I seek advice from those more knowledgeable than myself in the ways of money.

I'm a cheap bastid and, despite having by far the best paying job of my life, I have maintained the same standard of living I (my family and I) had when I earned a lower wage.

I've been able to sock away an emergency fund of around 8 months worth of living expenses (mortgage, insurance, food, yadda, yadda) and it has been sitting in a savings account reaping a colossal .014% interest. This is separate from the college funds for the kids and primary and secondary checking.

Obviously I would like a better interest rate but it also has to remain accessible in case of emergency, without penalties.

Is there an option out there like what I'm looking for that is available to a regular guy like me?

Ally Bank has 1% Interest Online Savings

No physical bank, though.

I was going to recommend an online bank as well. CapitalOne360 offers a no minimum, no fee savings account that pays .75%

Following

Keep 6 months of it liquid in a savings account.

Use the rest to fill up your deferred tax accounts if you are not already maxing them out 100%. Any more then that Vanguard is cheap and easy to invest with.

You're going to get some debate on this, with one camp saying a money market account and hope to match inflation, and the other camp saying with that big of an e-fund, it'd be wasteful not to at least put some into an ETF or a mutual fund.

I split the difference, but 25% in a "safe" fund and the rest in a smattering of Vanguard funds.

Some thoughts on the subject.

Not really.

Stock market is the one legged barstool of the investment world, so best belly up to the bar with a fund of some sort. Call Vanguard.

My preferred way of handling the emergency fund is to park several months' worth in a "high yield" saving account - ie, online bank with approx 1%, the park any excess in something Vanguard's VFSTX. As to how much goes where, that's up to your comfort level essentially.

Personally, I use our Roth IRAs to park the excess money and keep a somewhat smaller emergency fund around, but that very much depends on your risk tolerance.

My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

BoxheadTim wrote: My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

Wonder if anyone's done the numbers on if having no real e-fund and that money invested and floating (rare) emergencies with a credit card comes out ahead of basically paying to have a constant e-fund.

You have to decide for yourself what your priorities are. Are you willing to subject the emergency fund to any risk? If not, then keep it in a savings account (with the understanding that you won't lose any of it, but the minimal interest probably won't keep up with inflation). If some risk is acceptable then investing in some index funds or ETFs is an option. Personally, I'm not willing to subject an emergency fund to much risk, but that's a personal call.

If you're keeping it in a savings account, then you also have to ask yourself how much you value interest gains vs a physical location. Online banks will net you higher interest rates. Brick and Mortar banks offer lower rates, but appeal to some people more than throwing your hard earned money at a bunch of 1s and 0s on the internet. Keep in mind that neither of these are really going to offer enough to keep up with inflation, so you'll have to periodically put money into the savings account in order to maintain the same value it currently holds (relative to inflation).

And, as Weary suggested above, now that the emergency fund is in place, work towards maxing out any tax advantaged accounts (401k, HSA, etc) that you have available. If that's not an option, or you're already maxing out everything you can, then a Vanguard account is a great option to avoid unnecessary fees.

First...Congratulations on removing your money from loans and stuff that make YOU pay them. This places you far from the "regular guy".

Bruce

In reply to iadr:

I have never heard that term... Is that another name for a Certificate of Deposit? Those are not necessarily liquid.

Keep like 1 month liquid and put the rest in some index where it makes money. Its easy to take it out.

+1 to max all tax advantaged accounts.

401k HSA Roth IRA

etc.

Osterkraut wrote:

BoxheadTim wrote: My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

Wonder if anyone's done the numbers on if having no real e-fund and that money invested and floating (rare) emergencies with a credit card comes out ahead of basically paying to have a constant e-fund.

Can your emergencies not wait a day or two? Even if you have to float on a CC, its only for a few days while you liquify money from other areas. Paying off immediately will have zero interest. You can also use a home equity line of credit for this purpose.

I never have a big emergency fund. Anything 5 figures or more is almost never a "I need this to happen right this second" transaction. Medical emergencies have billing cycles like everything else. I don't understand the need for such a gigantic fund unless you are expecting to pay ransom at any moment.

Thanks for all of the info!

I want to keep it at zero risk or as close to zero as possible. I have my 401k set to capture all of the matching funds that my employer offers, right now that's 5% of my gross pay. I'll look into increasing that.

I'm one of those who shy away from online only banks.

I'll look into Vanguard.

With an emergency account, zero risk and high liquidity are paramount. You could shop for a better rate on a savings account, maybe at a local credit union? For .014%, I'd stash it under my mattress. You could consider putting half of it in a short-term CD. My CU is currently paying right around 1.0%

In reply to The_Jed:

You can do the Vanguard thing anytime, but it will benefit you the most to make sure your tax advantaged options are all maxed out first. This year, the IRS limit on 401k contributions is $18k. Most people don't get close to that. If you have an HSA, the limit is $3350 for single and $6750 annually for more than one user. You can think of this like a 401k for medical costs.

FWIW, my general strategy is to minimize the amount of emergency money I need rather than have a lot of emergency money on-hand.

Honestly, I don’t understand people that carry a mortgage and have bonds at the same time…do the math, even taking the AGI adjustment into consideration, you’re better off just paying down your loan.

Fun fact…the standard guidance financial advisors gave in the not so distant past was to match your bond / stock mix to you age (i.e., at 45, you should have 45% in bonds and 55% in stocks). Hahaha, today, that would be an excellent recipe for a cat food diet in retirement.

