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 since my last update in June. However, there are still better options out there for cash stuck in a too-big-to-fail megabank savings account paying 0.000001%.
Best Currently Available Interest Rates
If I wasn’t already invested as outlined at the bottom of this post, 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 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 1.48% 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 still likely to be competitive with top 1-year CD rates. 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 $20k balance, although 3.09% APY is easier to achieve unless you satisfy a long list of requirements. Good news is the rate is guaranteed until August 2015.
- 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. For example, if you withdraw from this CD after 2 years and pay the penalty, your effective rate earned will still be 1.72%.
- Willing to lock up your money for 7 years? 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 at DepositAccounts.com.
- How about two decades!? “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.
Where’s My Money At?
Here’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 Savings paying 0.90% APY (as of 11/3/14) which also serves as a no-fee overdraft option to my Ally Interest Checking, that way I can keep a 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 Ally CD rate of 11/3/14 is 2.00% APY for 5-Year CD 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 only so-so.
- I also bought 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.
All rates are believed current as of writing, 11/3/14.
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Jonathan – are you worried about the chance that Ally will not allow you to break your 5-year CD’s? I’ve read that there is wording in the Ally CD agreement that (If Ally choses) would dis-allow breaking CD’s early. See https://www.depositaccounts.com/blog/2012/10/ally-bank-changes-deposit-agreement-covering-cd-early-withdrawals.html
That post is worth consideration, but I am personally not really worried about it. My Ally CDs are actually pretty old and expire in 2015 and 2016. But mostly, not allowing early withdrawals would be a huge public relations fiasco and would hurt future business, so Ally would have to think very hard about pulling that kind of stunt. It would have to be a quite extreme situation, like market CD rates going to 10% and everyone exiting and Ally messed up their balance sheet so bad that they are desperate enough to burn bridges. Finally, it would not be the end of the world to me even if that happened, I could get money elsewhere. Now if such lack of liquidity (however unlikely) would be a true disaster, then yes maybe it would be wise not rely on any early withdrawals of any bank’s CD product.
We broke a couple of our older Ally CDs last year when we bought a house, and they had no problem with it. The whole process was very easy, and we had the money in our checking account within a few days.
I too broke a couple of CDs with Ally last year (Using their online chat). No issues. The money was there in the bank account in 2 days.
If part of your emergency fund is to cover expenses related to an eligible high deductible medical insurance policy why not open a HSA, get the tax benefit would should be about $600 or so for your family and then invest the money withing the HSA to get a 2%-3% return?
HSAs can be a good option for those in good health and for whom it is available. I am not eligible to purchase a HDHP, and thus not eligible for an HSA. Thankfully, we get low-deductible health insurance as a work benefit.
Thanks! I too did the Ally 5 year CD at 2.9% and it expires early 2015. Looks like your recommendations could be a likely parking spot at 2.3%.
Considering Ally Bank has no brick and Mortar locations they can afford to pay a much higher interest rate than a regular bank. It has crossed my mind to transfer my funds to an “internet bank”. Perhaps that will happen as some point in the future. One thing with banks is that they have high ‘switching costs’ making it a little cumbersome for a customer to transfer around from bank to bank. However, for a higher interest rate in savings it may just be worth the “sacrifice”.
You mentioned Consumers Credit Union’s rewards checking account with a high rate for balances up to $10,000. Please note on their site that it is now for balances up to $20,000. Thought you might want to correct your blog’s information.
Thanks! I wonder why their 3.09% tier is only good for $10k when the other ones are for $20k.
I have all my safety cash spread across multiple low duration bond funds (avg duartion below 3 years) and have been averaging a return of 1.5% with minimal volatility the past two years and able to sell whenever with no trading fee from fidelity….. Tickers: Istb, plddx, bldax, jasbx,etc…. I see no reason to buy a CD or invest in a bunch of diaggregated banks with the number of funds out there as investment options.
I opened US Bank checking and savings back in August, but it took three weeks just to get the PIN number required to be able to set up online banking. Same thing when I tried to fund the accounts — really long delays to give access to my deposits, lots of excuses from Customer Service. Closing the accounts took another two weeks to get my money back. Not worth it.
Amex Savings is a different story. I’ve had account with them for 18 months, all transactions are done the same or next day. No excuses, delays, games. Only 0.80% interest, but that’s better than almost anybody else.