdown of 5.09% as well as a short term redemption fee of 1% for funds held less than 90 days, and an expense ratio of 1.00%.

We pretty much zeroed out our emergency fund last July to pay off our last car loan (our jobs are secure) and have been building it back up in ING at 1.2% right now. We have less than $15,000 (4-5 months of living expenses) so I'm not killing myself to find a better rate yet. I think we may just keep it at or around $15,000 and use any extra to pay off our house faster since that 5.375% seems like a good return right now. If savings rates go back up, we'll start keeping more cash in our emergency fund. :-)

6% in Australian bank accounts

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