Tiered Emergency Fund

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Tiered Emergency Fund

Postby Dopey » Wed May 22, 2013 8:33 pm

Given the stats below, is it worth setting up a tiered emergency fund utilizing the CD options available to me?

    *High Int Savings Account (Currently holds my entire EF, approximately 10 months): 1.00%
    *3 month - 24 month CD: <= 1.00% (Not worth tier-ing anything to this level since it is less than or equal to the amount I am getting in my savings)
    *36 month CD: 1.40%
    *48 month CD: 1.60%
    *60 month CD: 2.55%

Do the 36, 48, and 60 month rates make it worth putting some of my emergency fund into these accounts?

I'm sure there are better rates out there, but are probably in the ball park. Does a CD ladder even make sense with today's current rates?

Thanks for the advice.
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Re: Tiered Emergency Fund

Postby Grt2bOutdoors » Wed May 22, 2013 8:47 pm

The intent of an e-fund is for the funds to be readily available. If you lock up the funds in a CD and are forced to liquidate it, you will incur some sort of interest penalty. The penalty at Ally is 60 days interest.

If you placed 60% of your e-fund in the savings account - .60 x 1% = 60bps
If you placed 40% of your e-fund in the CD account - .40 x 1.4% = 56 bps
Total earned 1.16%

Early withdrawal penalty would cost you = 9 bps
Gross yield = 1.07%

For a very large amount of money, maybe 7 bps is worth it, but that would be in the millions, otherwise, it seems like a lot of trouble for very little.
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Re: Tiered Emergency Fund

Postby Boat Guy » Thu May 23, 2013 7:38 am

As an aside, a 2.55% rate on a 5 year CD is very good. Is that rate currently available? If so, where?
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Re: Tiered Emergency Fund

Postby Dandy » Thu May 23, 2013 9:12 am

Emergency funds are always a problem. large amounts of money we probably won't need or won't need all of and keeping it safe and liquid mandates low returns. Early in the accumulation stage it also is a large portion of your investable assets. A typical bad case scenario is loss of the sole bread winner's job combined with a major expenese or two over a 9 - 12 month period. Most emergencies probably don't require the use of the whole EF.

The CD rates you quote seem high from what I see. You need to also look at the interest penalty. Especially, If your job is reasonably secure and you have other access to funds, e.g. other taxable investments you can probably go with several 5 year CDs. Don't get 1 5 year CD for $60k get 3 e.g. 10k,20k,30k.
That way you can avoid penalties on funds you don't need. You can look at I bonds, EE bonds. If you have access to a stable value fund at work you can use that e.g. sell taxable investments and reallocate stable value funds to equities to maintain your allocation.

As your assets grow you might consider using some short term bond funds for a portion of your EF. At these low rates and interest rate risks - I would not use them now.

FYI I lost 2 jobs and my wife had a major illness and I never had to tap my investments (I did not have a specific EF). One reason was not having any debt and few ongoing monthly commitments. Keeping those to a minimum or cancelable will make surviving a job loss more manageable. I always had a large amount of money in vehicles not subject to market volitility. e.g. stable value, EE bonds, CDs etc. I didn't need them but it was great knowing that they were there. No regrets.
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Re: Tiered Emergency Fund

Postby larmewar » Fri May 24, 2013 10:28 pm

Many posters on this board, myself included, use I-bonds for all or part of EF.

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Re: Tiered Emergency Fund

Postby LadyGeek » Fri May 24, 2013 10:33 pm

The wiki has some background info: Emergency fund
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Re: Tiered Emergency Fund

Postby dailybagel » Sat May 25, 2013 9:22 am

I think I bonds are a great option, but there are challenges: the contribution limits, plus the one-year minimum holding period, during which you wouldn't have any access to your money.

Here are some posters responses to those issues: viewtopic.php?f=1&t=107241
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Re: Tiered Emergency Fund

Postby Dopey » Sat May 25, 2013 12:13 pm

Boat Guy wrote:As an aside, a 2.55% rate on a 5 year CD is very good. Is that rate currently available? If so, where?


Through my employer's credit union which I'm a part of. They are a little vague about their early withdraw penalties. Once I verify it's only three months, I think I might utilize that rate but not a ladder.
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Re: Tiered Emergency Fund

Postby Dopey » Sat May 25, 2013 12:15 pm

Dandy wrote:Emergency funds are always a problem. large amounts of money we probably won't need or won't need all of and keeping it safe and liquid mandates low returns. Early in the accumulation stage it also is a large portion of your investable assets. A typical bad case scenario is loss of the sole bread winner's job combined with a major expenese or two over a 9 - 12 month period. Most emergencies probably don't require the use of the whole EF.

The CD rates you quote seem high from what I see. You need to also look at the interest penalty. Especially, If your job is reasonably secure and you have other access to funds, e.g. other taxable investments you can probably go with several 5 year CDs. Don't get 1 5 year CD for $60k get 3 e.g. 10k,20k,30k.
That way you can avoid penalties on funds you don't need.
You can look at I bonds, EE bonds. If you have access to a stable value fund at work you can use that e.g. sell taxable investments and reallocate stable value funds to equities to maintain your allocation.

As your assets grow you might consider using some short term bond funds for a portion of your EF. At these low rates and interest rate risks - I would not use them now.

FYI I lost 2 jobs and my wife had a major illness and I never had to tap my investments (I did not have a specific EF). One reason was not having any debt and few ongoing monthly commitments. Keeping those to a minimum or cancelable will make surviving a job loss more manageable. I always had a large amount of money in vehicles not subject to market volitility. e.g. stable value, EE bonds, CDs etc. I didn't need them but it was great knowing that they were there. No regrets.


