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.
Interest rates are still depressingly low, and I haven’t made any changes to how I hold my cash reserves in the past 12 months. However, I figured an update is in order as some of you may not be aware of the many options besides your too-big-to-fail megabank savings account paying 0.000001%.
My Cash Reserves
First, a quick recap of how I have our cash reserves split up. Keep in mind that most of the rates that I locked in are no longer available, but I did blog about them at the time.
- Ally Bank Online Saving (0.87% APY of 6/24/14) as a no-fee overdraft backup to my Ally Interest Checking (0.10% APY on balances under $15k, 0.60% APY over $15k of 6/24/14), that way I can keep minimal balance in checking. Ally checking also has unlimited ATM fee rebates and no fees. I know there are some savings accounts paying a tiny bit more, but not worth the trouble for less than 0.1% difference on $10,000.
- Ally Bank CDs earning between 1.84% and 3.09% APY. These are old 5-year CDs with a short 60-day interest penalty. Current CD rate of 6/21/14 is 1.60% APY with 150-day early withdrawal penalty.
- PenFed CDs earning 5% APY. Long gone, although earlier this year PenFed did offer 5-year CDs at 3% APY (no longer available). Current rates are yawn-tastic.
- I also have several US savings bonds that I now consider part of my retirement portfolio as opposed to cash reserves, as I don’t think I’ll ever want to cash them in before full maturity. More info below.
Best Currently Available Interest Rates
If I wasn’t already invested as outlined above, here are the FDIC-insured or government-backed opportunities that I would be looking into based on my needs.
- Everbank Yield Pledge Money Market and Everbank Interest Checking account both offer 1.40% APY guaranteed (up to $50k each) for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
- “Series I” US Savings Bonds offer rates that are linked to inflation. “I Bonds” bought right now will earn 1.94% total for the first six months, and then a variable 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. While future rates are unknown, the net rate after a year is likely to be higher than any 1-year CD. More info here.
- Rewards checking accounts pay above-average interest rates, but only if you to jump through many hoops. Make a mistake and you’ll forfeit your interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. If you’re up for it, a recent example is Consumers Credit Union where you can earn up to 5.09% APY on up to a $10k balance, although 3.09% APY is probably a more reasonable expectation (there are a lot of hoops).
- Certificates of deposit. If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.30% APY for $25k+ balances (2.25% APY for $2k+) with an early withdrawal penalty of 180 days interest.
- Willing to lock up your money for even longer? Tobyhanna Federal Credit Union has a 7-year CD paying 3.04% APY, however the early withdrawal penalty is a full 2 years of interest. More info here.
- Even looooonger? “Series EE” US Savings Bonds are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.50% APY). You really want to be sure you’ll keep it for 20 years.
All rates are believed current as of writing, 6/24/14.
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We are fortunate that our rewards checking account allows us to easily check our status.
Given that I check our paycheck deposits every week, the only thing I have to watch for is using the debit card the required number of times. Given that we shop at Aldi’s now and then, we really only have a handful of times we need to use it beyond that to make our quota.
I am only keeping about $6k in cash between the wife and I. The rest goes to taxable investing (VTINX Vanguard Target Retirement Income Fund). Already max 401k and Roth IRA.
The first item in your list of Best Currently Available Interest Rates got chopped off without a name or a link and the description is incomplete…
The Everbank bullet? I’m sorry I don’t see what you are referring to. It shows up correctly for me. Could you please refresh and try again? Thanks
I have the same issue with no word of EverBank just mentioned 1.4%. Here’s a screenshot: https://www.dropbox.com/s/t3vvkkkn2n424b5/MMB%20No%20EverBank%20mention.PNG
I’m running latest version of Chrome on a Windows 8.1 laptop.
Thanks for the post as always Jonathan.
Thanks. I think it might have been a extra apostrophe, how does it look now?
Hmm, it’s still showing the same cut off before “and account both offer 1.40% APY…” so I’m not sure what’s going on.
Me neither, I used Browserling.com to try a few different browsers and it all worked. Cache?
Fixed. Appears correctly now. Thanks.
Same for me too.
So Jon, if I put $500K into the Series EE” US Savings Bonds, 20 years, it will be $1m? or is there a limit?
I think there is a 5k limit per person or so. If I remember correctly it was quite low.
10k per SSN per year currently, I think you might squeeze another 10k per year in there if you have a trust set up. But yes, if you put 10k in there now in 20 years you can take out 20k.
By the way, current 20-yr Treasury rate is 3.14%.
Emergency cash is always a good idea to maintain but as you know it is quite depressing keeping money in any large bank that basically pays nothing. I wouldn’t want to lock up any of my money in any long tern EE bond or even I bond yet. Rates are too low to even consider these. Best bet is go with those online savings accounts that pay close to 1% but more importantly are liquid unlike EE bonds or CDs Thanks for sharing.
We’re currently pursuing a fairly standard emergency fund strategy, shooting for 6 months of expenses, and currently using a mixture of rewards checking accounts (INOVA ovation) and Ally. I’d really like to use Mango to slightly boost our average rate on cash funding, and I’d recommend that other’s look at it (I belive it’s still over an effective 5% APR on the first 5K, if not, it’s only slightly under), but for reasons I don’t understand I’ve never been able to sign up for it. Anyway, one idea I’m very interested is a suggestion that I originally saw on Betterment’s blog (https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/), though I imagine it’s not their’s originally, to hold about 130-150% in a conservative stock/bond mix and use that as one’s emergency fund. Jonathan, I’d be curious about your thoughts on that approach to emergency funds.
Not a horrible idea from Betterment, although keep in mind they are an asset manager so obviously they want your assets and not a bank or insurance company. It seems like a lot of mental accounting work while one main benefit of cash is the psychological knowledge that your money is 100% safe. Your 130% may “only” go down to 100% in a crash, but if it was cash it’d still be 130%.
SmartyPig is offering 1% APY on their goals-oriented savings account.
With the new baby I’m sure you’ll be too busy to notice that (and very reasonably so, at that), but I wasn’t suggesting setting that up through betterment, just using the idea and setting up a 40% stocks/60% bonds sub-account as an emergency fund. You’re right about the mental accounting part, but I’m still tempted.
Do you buy bonds (EE or I) under your two girls names? How do you invest for money strictly for them?
I believe for cash reserves or emergency fund, as some might call it, the most important thing is to make sure the funds are safe. The interest rate that the fund earns is not important and its the price you pay to have the funds safe and available for when and if you need them. I would never consider keeping this money in stocks and bonds due to the fluctuations of the market. Personally I prefer to use my local bank in town to hold my security fund money because if an issue should arise I can go down there and talk with a real live person face to face. I guess I am old fashion.