Cash Reserves & Emergency Fund Update: June 2012

Our family keeps a full year of expenses put aside in cash reserves, it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.

But that doesn’t mean I shouldn’t still maximize my interest earned, especially as cash is an asset class where doing some research can often increase your return without having to take on additional risk (if you stay FDIC-insured or equivalent). Things are tough these days with such low interest rates, but with low potential returns everywhere, an incremental 0.50% or 1% more can still be significant. Watch out for money market funds paying 0.05% or less. Here’s another update on what’s currently out there, with high-interest checking accounts, US savings bonds, and flexible bank CDs:

Short-Term, Flexible Certificates of Deposit

I don’t know where rates will go, so finding the best combination of high rates now plus flexibility for the future is the goal. Some top rates:

  • TIAA Direct is a new savings account with a rate of 1.25% APY, no guarantee of how long that will last though.
  • Everbank has changed the rate on their Yield Pledge Money Market and Interest Checking account to 1.10% APY guaranteed for the first 6 months for new accounts. Since it is fixed, that is better than any other 6-month CD rate out there.
  • CIT Bank has a 2-year Achiever CD that pays 1.25% APY for a 2-year term with two unique features – both a “rate bump” option if rates rise, and the ability to add more money if rates drop.
  • Ally Bank has a similar Raise Your Rate CD with the rate bump feature; the 2-year term pays 1.05% APY and the 4-year term pays 1.30% APY.

Rewards Checking Accounts

Usually through smaller credit unions with limited membership areas, these checking accounts pay a higher interest rate if you jump through several hoops. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. While I made a lot of interest from these accounts over the past few years, it appears the party is ending as anything above 2% APY won’t last long.

Your best bet is to find a local rewards checking account by using the filters over at DepositAccounts.com. I no longer have any money in any rewards checking account as the benefits are too low for the time and effort of jumping around, especially when I could just do some $500+ credit card bonuses for much more (non-taxable) easy money.

Long-Term, Flexible Certificates of Deposit

Ally Bank LogoIf you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, I think it’s okay to put some of it in longer-term investments. With the Ally Bank certificates of deposit, you can still access your money as long as you pay a early withdrawal penalty of 60 days interest. That’s significantly less than at other banks. I have 5-year CDs paying 3% APY, but the current rate for new deposits is 1.60% APY for a 5-year CD. I’ll show you below why this is still a competitive and flexible rate.

Let’s analyze a CD paying 1.65% APY with an early withdrawal penalty of the last 60 days of interest. Here’s how your actual annualized interest rate would fluctuate given your holding period.

If you hold it a year and withdraw, you are already at 1.38% APY – try to find any similar 12-month term CD that beats those rates. The rate on this CD keeps falling, but if you bought this previously you’re happily locked in at closer to 3% APY.

U.S. Savings Bonds

For inflation-linked Series I Savings Bonds, the total rate earned consists of a fixed rate and a variable rate that adjusts with inflation every 6 months. Series I bonds bought right now will earn 2.21% total for the first six months, and then an unknown rate based on ongoing inflation after that. You must hold them for a year, and if you redeem them within 5 years you lose the last 3-months of interest. Still, the net rate is still better than most competitive CDs, and you get ongoing inflation protection. More info here.

I’ve been very happy with my historical purchases of these bonds. For 2012, the annual purchase limit for electronic U.S. savings bonds bought at TreasuryDirect is now $10,000 per series, per person.

Day-to-day Banking Needs

Since I already have my CDs there, I remain happy with Ally Bank for my daily banking convenience and emergency fund needs. Their Interest Checking currently pays 0.40%-0.75% APY and their Online Savings is at 0.85% APY (as of 11/12/13). I like Ally due to their checking features like no fees, ATM fee rebates everywhere (even at ripoff Las Vegas casinos), and free overdraft transfers from savings. This allows me to keep a minimal balance in checking and more in savings/CDs. Check out my Ally Bank Checking account review for an in-depth rundown.

Comments

  1. brandon says:

    LakeMichiganCredit Union offering 3% rewards checking up to $15,000…easy to apply, for non-Michiganders a $5 donation to Lou Gehrig disease foundation gets you memebership. https://www.lmcu.org/

  2. I disagree with your dismissal of reward checking accounts. I use Lake Michigan Checking Union, which has kept a 3% APY (albeit with a $15k max) since October 2011, a yield that is higher than any of the other options that you’ve mentioned in the article. Whether that yield is worth meeting the monthly requirements is up to you, but it doesn’t sound like you’ve had a problem with that in the past.

