The Emergency Fund- Where Should I Keep It and Why?
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A reader, Slinky, recently commented on my article “10 Great Ways for College Graduates to Start Off on the Right Track With Their Finances” that many recent graduates know information about budgeting, and know not to go “wild” with their new found income, such as by buying a brand new car, etc, but were less knowledgeable about SAVING and INVESTING their new found income. One thing she specifically asked about was in regards to emergency funds, where one should keep an emergency fund and the pros and cons of different options. I recently wrote an article on why you need an emergency fund, and how it can be a powerful tool for keeping from getting into debt or going deeper into debt, but did not go into details on where the best place to keep one is. You want some liquidity and little risk, so index funds and the stock market are not a great place for your “base” emergency fund. You don’t want to HAVE to sell index funds at a time when the market may be down. Three of the most common places to keep an emergency fund are 1.) online savings accounts, 2.) money market accounts, or 3.) a local branch or “bricks and mortar” bank savings account.
Online Savings Accounts- Online savings accounts such as INGDirect , HSBC Direct, and Emigrant Direct generally pay a much higher interest rate than local bank branch savings accounts. Online savings accounts generally do not provide you with an ATM card, so to get your money you must transfer it to a linked checking account. Currently, I have a small amount of money in my local bank account savings account as a cushion, and I believe it pays 0.2 % interest, as opposed to ING Direct which pays 3.0% interest. That is a difference of 15 X ! For getting to your money, time-wise, with ING it takes about 4 to 5 days to transfer money in from a linked checking account, and about 2-3 days to transfer money back out of ING into your checking account. So if you think you may need the money faster than a few days, this might not be the best option for you.
Money Market Accounts- Money market accounts are similar to online savings accounts, but they usually have check writing privileges and may have an ATM card as well. They also usually pay a higher interest than a local branch savings account, many with rates similar to online savings accounts. I currently use a Capital One Direct Banking High Yield Money Market Account as an irregular expenses account and have an ATM card and checks, both of which were free. It has a current APY of 3.0%, the same as ING Direct. Capital One seems to take an extra day or two to transfer money into your account, or about 5 days. There are usually monthly transaction limits on check writing and withdrawals, for the Capital One account it is 6 withdrawals, of which only 3 can be by check, but that is plenty for my purposes and should be for an emergency fund as well.
Local Bank Branch- A local bank branch savings account is the old standard for many people’s savings, including emergency funds. You can drop off deposits in person or transfer money from your checking account, and it will be available to you by the next business day. Most savings accounts, similar to online and MM accounts, do have limits on withdrawals per month as well though. Local bank savings accounts will provide the easiest access to your money, but generally offer very little interest. Nowadays, if you are earning the typical rate savings accounts pay, you are losing money due to the effects of inflation.
So how do you determine which account is the right place for your emergency fund? -Ask yourself the following questions:
Are you likely to need cash really fast ? (Like 1 day or less)
How soon will you need access to it? Is 2 to 3 days OK?
Do you want it to be a little harder to access?
How concerned are you with rate of return?
By thinking about and answering the above questions, you can determine which account provides the benefits most important to you. If I were just beginning an emergency fund, I would probably think about using a money market account, as I like the ability to access your money with an ATM card or write a check in a true emergency if need be. I do like ING very much, I have had an account for almost 6 years, and used to really like the fact that you can’t access it immediately, although since I am more disciplined now this isn’t quite as important to me. Since a MMA provides basically instant access to your money as well, I personally find the bank branch savings account the least attractive, although I do keep a small amount of money as a back up to my checking account.
Where do you think is the best place to keep an emergency fund?

The new rates for I Bonds came out last week, and I think many people, including myself were quite surprised that the fixed rate portion went from 1.20% to 0.0%. The inflation rate went up to 2.42%, for a composite rate of 4.84%. I think most people were expecting it to drop fairly significantly and the inflation indexed portion to go up, but I don’t think too many people thought the fixed rate component would go to zero. As I have explained previously 






