Aug 1, 2007

Why I Keep My Emergency Fund at the Low-Interest Bank

I know this is a question that's been explored countless times in the personal finance blogosphere, and it appears from my reading of various blogs that the general consensus on where to stash an emergency fund is an online savings account like ING (not an affiliate). I've thought about it. The interest rate is attractive, as is the liquidity of the money. But I hesitate at the thought of giving my private information (and Marc's as well) to yet another institution. And to be honest, I'm still ever so slightly reluctant to trust a purely online account. (Stodgy of me, I know. I freely admit it, but that's how it is.)

Before I go into our other options, let me tell you that I do my "regular" banking at one of the country's largest banks. This bank holds the accounts I use to pay bills, where our direct deposit checks go, and where our emergency funds are currently stashed. The interest rates on savings accounts are extremely low, but I get the convenience of ubiquitous branches and well, I've got a whole system set up for paying bills and I don't have the inclination to change things (for the time being). However, that extremely low interest rate has been bugging me.

So, back to our emergency fund. I've thought about the higher-interest money market fund at our credit union (currently 4%), where we already have a couple of accounts. But since it's not the institution that I do my day-to-day money managing with, transferring money in an emergency could get complicated and most importantly, result in unacceptable delays.

For the last year or so, our emergency fund has been split between a 6-month CD ladder and the money market fund we've always had. I had intended to transfer more of the funds in the money market to the CDs, but I just got uncomfortable tying up our money that way (even though it is more than 6-months' worth of expenses). The lack of liquidity quite simply made me uncomfortable. If the rates had been higher, I would have been more willing to invest in the CDs, but 2.8% always made me feel like the non-liquidity wasn't worth the interest.

So I kept thinking about ING or some other online bank with a high-interest savings account. I looked harder at the options offered by our credit union. I briefly checked out the options at USAA, which holds most of our investments. But I kept coming back to one thing: I handle the money management in our family, but what if something were to happen to me? It became clear that while maximizing our income was important, so was simplicity in the event of an unthinkable emergency.

I did what people have done for eons when torn in two directions: I compromised. We opened a liquid CD account with most of the money in our money market account. As the 6-month CDs mature, I'll roll them over in the liquid CD and six months from now, our entire emergency fund will be in that account and earning a tiered interest rate of 3.1% while giving us greater access to our money in the event of an emergency.


story girl said...

I have to say, I love my ING account but I do totally understand your concern. It is very comforting to have your accounts with one bank so that you know you can get to them quickly.

I would have to say, though, that I would choose the ING account over a CD, as the rate is generally higher and the tie up would be no more than 1-2 days - which is less than it would take to get the money out of a CD, even with penalties.

I know that you know this, but ING is FDIC insured and the fact that it doesn't have bank branches is really not a risk factor

ChiefFamilyOfficer said...

I totally agree with you, in principle it makes so much sense to go with the high interest savings account. My unease with ING has more to do with their being new than anything, though I think I could get over that if it were just me in the equation. But the overall situation I described made me decide to go with the liquid CD.

Anonymous said...

ING is not the only possibility. You could go with a brick and mortar bank with has online savings accounts. For example, both Washington Mutual and Citibank have 4.5%-5% online savings accounts. I don't know about WAMU but for Citibank, I can deposit/withdraw money directly to this savings at any Citibank branch despite the "online" label.

ChiefFamilyOfficer said...

I'll definitely have to look into that. Thanks!

Anonymous said...

3% is not that bad, although below inflation. I think there should definitely a pool of money that is easy to get to regardless of interest rate. I have a little bit of my emergency fund in my local bank... in a real emergency, if the Internet goes down, I can walk in and get my money (though presumably if the bank's mainframe is down, they won't be able to verify my balance and give me my money anyway -- maybe under a mattress is the best place).

Anyway, the rest of my money is at higher-interest online accounts... but having a portion more easily accessible even if it's earning less interest is a good idea. (And in my case, my bank's savings account offers only 0.4% APY.)

ChiefFamilyOfficer said...

Flexo, funny you should mention the money under the mattress. I actually do keep some emergency cash at home in case of disasters (we live in Southern California, after all). I think that if it was just me I had to worry about, I would do exactly what you do and split the money - a smaller amount in the brick and mortar bank where I can walk in, and the bulk of it in an online account with a (significantly) higher interest rate. But I'm trying to keep things relatively simple ...

Anonymous said...

Although my primary bank is the B&M Wachovia that has locations on every street corner in my town, I confess that I plan to keep my emergency fund money in an ING savings account linked to a new ING Electric Orange checking account. The interest rate for balances up to $50k on the checking account is 3.93% (4% APY), which isn't bad at all, and free billpay, paperless electronic checks, and a Mastercard debit card are all included. Transfers between your ING savings and checking accounts are processed immediately with no lag time, and you can access your emergency funds for free without Internet access via any ATM on the Allpoint network (mostly at gas stations and retail stores like Target, Costco, and Walgreens in my area; $1000/day cap on ATM withdrawals) or just pay directly with the debit card.

Anonymous said...

I've looked into CDs in the past and done them before, but even the highest 6- and 12-month rates I can find would only pay me an extra 0.25-0.5% over HSBC or another online bank. That's a $2.50-$5.00 premium per $1000 saved for the privilege of having my money locked up, and it's something that I will gladly give up.

Just hope you don't have to get out of a CD in an emergency, and go through the lost interest penalties- I understand the idea of a CD ladder, but I'm not going to do it until I can get a substantial premium.

My big complaint with HSBC is that it takes me a week (yes, a week!) to move money back and forth to my Bank of America checking account, so each transaction has an implied cost of 1/52 * 5% = roughly $1 per $1000 moved. The way my accounts are set up, I wind up moving money from HSBC savings to BoA checking to pay off my HSBC credit card, so it gets messy... but yeah, otherwise no complaints lol.