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I found several checking accounts from credit unions offering between 3 and 5% (such as Northpointe Bank) and a savings account with BECU here in WA offering over 6% APY.

Savings accounts, money market accounts, CDs, and Treasuries I looked at don't yield over 2% or so.

So would those high interest checking accounts indeed be the best place to store a few thousand dollars of emergency money?

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    6% APY on savings? That's 6x my savings account interest, sounds pretty fantastic, oh, on balances up to $5k, plus have to use their debit card x times per month, and do some automatic withdrawals or deposits. Bleh. – Hart CO Apr 12 '17 at 20:14
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    The problem with those accounts is the minimum debit card transactions and/or direct deposit requirements. – D Stanley Apr 12 '17 at 20:21
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    @aparente001 If you have an emergency like unemployment your creditworthiness is impacted in a major way. – quid Apr 13 '17 at 0:36
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    The PS makes me think this is just an excuse to post the OP's link. – stannius Apr 18 '17 at 18:04
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    @stannius - yes, deleted. – JTP - Apologise to Monica Apr 18 '17 at 18:19
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I'll start by saying accounts that require a certain number of transactions are a horrible place to put any savings and, in fact, I'd stay away all together.

However, you've asked a lot of questions here and are clearly more in-tune with this topic than most. If I was young again and just starting to try to pile some money together, I would absolutely chase the highest interest rates by taking advantage of accounts like this. If you have the discipline to hit the transaction counts and maintain the minimum balance AND leave your savings funds alone, do it.

If for a single second you think you'll go out one Friday night and blow your emergency fund, put it somewhere else.

I used to keep really elaborate spreadsheets of my spending and savings with goals set and progress charts, etc. I see the argument that the transaction count is not worth the gain in interest, but you've said you're not dealing with big numbers and 5% of $5,000 is about $255 after a year. It's not a lot but it's 5x more than a "normal" no transaction hoops high-yield savings account; you get five years of interest each year. So, yes, this is an amount of money you could probably generate by frequenting starbucks less, but presumably you're already doing that. Obviously you would keep this to an upper account balance of $5,000 and put the rest in a vanilla high-yield savings; then when administering the transactions becomes too much work close the account.

8

Here are my conditions for an emergency account:

  • It needs to be very liquid - meaning no CDs or investments to cash out
  • It needs no minimum transaction or balance requirements. It's meant to sit there and do nothing.
  • It needs to be risk-free - no index funds, let alone stocks or bonds
  • Interest is a nice-to-have. 2% on $10,000 is $16 a month. It's nice, but it's not going to change your financial picture. You can save more than that by going to $tarbuck$ one less time a week.

A compromise would be to have 1,000-2,000 in a very liquid account and the rest in something a little less liquid that maybe has a minimum balance (but no transaction requirements). The behavioral risk is when you do have an emergency and you don't want to cash out or go through any hassle to get it out, so you just charge the emergency instead of paying cash.

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    There's something about a CD that I like for EF. Illiquid enough to be a pain in butt to break, but a low cost to do so in real emergency. +1 by the way – JTP - Apologise to Monica Apr 12 '17 at 20:27
  • @JoeTaxpayer the rates just aren't high enough for me to fool with. It's not stupid to try to earn interest, but it doesn't move the needle. – D Stanley Apr 12 '17 at 20:29
  • You're sure right about Starbucks, but if you have 3k invested at 5% APY that's $153 (assuming daily compounding). In my case even after accounting for taxes (with a 15% tax bracket) that's about a $130 return—at least that would cover inflation assuming 3% inflation and then I'd still make $40. – Natalie Apr 12 '17 at 21:48
  • I also like CD for emergency savings. My "emergency" funds are about 75% in CDs. In this day and age the "penalty" to break most CD accounts is part of the interest you've earned. You're not supposed to be touching emergency savings anyway and for that reason I agree about transaction requirements. – quid Apr 12 '17 at 22:43
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As others have noted, you can do better than a checking or savings account. If you're going to invest emergency money, the vehicle you put it into should be:

Liquid - Wherever you put it, you should be able to quickly cash it out. Highly liquid exchange traded products are good for this.

Low volatility/drawdowns - If you need at least 6 months of your paycheck to cover you in the event of an emergency, you don't want to park it in a portfolio that can potentially lose 30% value.

Insured - Your investments should have SIPC coverage (protection against losses resulting from failure on part of broker).

Moderate/Steady Growth - If the emergency fund doesn't grow, you'll need to continually pump money into it. My 'steady growth' portfolio is majorly allocated to fixed income. Within that, a major portion is allocated to high yielding instruments. Over the past 10 years, it's seen at least a 7% annualized return.

  • Thank you. I haven't heard of SIPC coverage before and will look into that. Are you picking out your own bonds or using a bond fund? If a bond fund, may I ask what you suggest? – Natalie Apr 13 '17 at 21:51
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    @WalletSage I'd caution completely against putting emergency funds in any sort of exchange traded product. Even the PIMCO Long-Term U.S. Government Fund (PGOVX) bond fund fell about 12% in 2008. If you're in an emergency you can't afford any erosion of your safety net, in my opinion. All retail level brokers carry SIPC, but understand it's not insurance against value loss. – quid Apr 13 '17 at 21:57
  • @WalletSage here's my allocation: primarily high yielding bonds - iShares iBoxx High Yield Corporate Bond ETF; Vanguard Emerging Markets Government Bond Market ETF; Vanguard Long Term Bond ETF; iShares Investment Grade Corporation World Bond Market ETF; SPDR Bloomberg Barclays Convertible Securities ETF - I also have high dividend stocks and a small amount of real estate in the low risk portfolio - I'd be happy to go into this in more detail if you'd like - just trying to be helpful – Lochsmyth Apr 14 '17 at 2:51
  • I use an investment service - I don't think stock picking is a good use of time. – Lochsmyth Apr 14 '17 at 2:52
  • @WalletSage no problem :) -- You can have the perfect allocation, but it won't be valuable unless combined with proper asset management. My allocation is dynamic and changes according to market conditions. There's risk management in every aspect of my trade process. These things make all the difference. – Lochsmyth Apr 14 '17 at 13:18
3

These good rates all tend to be "on up to $X" where X is some low'ish number that could require multiple accounts. They often also come with other strings, like set up automatic deposits/withdrawals, and use debit card at least 15 times per month.

The two you mention have these flaws, whether or not it's worth it depends on if you are happy to meet those requirements and how big your emergency fund is.

Personally, I'd rather get rewards on a credit card than use a debit card, and I don't want to open a bunch of accounts, so I have a boring savings account with a pretty low interest rate for my emergency fund. It's liquid, earns some interest, and I don't have to think about it.

  • I also only use rewards credit cards for transactions that take them. However, my student loan payments and rent can only be made using debit; in this case, I would charge those to the account. As for the remaining number of required debit card transactions, they can be any amount – I can just buy 10 pieces of 10 cent candy in different transactions. – Natalie Apr 12 '17 at 21:37
  • @WalletSage Yeah, if the requirements aren't a hassle for you then sure doesn't hurt to sneak some extra interest. – Hart CO Apr 12 '17 at 22:10
  • @WalletSage the Northpointe one requires 15 transactions totaling at least $500. You may need to do more than buying candy. – iheanyi Apr 13 '17 at 19:39
  • Yes I know, I will be putting big expenses like rent that don't allow credit. – Natalie Apr 13 '17 at 21:27
  • Another idea is buying a bunch of $0.50 Amazon gift cards. – Natalie Apr 13 '17 at 21:29

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