Cash Reserves & Emergency Fund Update: Q2 2011

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

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 (as of 10/25/13). 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 0.85% APY (as of 11/12/13). 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 1.10% APY for the first 6 months for new accounts. Alliant CU also offers a good checking account solution at 1.10% APY, though their ATM rebates are more limited.


  1. Great tips as usual. I need to put more of my cash into CDs to get some more interest growing. I have too much idly sitting in non-interest checking and Zecco.

  2. hawks5999 says:

    Another good checking option (I treat it as savings) is Liberty National Bank in Oklahoma ( They are a Kasasa bank that offer 4.11 up to $10,000 with 12 debits, 1 ACH and e-statements. A couple could each setup an account and then use a third party *cough*amazonpayments*cough* to perform all the debits and ACH activities in about 30 minutes/month. Sure, money for no time is great, but getting $65+ for half an hour of work is a decent wage.

  3. For those in WA state, BECU(Boeing Employee Credit Union) offers 6% on the first $500 in your account. All you need to do is sign up for online banking and billpay(which you don’t have to actually use). I set up a savings and checking account for myself and my wife and early savings accounts for my 3 kids, for a total of $3500 @ 6%. It drops to .25% after the first $500.

  4. Russ – I am taking advantage of the same thing. In fact the deal is even better, you get 6.17% on both Checking AND Savings (so 6.17% on up to $1000) if you have “Member Advantage”.

  5. Everbank also has interesting CDs in international currencies paying higher yields. Check out the basket CDs.

  6. 1) Is there an easy automated way to carry out the 12 debit card transactions/month?

    2) For the Series I savings bond; how do you determine what is a good time to redeem them based on the prevailing interest rate? Or do you hold them for approx 30 years as part of your “bond” portfolio?

  7. Do you think it’s worth it to complicate things by having so many different accounts for cash reserves/emergency funds just to earn that extra few dollars in interest?

    I’m still debating whether to do something similar. Right now I just have Ally for checking/savings and I’m thinking about opening a CD. But that’s all I have right now – nice and simple and all in one bank.

    p.s. I have another account at a credit union where I receive DD’s.

  8. @Jdo – It depends on your own preferences, and also how much money you’re talking about. The bigger the balance, the bigger a % makes. My emergency fund is nearly six figures at times. For small balances, it’s probably best to focus elsewhere first. Here’s a rate chaser calculator to see how much more you might make:

  9. Hi, I have a kind of newbie question. It seems you spread out your emergency funds into a bunch of places. Is that because the cash you are saving in these accounts exceeds the upper limit on deposit amount that the higher interest places (like Danvers bank) have? Or are there other advantages to the lower interest places that I might be missing?

  10. Has anyone had experience with Capital One’s InterestPlus Online Savings Account? They’re advertising a 1.10% APY with a 10% quarterly interest bonus….question is just how much (all?) of this are teaser rates that’ll drop to nothing in three months after opening? Has anybody opened an account with them??

  11. Danvers Bank was purchased by Peoples United. They will probably discontinue the Free Rewards Checking account. Maybe Danvers Bank was just using it to improve their balance sheet and customer list before being sold.

  12. @Cody, checked capital One’s Interest Plus Online. Its a tease. They give you .65% and the 10% is 10% of the interest you earned. For example. In one year your initial deposit was $20,000. After one year you have earned $130 in interest and you earned $13 in bonus interest for a total of $143.00

    I think you would fair better at ING Direct or Ally who are giving you .8% and .84%

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