How much of your Emergency Fund would you lock up in CDs?

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BeaverFood
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How much of your Emergency Fund would you lock up in CDs?

Post by BeaverFood »

Trying to balance liquidity with returns (although I know not to expect high returns on our savings).

We currently have our Emergency Fund in a high yield savings with Ally with .9% yield. I'm debating moving a portion of those funds into a 5 year CD ladder with Ally for the higher interest rate. But, how much is too much to lock up?
Tanelorn
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Tanelorn »

How big is your EF? Do you really think making an extra 1% before taxes on that is worth the trouble of doing paperwork and penalties to break the CDs if you needed the money? If it's not more than a few hundred bucks/year net, I'd keep it simple.
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nisiprius
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Re: How much of your Emergency Fund would you lock up in CDs

Post by nisiprius »

If I had a relatively small emergency fund, as in a young person starting out and building up 6 months' expenses in savings before starting to invest, I would not lock up any of it in CD's.

The reason can be summarized this way: you're "supposed" to hold a CD to maturity, they are not "designed" to be tapped instantly, and the whole point of an emergency fund is to be able to tap it instantly because emergencies don't wait for things to mature or recover from crashes.

Maybe you can get to the money in a CD in an emergency, but that's not the job this tool is intended for.

"Supposed to" comes into play in two ways. The first is: in real life, what is the process for breaking a CD? How long does it take? In real life you are stressed and worried and standing in front of a desk that says "We require payment at time of service." A checkbook probably works. Leaving someone to sit alone in the waiting room while you hop in your car and drive through congested traffic to get to a bank which is about to close isn't so good. I will not say that banks are obstructive about breaking CDs, but it not quite like getting cash out of an ATM machine, either. The only time I personally had to break a CD, it happened to be in an ING Direct online account. It was pretty smooth. They answered the phone fairly quickly, didn't spend too much time telling me reasons not to do it, but to the best of my recollection it took several days before I actually had the money in the form of the teller's check that the car dealer insisted on.

And now the paranoia. You may not have an unconditional right to break the CD. Some CDs say in their terms and conditions that you may do it only "at the bank's discretion" or "with the bank's permission." Invariably in my experience the person at the bank expresses mild surprise and says "Oh, I don't think we would ever do a thing refusing early withdrawal, I don't think it's ever happened" but the language is there. And if it doesn't, the CD may have something say they can change the terms and conditions on 30 days' notice. And at least one bank has done so, adding "early withdrawal with our permission" (while verbally telling columnist Allan Roth that it wasn't really a change and policy and that they didn't think they would ever refuse early withdrawal."
Last edited by nisiprius on Sat Oct 11, 2014 1:43 pm, edited 1 time in total.
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BigJohn
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Re: How much of your Emergency Fund would you lock up in CDs

Post by BigJohn »

I'm with Nisi. I want guaranteed instant access to my emergency funds so they are kept in linked bank checking/savings account with overdraft protection. Earning next to nothing in terms of interest but that's a price I'm willing to pay for the peace of mind that I can write a check on those funds anytime without additional action needed.
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Johm221122
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Johm221122 »

None, but my situation is different than yours.Have you Considered I bonds or
http://www.bogleheads.org/wiki/Placing_ ... ed_account


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Re: How much of your Emergency Fund would you lock up in CDs

Post by spectec »

I agree with the previous thoughts on not encumbering the EF in any manner. I recently had two situations over several weeks requiring me to access my emergency funds, which are in a MMA I can access online to transfer into checking. In both cases, it was extremely helpful to be able to make the transfer online, after hours, and with no extra effort.

This enabled me to pay attention to the actual emergency during the normal day rather than being disfracted by administrative details. The extra .05%- 1% over a considerable period of time would have been completely wasted by the extra effort had I needed to waste valuable time running to the bank and getting someone to sign off on what I needed to do with part of my money.
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Toons
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Toons »

Me personally ,,,zero :happy :happy
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trueblueky
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Re: How much of your Emergency Fund would you lock up in CDs

Post by trueblueky »

It depends.