This is a good tip I had not considered. Thank you.
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Re: Tiered Emergency Fund

Postby OverTheHill » Sat May 25, 2013 12:30 pm

I'm fully retired now, so the concept of an emergency fund has a different meaning for me now. My overall portfolio is 50% equity and 50% fixed asset. Within the fixed asset allocation, I've got short and intermediate investment grade bond fund, plus a small amount of a high yield bond fund...all with Vanguard. I also have a portion of my 50% fixed allocation is a FDIC MM account at my bank. I view all of my fixed assets as a defacto emergency fund, since those dollars aren't invested in equities. My wife and I have SS, then we tap into our account for the additional cash necessary to maintain our lifestyle. I dip first into the MM account. When it gets below a certain level, I'll replinish it with money from my bond funds, probably the short-term fund, but it will depend on what's going on at the time. Currently, I have enough money in the MM account to cover our expenses beyond SS for 3 to 4 years. We have enough in our overall fixed allocation to cover our expense probably for life, depending on interest rates and inflation and whatever the future might hold. The equity allocation is just going to keep growing, as will the bond allocation to a much lesser degree. In short, we're in good shape. Regardless of our personal circumstances, I still view a retiree's fixed allocation as being a defacto emergency fund. Yes, bond funds can go up and down, but most of the money will be there more or less no matter what.
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Re: Tiered Emergency Fund

Postby Kevin M » Sat May 25, 2013 6:30 pm

I don't know about for an EF, but if I could get 2.55% on a 5-year CD, especially one with reasonable early withdrawal terms, I would use that for at least a portion of my fixed-income allocation. That is an incredible yield when the 5-year treasury is under 1%, and the 10-year is about 2%.

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Re: Tiered Emergency Fund

Postby Johm221122 » Sat May 25, 2013 9:45 pm

Boat Guy wrote:As an aside, a 2.55% rate on a 5 year CD is very good. Is that rate currently available? If so, where?

Try Google
https://www.google.com/search?safe=imag ... 0&hl=en-US
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Re: Tiered Emergency Fund

Postby Kevin M » Sat May 25, 2013 10:02 pm

Johm221122 wrote:
Boat Guy wrote:As an aside, a 2.55% rate on a 5 year CD is very good. Is that rate currently available? If so, where?

Try Google
https://www.google.com/search?safe=imag ... 0&hl=en-US
John

That didn't do me much good. As far as I know, the best rate on a nationally available CD without requiring an active checking account is 2%. My source, as always, is DepositAccounts.com. Better deals are available at credit unions in some localities, but are generally not available to most of us. I never see anything in my area.

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Re: Tiered Emergency Fund

Postby Johm221122 » Sun May 26, 2013 10:49 am

Kevin M wrote:
Johm221122 wrote:
Boat Guy wrote:As an aside, a 2.55% rate on a 5 year CD is very good. Is that rate currently available? If so, where?

Try Google
https://www.google.com/search?safe=imag ... 0&hl=en-US
John

That didn't do me much good. As far as I know, the best rate on a nationally available CD without requiring an active checking account is 2%. My source, as always, is DepositAccounts.com. Better deals are available at credit unions in some localities, but are generally not available to most of us. I never see anything in my area.

Kevin

If you wanted to get best possible rate checking all sources Google, depositaccounts.com, bank rate.com etc....Is it worth time , I guess that would be up to individual. I hope you did think of trying other search words ir frases on Google.How much looking or hoops you want to go thru is the question. Checking this sites search feature is another good place to look.I would personally check more than one site especially local credit unions, but that's me.I would also go local if rate was close.
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Re: Tiered Emergency Fund

Postby Kevin M » Sun May 26, 2013 1:26 pm

John, please let us (or at least me :wink: ) know if your searching turns up any good CD deals.

Thanks,

Kevin
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Re: Tiered Emergency Fund

Postby Johm221122 » Sun May 26, 2013 9:52 pm

Kevin M wrote:John, please let us (or at least me :wink: ) know if your searching turns up any good CD deals.

Thanks,

Kevin

3% found it on this site :sharebeer for current military
https://www.navyfederal.org/products-se ... -rates.php
I'm not looking but I read a lot on this site and people find deals, I can't say if it worth your time and effort but some think it is
viewtopic.php?t=29700
Or this post about brokerage cd 3%
viewtopic.php?f=2&t=100081
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Re: Tiered Emergency Fund

Postby Kevin M » Mon May 27, 2013 12:35 am

Johm221122 wrote:3% found it on this site :sharebeer for current military
https://www.navyfederal.org/products-se ... -rates.php

I don't qualify for membership, and that rate is only good for a max of $3,000, so wouldn't be very useful for me anyway.

I've often seen Navy Federal in the top tier on DepositAccounts in the past, but since I don't qualify for membership, I've ignored it. Currently their CD rates are not top tier, but they are listed on DepositAccounts, as usual.

The bottom line for me is that Ken at DepositAccounts does this full time, and there are lots of folks on that site that contribute info about CD deals. Perhaps I could find better deals if I spent lots of time looking, but that's not how I want to spend my time.

A fellow Boglehead did once PM me about a good local CU CD deal, and gave me a tip on how to qualify. Unfortunately, by the time I got on it, the rate had dropped significantly, but it still was a good deal, and I pursued it. What I learned from that is that if you want to work at it a bit, it can be profitable to scan the local CU deals (not nationally available), and look for ways to qualify. But it is more work, and I just prefer to wait for the good national deals to come along.

Thanks John,

Kevin
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