Like many of you, I am a big fan of having a sizable cash reserves. Having at least six months of expenses provides financial stability, helps you avoid debt with high interest payments, and lowers stress levels. In addition, cash is an asset class where you can increase your return without having to take on additional risk (stay FDIC-insured or equivalent). Even though interest rates are low, consistently earning 1% more over time can be significant. I last shared my emergency fund breakdown in January, so here is a 2nd quarter update. The size of the circles are proportional to the balance I hold in each account.
Rewards Checking Accounts
Usually through smaller credit unions with limited membership areas, these checking accounts pay a higher interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. More details here.
Many now seem to be struggling and lowering rates, but one nationally-open example is the Free Rewards Checking at DanversBank, which amazingly is still paying 3.01% APY on balances up to $25,000, provided you satisfy the following each month.
* perform at least 12 debit card transactions (excluding ATMs);
* receive their monthly statement electronically and log into Online Banking
* sign up for direct deposit or receive a recurring ACH transfer
Find a local rewards checking account by using the filters at the DepositAccounts database. I recently moved my money out of my local account, as they dropped their interest rate to 1%.
Long-Term CDs – Ally Bank
If 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 1.54% APY for a 5-year CD (as of 4/17/13). I’ll show you below why this is both a competitive and flexible rate.
Let’s analyze a CD paying 2.40% APY with an early withdrawal penalty of the last 60 days of interest. (2.40% APY ~= 2.37% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.
After just 6 months, you’ll already be earning 1.59% even after the penalty. If you hold it a year and withdraw, you are already at 2% APY. Try to find any similar term CD that beats those rates. Basically after just 6 months I have nothing to lose and a lot to gain, so I keep a sizable chunk here.
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. The new inflation rate officially announced in May is 4.60%. If you bought a bond now, you’d get a 0% fixed rate and 4.60% inflation rate, you would have an opportunity to earn at least 2% over the next 11-14 months. Details here.
My patience with my older I-Bonds is paying off, as some of them have a higher fixed rate of about 1%. Currently, I am only earning 0.94% to 1.94% for six months, but soon I’ll be earning 4.6-5.6% for the next six months. There is an annual purchase limit of $5,000 in paper bonds and $5,000 in online bonds per Social Security Number. For a couple, that’s $20,000 per year.
Online Checking and Savings Accounts
Each day there are more online banks competing with online checking and savings accounts. Last time, I was putting the remainder of my funds at SmartyPig, an online piggy bank that with some tricks could be used an a savings account. They still offer a competitive 1.35% APY, but I discovered that they don’t let you withdraw money when there are “pending” transfers for a few business days, and if you have a regular transfer something always seems to be pending. They are still good for savings goals, but not as much if you want to make regular withdrawals.
Since I already have my CDs there, I’m trying out 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 0.84% APY (as of 3/11/13). Most other online banks are clustered around 1% APY as well, and I am only going with Ally due to their checking features like no fees, fee rebates for an ATM, 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.
Alternatively, SalemFiveDirect is was guaranteeing 1.25% APY until April 2012. Everbank has their Yield Pledge Money Market paying 1.26% APY for the first 3 months for new accounts. Alliant CU also offers a good checking account solution at 1.10% APY, though their ATM rebates are more limited.