  3. Fred Fnord says:

    Likewise, my credit union has a 2.45% interest rate, on a maximum of $25,000, and allows you to have up to three of these accounts per member (and, if you like, I think you can set up a business membership and have another three, if you have a business.) It allows people outside the area to get accounts easily enough. The only significant requirement is ten debit card transactions per month, which is easily-enough met with ten monthly $1 charitable contributions that are pre-scheduled. Admittedly, if you’re not planning on giving ANYTHING to charity this year, that might constitute an unwanted expense, and it does take some work to find charities that are willing to schedule $1/month donations. But I found some that I consider worthy, and I just knock that $120/year off of my normal contributions and I’m done.

  4. https://www.penfed.org/Money-Market-Certificate/

    Term Dividend Rate APY

    3-Year 1.24% 1.25%
    4-Year 1.63% 1.64%
    5-Year 1.88% 1.90%

    If redeemed within 180 days of the issue date or any renewal date, all dividends will be forfeited

    If redeemed thereafter, but before the maturity date, dividends for the most recent 180 days will be forfeited.

  5. @Fred Fnord: What an awesome way to get to the minimum debit card use.

    Could not find the credit union you mentioned. How do non-residents ‘qualify’ to become members?

  6. If you are doing well with rewards checking accounts, then all power to you. Ken at DepositAccounts does a great job tracking them. I jumped around a lot and now the best local checking rate is 1% APY and all the national ones where I jumped on the bandwagon are gone. I hope Lake Michigan Credit Union’s rate lasts a long time, but if it really is nationally-available and will soon be effectively the top rate when CCU drops to 3.09% on $5k, I don’t think it will. Local credit unions with restrictive eligibility are still the better bet in my opinion, I’d love one paying 2.45% on $25k.

  7. Due to the 180-day penalty of PenFed penalty as opposed to 60-day of Ally, you would have to reach 3-years before the 5-year PenFed CD outpaid the 5-year Ally CD. For instance, at 1-year Ally at 1.38 APY, Penfed at 0.94 APY. Penfed 5-yr line added:

    http://cdn.mymoneyblog.com/wordpress/wp-content/uploads/2012/06/penfed190.gif

    From year 1 to year 3, Ally wins by a good margin for most of the time, 3 to year 5, Penfed wins by a small margin, and at full 5-year maturity PenFed will win by a good margin.

  8. I’m with Jonathan on reward checking. It’s getting to be too much of a hassle. I’ve watched my account go down from 5% to 2%. I still use it, but I wouldn’t bother opening a 3%… too much effort when it will likely disappear shortly thereafter. There are easier ways to make/save money.

  9. NewHere says:

    The proptions keeps changes for banks.
    How many accounts everyone has to move money around?

    Or you guys close the Bank accounts as soon as the promotion expires?

    I would be intertested to know..
    Thanks

  10. Fred Fnord says:

    I am hesitant to post details on my credit union… last thing I want is a giant rush of people running them over. However, I will say that it is always worth looking at the list of organizations that allow you access to any given credit union. The credit union I belong to, for example, allows you to join if you are a member of the Audubon Society. There’s another one with quite a nice rate that allows it if you donate to a certain charity in Michigan. (No, it’s not Lake Michigan Credit Union.) And so forth. Always worth a look.

  11. Brandon says:

    3% interest earned risk-free with the hastle of jumping through a few hoops is well worth it to me…my $ is liquid & it’s safe! Jonathan, I’ve been thinking about Prosper or Lending Tree as well, I look forward to you sharing your experience! Oh, and everyone please share where I can earn 3% or more than these silly reward checking accounts? Thanks!

  12. I also went with the Ally 4 year CD. I like how your graph explained that basically after 6 months you are doing better then any on line savings account. Granted that is not saying a lot.

  13. Can you give your formula for making this graph in excel? I’d like to make a new one for the current rate offer.

  14. Very cool blog. 2013 is the year for me to get all my ducks in order regarding finances for an early retirement too. One thing regarding emergency funds – i’ve only done my own research by speaking with people but a common error seems to be that if you need a 12 month fund then it is because you are no longer earning income – and if the reason for that is just unemployment it is easy to calculate, but if the reason is due to an accident or injury then something needs to be factored in for that.

    Too easy to just say current expenses are X multiplied by 12 when your expenses could skyrocket during emergency fund time. Did you factor in something for that or have you considered something like an Aflac etc?

    I’m still wrapping my head around this one so would be keen to hear your thoughts.

    Cheers.

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