Where should we keep our emergency fund so that we earn more on it and won't use it for non-emergencies?[ Edited ]
What is the best way to maintain one's emergency cash reserve to be used to pay bills in the event of a job loss, emergency or government shutdown. If we needed it, we would need it fast and liquid. Yet, I don't just want it sitting in a checking account. It would be too tempting to spend plus it would not be earning very much.
I was thinking of purchasing a series of CDs that would mature in sequential months. For example, a three month CD ladder that matured month one, another CD that matured month two and a third CD that matured month three. Then, they would just roll over each three month cycle until they were needed. That would help eliminate the tempation or risk that the funds were spent before we need them yet it would ensure the needed flexibility. What is your advice?
I actually LOVE your idea of a short-term CD ladder for this situation…but I’d like to suggest a slight twist.
Keep some liquid
Instead of allocating ALL of your emergency fund money to this approach, I’d suggest adding in a separate savings account where you could keep some of the money as well. This way, in addition to accomplishing your main goals of earning a bit more and removing the temptation to spend the money, you’d still preserve some level of liquidity in case you need money before one of your CDs comes due. Just how much to allocate to the savings account will depend on what seems reasonable for your specific situation.
Another reason I like this approach is that it also provides you with an account into which you can set up a direct deposit or automatic transfer to keep feeding the balance. It’s important to keep adding to the account on a regular basis to reduce the chance of wiping it out if a large unexpected expense comes along. Personally, I prefer the direct deposit approach because it gets the money into my savings account before I ever see it.
Don’t expect too much
Also, while I’m a big fan of “something is better than nothing” when it comes to earning money, just set your expectations correctly when it comes to how much you’ll likely earn in today’s interest rate environment on a short-term CD ladder like we’re discussing. It won’t be much. But again, it’ll be better than nothing and the approach should also help with your temptation issue.
Finally, depending on where you bank, you might not be able to find CDs with maturities as short as you need. If that turns out to be the case, you might just need to open one 3-month CDs each of the next three months to build your ladder. That way you’ll have a CD maturing each month after the initial 3-month period passes.
Thanks so much for your question. I hope this helps and I wish you all the best!