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I'm working on building up my emergency fund. I put the money into an Ally online savings account yielding 1% interest.
Would it be wise to put the money somewhere else that gives a higher rate of return?
Or not? seeing as this is an emergency fund and its purpose is fast access.
I have mine at Ally also. I've been transitioning about 75% of it in to a ladder of 18x 18 month CDs rather than leaving it in the regular savings. The early withdrawal penalty is so low, at just a portion of accrued interest, that the funds are essentially liquid. It was the safest way I could find an additional 0.25%.
Additionally, Ally gives a rate bump when you renew a CD. The bump is currently 0.05% but it's been as high as 0.25%. When I was building the ladder I started by buying 6, 9, 12, 18 month CDs every month, so the shorter duration CDs would generate the renewal bump on renewal.
Another option if you want a higher return is to tier your emergency fund so you are putting a portion in different savings vehicles, each with varying risk and rates of return. One option might be
You will need to assess the risk of these vehicles to see if it fits within your tolerance. If not, just using the online savings account is a fine choice.
One final note regarding I-bonds - they can't be cashed out until 1 year after you buy them. This may be too limiting to some depending on their perceived need for their emergency fund over the next year; others may be more comfortable with it.
It depends on how immediately you think you'll need your emergency fund cash:
If you anticipate running into problems where you need cash right away (e.g. you live paycheck to paycheck, and your car breaks down a lot), put it into a checking or money market account.
If you don't think your emergencies will require immediate access to cash (e.g. unemployment), then put it in a savings account or CD.
If there is a lot of money in your accounts that goes unused, and you want a bigger safety net, then consider investing it. Though it's generally a better idea to pay off debts at this point.
I think the best idea is to split your emergency fund between your checking and savings. Maybe 20% checking and 80% savings. That way, you have some extra cash on hand when you need it, while most of your money is growing in savings.