Many people on this forum have mentioned a laddered approach to EF, such as:
First 3 months from a savings account, such as your .9% Ally.
Next 3 months from CDs or I Bonds. (Remember, you can't access I Bonds for the first year after purchase, so this can't be part of building an ER. Later, you can add them.)
Then use Roth account contributions, or take money from a taxable account.

I personally have trouble imagining an issue that would cause me to need that much all at once. But I'm retired and don't need to plan for a job layoff. I'd probably see a large unexpected expense as an opportunity to use the cash-back credit card, then I'd pay it when it came due.
berg
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Re: How much of your Emergency Fund would you lock up in CDs

Post by berg »

I guess I'm the outlier here. I think it is okay to lock up some of your EF if it is fully funded in CD's. If you have 6 to 9 months of expenses in your EF, it is probably safe to have 1 to 2 months immediately available and the rest locked up in CDs with someone like Ally that you can break fairly easily. Chances are you won't need all 6 months at once. If you did need that much money, I can't imagine a scenario where you don't have a few days to pull it together.

For what it's worth I broke some Ally CD's (back when they were only 60 days of interest penalty) to use toward my home down payment and the process was very simple and I think I had my funds in under a week.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Geologist »

I have some of my emergency money laddered in two-year CD's that mature at 3 month intervals (that is, the CD's are staggered). At the moment, this doesn't increase income very much, but it has done so in the past.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by IPer »

My Emergency Fund based partially on some posts by Rick Ferri and an article:

Emergency Fund 18 months expenses Allocation:

Cash - 25%
CDs - 25%
VWSTX 25%
VBIIX 25%
Read the Wiki Wiki !
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Re: How much of your Emergency Fund would you lock up in CDs

Post by IPer »

BeaverFood wrote:Trying to balance liquidity with returns (although I know not to expect high returns on our savings).

We currently have our Emergency Fund in a high yield savings with Ally with .9% yield. I'm debating moving a portion of those funds into a 5 year CD ladder with Ally for the higher interest rate. But, how much is too much to lock up?
At Ally you can lock up as much as you are comfortable with, the penalty for early withdrawal was one month of interest last time I checked!
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Phineas J. Whoopee
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Phineas J. Whoopee »

IPer wrote:...
At Ally you can lock up as much as you are comfortable with, the penalty for early withdrawal was one month of interest last time I checked!
I checked just now.

The CD penalties are:
Two years or less: 60 days
Three years: 90 days
Four years: 120 days
Five years: 150 days

I also see:
Early Withdrawals —
• You may not make a partial withdrawal of principal from a CD or IRA CD prior to the maturity
date. If we consent to the closure of a CD or IRA CD prior to the maturity date, we will redeem
the CD and impose a penalty. ...
All the info is from pp. 6-7 of the referenced document.

PJW
Last edited by Phineas J. Whoopee on Sat Oct 11, 2014 3:39 pm, edited 1 time in total.
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nisiprius
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Re: How much of your Emergency Fund would you lock up in CDs

Post by nisiprius »

It's pretty clear that as of 2014, in the words of an Ally representative as as reported by Allan Roth, "Banks ordinarily will consent to the early withdrawal of a CD as long as the depositor pays the penalty."

It is also clear that banks are moving--Ally has moved--to give themselves the right to deny early withdrawal.

It is also clear that in the past there have been cases where banks denied early withdrawal, but it has been very rare. Ken Tumin reported one of them, though I can't find the link right now. Years ago the state bank commissioner's office confirmed that there had been such cases in my state but declined to give me any details.

I think it is very likely banks will grant early withdrawals as long as things go reasonably well, and I think it is likely that things will go reasonably well.