I own all of my cars out right, pay every bill the absolute first day I’m allowed to (property tax, car insurance, everything), and I zero out our credit cards at least every other week to ensure nobody ever makes a dime of interest off of us.

If I lost my job today, it would be months and months before any serious issues would arise from non-payment and if I got hit by a beer truck, my wife would have plenty of think time before any collectors started calling.

The two cases one could make against my strategy are:

Opportunity cost – I don’t have as much market leverage as I could. However, I can be more aggressive with the leverage I do have for a given overall level of risk tolerance.

Liquidity – The bank won’t give me my additional principle payments back if I need them for something else. However, I took my chances earlier in life when the risks were more manageable and now the finish line is in sight where I could pay off my mortgage without too much of a tax / penalty hit if it came to that.

RX Reven' wrote: Liquidity – The bank won’t give me my additional principle payments back if I need them for something else. However, I took my chances earlier in life when the risks were more manageable and now the finish line is in sight where I could pay off my mortgage without too much of a tax / penalty hit if it came to that.

Depending how much you need here, a HELOC will do that.

I'm still not a fan of paying down mortgage any more than necessary though.

I was going to do some math and suggest that with todays interest rates, its hardly worth worrying about, but 1% on $50k is $500 a year, so I guess its worth doing. I remember when savings accounts paid 6 or 7%. Inflation was over 10%, though.

WilD wrote: In reply to iadr: I have never heard that term... Is that another name for a Certificate of Deposit? Those are not necessarily liquid.

IIRC they're similar. That said, I don't think putting money into CDs for emergency funds is a good idea unless you keep, say, three months in savings and put the rest in a CD ladder.

At some point managing that combination is going to become a pain in the posterior, but I guess one savings accounts + 2 CDs (3 month and 6 month) would be manageable. Problem is that IMHO you don't get enough of a premium for CDs at the moment to make this worthwhile.

The_Jed wrote: Thanks for all of the info! I want to keep it at zero risk or as close to zero as possible. I have my 401k set to capture all of the matching funds that my employer offers, right now that's 5% of my gross pay. I'll look into increasing that. I'm one of those who shy away from online only banks. I'll look into Vanguard.

Unfortunately most decent savings rates are with online banks and CUs. And that's if you consider 1% to be decent. The Vanguard Prime Money Market fund gets fairly close, though, they show a return of 0.79%.

That said, as long as the online bank isn't the First Screw-You Bank of Lagos, Nigeria and is FDIC ensured, you should be OK. Yes, it'll take a bit longer (usually two days) to get the money out, but they're not inherently less safe than a brick-and-mortar bank.

I have two online savings accounts - one with Sallie Mae (yes, the student loan people), the other with Synchrony Bank (née GE Capital Retail Bank). Both OK so far.

RX Reven' wrote: Liquidity – The bank won’t give me my additional principle payments back if I need them for something else. However, I took my chances earlier in life when the risks were more manageable and now the finish line is in sight where I could pay off my mortgage without too much of a tax / penalty hit if it came to that.

Gotta do the math.

One thing to remember on the taxes front- you only get to deduct the interest from you income, not from your taxes.

So $1000/year ends up being $200-300 depending on your bracket.

For me, paying $1000 less in interest is better than getting $300 back in taxes.

Heck, having no mortgage and no interest will be better, and paying the resulting taxes due to an income increase is just fine.

One needs to be emotionless in terms of money- money out is out regardless of who is getting it. Just like money in is in regardless.

We set up our mortgage to be as short as possible with the payment as high as we could deal with- it's going to end up saving thousands of dollars doing that, since the interest way out does the tax break in terms of losses.

As for savings.... 100% safe is in a bank that's federally insured. Done.

If you want to make more money on that, the degree of safety goes down. I'd personally pile up 6-8 months of income in a basic savings account, and the rest, start putting into funds- mostly low cost index funds, since they mostly do as well as the high end funds, when all is taken into account.

At the same time, the "extra" would also go more toward the 401k. That will pay off the best in the long run.

Assuming, other than your house, you are debt free.

alfadriver wrote: We set up our mortgage to be as short as possible with the payment as high as we could deal with- it's going to end up saving thousands of dollars doing that, since the interest way out does the tax break in terms of losses.

Hi alfadriver,

Thank you for your good points.

I chose to get a 30 year mortgage but I’m on track to have it paid off in 13 years which is 4 years from now.

I realize that I could have gotten a 15 year mortgage at a lower interest rate but I was willing to pay a little more to get the lowest possible monthly payment requirement…sounds kooky until you realize it’s no different than buying insurance.

ProDarwin wrote:

Osterkraut wrote:

BoxheadTim wrote: My main issue with keeping the whole e-fund in savings accounts is that they don't even keep up with inflation so you'd have to keep contributing to it to keep its real value stable.

Wonder if anyone's done the numbers on if having no real e-fund and that money invested and floating (rare) emergencies with a credit card comes out ahead of basically paying to have a constant e-fund.

Can your emergencies not wait a day or two? Even if you have to float on a CC, its only for a few days while you liquify money from other areas. Paying off immediately will have zero interest. You can also use a home equity line of credit for this purpose. I never have a big emergency fund. Anything 5 figures or more is almost never a "I need this to happen right this second" transaction. Medical emergencies have billing cycles like everything else. I don't understand the need for such a gigantic fund unless you are expecting to pay ransom at any moment.

I agree with you 100%, in case that wasn't clear.

A huge money market you can cut checks out of only really makes sense if you're avoiding credit cards, or have very low limits.