Tough Financial Choices, Part 4: Where to Save Emergency Cash

Here's the next post from a Kiplinger's series about making tough financial choices:

Here's the question this time:

Should I save my emergency cash in a bank account, CD, money-market fund or under my mattress?

I know one of the choices is not a great option. They mention it right away:

Nix the mattress. The rule of thumb is to save three to six months' worth of living expenses in case of a financial emergency, such as job loss or unexpected medical bills. You'll want to put the money someplace safe and accessible, but you don't want it to sit in a standard bank account earning next to nothing. Go with a high-yielding money-market account, such as Emigrant Direct (currently yielding 3.5%) or ING Direct (3.3%). These FDIC-insured offerings link to your checking account at your bank, and you simply transfer the money online. Transfers take between two to four business days to clear.

You can probably do without a traditional money-market mutual fund. Some of the highest-yielding money market funds currently yield less than 2%. And although they are generally considered safe investments, your money is not insured. However, a money-market fund with check-writing privileges allows you to write a draft any time without waiting for an online money transfer to go through.

CDs are safe, and they earn good yields, but they don't satisfy the accessibility requirement. Your money is tied up for the term of the CD, and you'll have to pay a penalty to cash out early. By definition, an emergency is something you do not anticipate, so it's best to keep your money unshackled.

This is on my financial to-do list. I currently have my money in a money market, but need to look at moving some of it to ING or Emigrant. Some will need to stay in the money market for easy shifting in case I need to make some investment purchases quickly (though I can probably do what I want by linking ING to the account).

Click here to read part 5 of this series.

Comments

[Duane Gran]

I've heard of some people establishing a rotation of CDs in such a way that some portion of their emergency savings would be available every few months. This may be useful in the case of a job loss, but it wouldn't be ideal in the case of an immediate and large expense.

[Katama]

With 4% available from Emigrant, why even consider a CD? At current rates, you'd have to tie up your money for over 1.5 years before you could substantially best that rate. Besides, any small interest rate gain from CDs is more than made up in my view by the convenience of near-instant access to your funds in one of these online accounts.