Where to Stash Emergency Cash
My wife and I have finally socked away the recommended six months of savings to be used in case of an emergency. We deposited the funds in a money-market account, but is there a better investment method to maximize growth and still have the funds readily accessible?
It's a great time to search for a better home for your emergency funds. Yields on money-market mutual funds have climbed from a measly 1% up to 4% over the past four years, so shifting that money out of an ordinary checking account can finally pay off.
The top money-market funds are currently yielding a little more than 4%. Take a look at Vanguard's Prime Money Market and TIAA-CREF's Money Market, which pay 4.1% and have annual expenses of just 0.3%.
Or for a temporarily big bang for your buck, check out ING Direct's Orange Savings Account. The online bank is paying 4.75% on new deposits until April 15 (after which you'll receive the regular rate, currently 3.8%). The Orange Account has no ATMs but makes it easy to transfer money quickly into your checking account if you do end up needing it for emergencies.
Accessibility is a top priority for this money. The best 12-month certificates of deposit are currently yielding around 5%, but the extra points aren't worth it for your emergency fund. Because you never know when you might need the cash, you can't afford to tie it up for that long.
For help figuring out how much money to set aside in your emergency fund, see my Best Bets for Emergency Funds column. It's best to set aside enough to cover three to six months of essential living expenses in an accessible account. You can keep the balance on the lower side if you have easy access to other money, such as through a home-equity line of credit.
Got a question? Ask Kim at firstname.lastname@example.org.