Wednesday, February 16, 2011

Getting the Most Out of Your Emergency Fund

Having an emergency fund is important. You probably already know this. However, one of the most depressing things about an emergency fund is the slow rate at which your interest earnings build up. Emergency funds are often kept more traditional savings accounts, since they are easy to access. This is one of the reasons the yield is so low. Because of the safety of cash savings (if kept in a FDIC-insured bank or NCUA-insured credit union), and because of their liquidity, it is difficult to get a good yield on your emergency fund savings. You can, however, get a little more out of your emergency fund with a little rate shopping and some planning.

Looking for Better Interest Rates

Different cash products are offered by a variety of banks and credit unions, and the competition for your deposit might help you find some better savings account rates than what you would get on a more traditional savings account. Look online for rates in other states, as well as consider the offerings from online banks. You can find a number of options if you are looking for a better yield.

Be warned, though: You might have to maintain a minimum balance in order to qualify for the best savings account rate. Additionally, you have to be aware of the restrictions on the number of withdrawal transactions you can engage in when a savings account is involved. Another issue is that the remote (or online) nature of your bank or credit union might mean that you have to wait a few days to access your money.

You can ensure access to your money by linking your high yield savings account to a checking account at the same bank. Then, you can do an instant transfer to your checking account when you need the money and use the debit card to access the money. Another possibility is keeping a small amount in the local brick and mortar bank, and using that until you can get money from your main emergency fund sent in.

Creating a CD Ladder

In many cases, the idea of a CD ladder is confined to long-term savings schemes. However, it is possible to set up a CD ladder as an emergency fund, allowing you to take advantage of higher interest rates in your emergency savings, while still accessing your money regularly. You can set up a ladder that matures every three months – or even every month – based on a 12-month or 18-month maturity for your longest CD. You follow the basic rules of setting up a CD ladder by dividing up your emergency fund money. You can then roll CDs into longer maturity accounts as each term ends, adding money you have saved up, and taking advantage of better CD rates. You do need planning, though, since you will only be able to access your money penalty-free once a month or once every three months.

With some planning and shopping around, it is possible to earn more interest on your emergency fund, making it work a little hard for you.

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