Where to Stash Your Emergency Cash

By Michelle Singletary
Thursday, October 11, 2007

Krista Swetz and her husband are just a few months away from reaching a money milestone.

The Maryland couple will soon have saved the three months' worth of living expenses I'm always telling folks to have stashed away in case of an emergency.

Once they reach their goal, Swetz wanted to know where they should keep the cash.

First, keep in mind that this money should remain readily accessible. You'll want to be able to withdraw it quickly without having to sell an investment or pay a penalty. This is your safety stash, so you don't want to put it in a long-term holding.

You have several options for where to put your rainy day money. Whatever you select is fine because there really isn't a wrong choice among these options:

¿ Simple savings account. Before you shout "no, no way," know that even in this low-interest rate environment you can find institutions offering a good rate on a savings account. But you may have to move beyond your comfort zone. Some of the best rates are not from typical brick-and-mortar banks.

For example, E-Trade is offering (as of Tuesday) a 5.05 percent annual percentage yield on savings accounts. ING Direct, an Internet bank, is offering (as of Sept. 19) 4.3 percent annual percentage yield. Deposits at both institutions are federally insured. Getting your money is pretty easy. With a click or two, you can transfer money to a regular checking account at any bank.

When going with a nontraditional financial institution, check the fine print because transfers can take a few days and you may be limited to a certain number of withdrawals a month. But none of these terms should deter you. After all, this is your emergency money and you don't want it to be too easy to withdraw.

To search for institutions with the highest savings account rates, go to http://www.bankrate.com. At the top of the Web site, click on Compare Rates. Under CDs and Savings, select money market high yield (MMA) and savings account rates.

¿ Certificates of deposit. Short-term CD rates are pitiful these days. The rates for longer CDs are better. But you wouldn't want to lock up your emergency money in a five-year CD. However, you could "ladder" your CDs. Laddering allows you to take advantage of typically higher rates offered by longer-term CDs while maintaining access to some of your money. With this strategy, you divide your money and buy a series of CDs that mature at different times. Bankrate.com has an online calculator to help you figure out how to ladder your money in CDs. Look under the link for calculators.

¿ Money-market deposit account. These are interest-earning savings accounts offered by FDIC-insured financial institutions. Money-market deposit accounts offer many of the same privileges as checking accounts, but you are limited in the number of transactions you can make in a month. These accounts have a minimum balance requirement. If you are going to use this type of account to hold your rainy day money, be mindful of any monthly fee, especially if your balance drops. Also check to see whether you get a higher rate if you deposit a larger amount.

¿ Money-market mutual fund. Money placed in this type of account is not federally insured, and your principal is not guaranteed. But the risk of losing the principal is extremely low. Money-market mutual funds usually invest in short-term instruments. This account typically pays a higher rate than a bank money-market account. However, you have to watch the fees, which can lower your return. To find the average rates for this type of account go to http://www.iMoneyNet.com, which tracks money market funds. Click on "Retail Money Funds" for a list of the top money market funds.

And in case you don't know, your emergency fund should include not just your rent or mortgage payment but any expenses for cars, food, utilities, gas and other ordinary household needs. You might as well throw cable into the calculation and the average amount you spend eating out or for entertainment. Don't underestimate what you need in an emergency because I've found that even in a crisis, it takes several months before the average family cuts back on their expenses to accommodate a reduction in their income.

"As we close in on reaching this goal, it motivates us to look forward to starting other financially challenging ventures in our life," Swetz said.

It's such a good feeling when you finally put enough away for a rainy day, because as my grandmother, Big Mama, used to say, "It's going to rain."

¿ On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a personal finance call-in show that airs from 8 to 10 p.m. Sundays on XM Satellite Radio, Channel 169 "The Power."

¿ By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

¿ By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.