Being frugal is only one part of personal finance success. At some point, you run out of easy and painless ways to cut back your monthly expenses.
Less talked about is the earning side of the equation. One of the best money decisions I made last year was to move my emergency fund from a traditional savings account to a high-yield savings account.
U can’t touch this!
It took a couple years, but I had finally achieved one of my big goals: saving six months of expenses toward that much-talked-about emergency fund.
We’re taught to forget about this money, don’t use it for anything except emergencies, etc.
To quote MC Hammer: “U can’t touch this.” (Though The Miser isn’t sure MC was talking about emergency funds.)
This is good advice, but it lends itself to a do-nothing, stuff-it-under-the-mattress approach. Which means…
The Miser had his money stored in a traditional savings account that offered a sweet 0.03 percent interest rate. This earned less than $5 a year, which adds new meaning to the phrase “get rich slowly.”
Whether you’ve got a full six-months of expenses saved up or are building your emergency fund right now, there’s a better way.
Many online banks offer high-yield savings accounts that will at least keep better pace with inflation and, better yet, provide you with proof that you’re moving the needle on your savings. This was the first place I looked.
As of January 15, 2018, the best rate is 1.55 percent at CIT Bank.
Ally, a well-known online bank, has a 1.25 percent rate.
And Synchrony checks in with a 1.45 percent rate.
I already had a CD with Synchrony so, to keep things simple, I opened a savings account there, too. (At the time, the rate was 1.30 percent. It jumped to the current 1.45 percent a couple months later. Cue the party.)
There’s another option for your emergency fund that functions in some ways like a high-yield savings account: the no-penalty CD.
You probably know about traditional CDs, or certificates of deposit. Open one up, pick a term (6 months, 12 months, etc.), deposit your money, and wait for the term to be over before capturing your interest earned. Take the money out before the term is over, and you pay a penalty.
While the penalties are usually fairly small, worrying about paying a penalty is the last thing you want to do if you’re tapping your emergency fund during an actual emergency, so avoid traditional CDs for this purpose.
No-penalty CDs, on the other hand, allow you to access your full investment at any time. For this reason, they’re a great option for an emergency fund — and the rates are sometimes higher than high-yield savings accounts.
As of me writing this, CIT’s no-penalty CD rate is 1.55 percent for 11 months with a minimum opening deposit of $1,000. Ally’s rate is 1.35 percent for opening deposits between $5,000 and $24,999. Synchrony doesn’t have a no-penalty CD.
You’ll want to read the fine print on products advertised as no-penalty CDs. Most banks will require you to keep your initial investment there for a week or so before you can withdraw it.
Two big differences between CDs and savings accounts: you can’t add money to a CD during the term, and the interest rate is locked in. With savings accounts, you can make deposits and take advantage of interest rate increases.
Easy peasy lemon squeezy
The process to open either type of account is simple and should take about 15 minutes.
- Choose a bank and go to its website
- Click the “Open Account” button
- Decide which type of account you’d like to open
- You’ll have to specify what your opening deposit will be (like your entire emergency fund)
Then, you’ll have to say how you’re funding your account. I did this by providing a routing number to my external checking account. Once that’s established, the online bank can fund your new account.
You should keep your existing checking account open, because many of these online banks don’t provide debit cards. Nor do they have physical branches with ATMs. Think of this new account as a place to stash your extra cash, not as an account to pay your bills.
The extra interest
At 1.45 percent, a $10,000 emergency fund will earn $145 a year in interest. On $15,000, you’ll make $217.
That’s a heck of a lot better than a couple of bucks.
Hopefully, we’ll never need the money in our emergency funds. No emergencies. It’ll sit there forever.
While it’s doing that, you might as well put the money to work and get something for doing the hard work to build up that emergency fund in the first place.