The Federal Reserve has recently announced that it will be keeping interest rates that banks pay to borrow money at 0 – 0.25% for the foreseeable future. This is done in the hopes of encouraging borrowers and spenders, but punishes savers. This makes it harder than ever to find the best place to let your emergency fund grow. But just because it’s difficult to find a place to make your money work harder for you doesn’t mean you should let it sit idle in a low yield bank account!
While it’s easy to find places to stash your cash that pay more than the average bank savings account (currently 0.08%!), high yield isn’t the most important thing when looking for a home for your emergency fund.
The two most important factors to determining where to keep your emergency cash are:
- Safety
- Liquidity
“Safety” is a measure of short term risk. Putting your emergency fund in the stock market is foolish because stocks can lose money on any given day, and you need to be able to count on your money being there when you need it.
Certificates of deposit are safe. They are FDIC insured, so you cannot lose principal. But this is where liquidity comes into play. CD’s are safe, but you don’t want your emergency fund tied up in a 5-year CD when you need that money now.
Because of these two factors, the most common places to store your emergency fund money is in a high yield savings account and sometimes a short term certificate of deposit (CD). You could put some of your savings in a savings account, and the bulk of it in a CD. This way you have immediate access to what’s in the savings account, but the bulk of your fund would be in a CD earning higher interest.
Ideally, you’d put the money you would need for repair bills on the house or car in the savings account, and you’d use the CD for that part of your savings you would tap only in the event of a loss of income or some larger emergency.
In the current economic environment however, it makes sense to use only the high yield savings account and skip CDs. Here’s why…
High yield savings account vs. a 1 year CD.
A quick look at yields on 1 year CDs shows that the highest yielding CD (currently offered by Sallie Mae) only offers a tenth of a percent more that the highest yielding savings account, but you wouldn’t have access to your money for an entire year (without penalties). That’s simply not worth tying up your money like that.
So, on to high yield savings accounts…
How to Find The Best High Yield Savings Accounts.
First, head over to BankRate.com and check out their list of high yield savings accounts. Sort by APY (the yield you can expect if you leave your money in the account for a full 365 days), and work down the list. Be sure to read the details of the terms and look for a star rating of 4 or 5.
That star rating is Bankrate’s rating system which rates a financial institutions solvency and safety, not customer service or satisfaction. It’s meant to give an indication of the likelihood of the bank being closed by the FDIC.
For the record, neither of my banks is on the list (ING direct or HSBC)*, so it’s not the only resource you can use but it is a good place to start. If there’s a bank or credit union you’re interested in, you can search Bankrate’s safety ratings.
They also offer a checking account search.
* I’ve been a happy customer of both HSBC and ING Direct for over five years now. I’ve kept the bulk of my savings at HSBC direct, but they have recently decreased their rate. It’s still much higher than the average though. ING direct has been very good to me, and they still sport one of the highest rates and easiest to use website in online banking. They’ve recently been acquired by Capital One though, and a lot of people are not happy about that. I haven’t seen any changes yet though, so I’m taking a wait-and-see approach. Plus there’s the ever popular $25 ING Referral codes that give you an extra $25 free when you open an account with $250 . (that’s an immediate 10% return on your money, for those of you playing along at home)
Look for special deals.
It’s also a good idea to check out online forums, like the FatWallet finance forum and see what people are saying about various banks and account offerings. You can also search for discussions on high yield savings accounts and learn about the most recent perks for signing up with various banks. Sometimes they offer introductory rates that are higher than normal, or cash back when you open an account. Public forums like FatWallet’s are a great source for getting the experience of real customers, instead of marketing execs.
Please share any tips, tricks or experience you may have in the comment section below.
Happy Saving!
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