Question re: Emergency Savings (funds, pay, rates, vehicle)

[BD1978]

My wife and I recently purchased a home using the bulk of our savings, but set aside $100,000 (or about 12-14 months' expenses) as an emergency cash fund. We have this money in an American Express savings account that earns only .9% interest, which is paltry.

Do you have recommendations for a relatively low risk way to earn a higher yield on some or all of this money? I do not want to put it in the stock market because it's an emergency fund. Other than substantial 401(k) and 529 college accounts for my daughter, we do not own any stocks or bonds - we basically have lots of equity in our home, and this emergency account. But I feel like it's a waste to earn such an incredibly low yield on a six figure dollar amount. Any advice would be much appreciated. Thanks!

[jms493]

Well my first question would be why do you need a 100K emergency fund? How long can you live on that?

[BD1978]

It's about 12 to 14 months of expenses. We are conservative with our money and feel better having a larger emergency fund than maybe is necessary.

[awestover89]

You can go with a CD to get slightly better rates, but if you actually want a solid return, stocks and bonds are really the best bet. You don't have to put the full $100K in, but you can find relatively low risk stocks, even better if they pay dividends. Unfortunately, risk and reward are linked, if you want better rewards you have to take more risks.

[BD1978]

Thanks awestover - maybe a balanced fund that's 50/50 stocks and bonds, or a similar balance of ETF's? I don't really want to invest in individual stocks. If you have any specific suggestions I'm all ears.

[midwestlaxer]

May I suggest a laddered CD strategy....but $8-10k in each cd and ladder the maturation date of them and renew as appropriate...easily triple what you're making now.

[BD1978]

Thanks Midwest, I really like the suggestion. But I'm making 0.9% now - triple would be a 2.7% yield and I don't see that available even on 5 year CDs.

[chet everett]

It will be counterproductive to really try to maximize returns on a true "emergency fund" -- the idea is you keep that LIQUID so that if something unforeseen requires you to expend the cash it is readily available.

That said, I cannot fathom what sort of lifestyle a normal couple that just bought a house with CASH that would require $100k for "expenses".

The strategy of using a "regular" cash account means that you accept the paltry return in exchange for the liquidity; frankly .9% is not bad for an account that has ZERO penalty / wait time -- CDs will have penalty for 'early withdrawal' and even the most stable ETFs are not really appropriate for a true emergency fund...

Unless you have some unusual life circumstances (like exceptionally volatile career...) it probably makes sense to scale back your 'emergency fund' while keeping it in a liquid instrument. Most financial planners would probably say 90 days of true 'unforeseeable' expenses is adequate -- That Elusive Emergency Fund: Why You Need It - US News The smarter move might be to shift more of your savings toward fully funding retirement savings -- Money Advice the Experts Don't Agree On: Emergency Funds Of course the assumption is that you also have no significant DEBT and a good handle on what are your true expenses too ...


A CD ladder (of US bank...) is NOT going to yield 3% in today's market. If you decide to put more of the cash that you have at more risk for potentially greater return you probably should consider ETFs in the sectors / categories that you are comfortable with tracking -- the total mix of funds you invest in should be able to get you returns more in-line with historical averages with acceptable risk exposure. That typically means that you find an acceptable percentage of lower volatility large cap / "Blue Chip" fund with more growth oriented funds and some stabil-ish bond funds. These are NOT "set and forget" type investments! You need to rebalance several times a year to keep the risk profile in the acceptable range. For example, with recent announcements from firms in the financial sector (like JP Morgan...) having much better earnings you would rebalance away from that sector...

[Lowexpectations]

Cit bank is offering 1.05% if you have more than 25k but at 100k that's only an extra 150.00 annually


Where is your current cashflow coming from? In my hh it's 60/40 me/my wife give or take. We are in two totally different lines of work so the probability we both lost our jobs at the same time would be slim and I can't come up with a scenario outside of death or disability where we'd both be out of work long term and still need the same cushion.


Emergency funds are a comfort blanket and everyone is different

[BD1978]

Thanks Chet, I really appreciate the advice. Just to answer your question, we did not pay cash for our home - we put down more than 50% of the purchase price, so we have a large amount of equity and a relatively small mortgage. Besides a mortgage and a very small student loan balance, we do not have any debt, and we fully fund our retirement accounts (and heavily contribute to my daughter's college account).

We live in a very high cost of living area, so a $100k emergency fund is really like a year's worth of expenses. I am thinking we may reduce it to 6 months worth of expenses, and take the other $50k and put it in some other type of investment vehicle such as CD's or some type of balanced fund.