Nevertheless, with Ally's terms, it is clear: you do not have any right to demand early withdrawal, and the bank does have a right to deny it. If interest rates soar to the point where it is a such a no-brainer to break CDs that everyone is doing it, if it actually starts to hurt banks, can anyone doubt they will start playing hardball and exercising their rights?

An organization can say "Our policy has not changed," and that's good to know, but at any time they can say "And now our policy has changed."
Last edited by nisiprius on Sat Oct 11, 2014 2:12 pm, edited 1 time in total.
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BigJohn
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Re: How much of your Emergency Fund would you lock up in CDs

Post by BigJohn »

Ally is not alone in have words that make it clear they may or may not allow you to redeem their CDs early. In addition to my desire not to have administrative details/delays, the IF makes CDs for emergency funds unacceptable for me.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Austintatious »

Does anyone know of instances where a bank or CU has acted on that "fine print" warning that they might not allow early redemption of a CD? Do we have an idea of just how likely it is to occur? For example, do we know if it occurred during our most recent financial crisis and, if so, do we know the extent of the practice? Also, are there instances where you've attempted early redemption and you've felt that the institution was intentionally dragging its feet to avoid a redemption? I'm speaking of conduct other than plain old incompetence, if you could tell.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by nisiprius »

Austintatious wrote:Does anyone know of instances where a bank or CU has acted on that "fine print" warning that they might not allow early redemption of a CD?...
They have been very rare. They have occurred. I think banks are understandably are concerned about customers' reaction to the idea that they can't get their own money out of their bank. In a phone conversation the state banking commissioner's office told me verbally that there had been cases in our state but declined to disclose details; I was about to open a CD and was trying to find out "if they could" deny early withdrawals, and the banking commissioner's position was that if I'd actually personally been denied an early withdrawal they would be happy to talk to me, but if I hadn't they weren't going to discuss hypotheticals or history and please go away.

Found the link I was looking for: Can banks refuse an early withdrawal request?
Chris at Jumbo CD Investments... remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.

Chris had a good recommendation when banks have this small print about restricting withdrawals: "Some of our clients would issue a letter and have the bank sign, indicating that they would allow for the closure at the stated penalty. This is quite effective. Most banks are willing to sign because they really don’t intend to not allow the withdrawal."
Last edited by nisiprius on Sat Oct 11, 2014 2:45 pm, edited 2 times in total.
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lululu
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Re: How much of your Emergency Fund would you lock up in CDs

Post by lululu »

I'm retired, so my emergency fund and my money for living expenses are one unit. I have them in two things. One is the slush fund in a money market account which has max about six months' living expenses in it. I transfer money from that to my checking account and to pay my credit cards with a few mouse clicks.

The other is a bunch of CDs. They are not laddered nearly as much as I would like, because I go for the highest yield taking into account early closure penalties. They are almost always 5 years nowadays. When the money market account gets down to 1 to 2 months' living expenses, I break a CD into it. Each CD has about six months' living expenses.

Theoretically, I suppose a credit union could refuse to let me end a CD early, but at least when I open the CDs they have specified penalties. The credit unions are mostly within easy driving distance. If I need major money instantly, I have credit cards. I can't imagine needing, say $100,000 within one or two hours, which seems to be the scenario some people are imagining.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by nisiprius »

lululu wrote:...If I need major money instantly, I have credit cards...
Debt is not cash. People sometimes think their credit card spending limit is the same thing as cash, but it isn't. Following 2009, there was a wave of credit card limit reductions, including "chasing the balance" (the bank cuts the spending limit down to the actual balance, and cuts it further as the balance was paid down, so that the cardholder cannot make additional purchases). These limit reductions were not due to the cardholders doing anything wrong or being any less creditworthy, they were done because the banks were short of cash to lend out.Can My Credit Card Limit Get Reduced Without Notification?
While credit card companies are required to give you 45-days’ notice before making key changes to your account’s terms, that usually doesn’t include credit line reductions. In other words, your bank most likely won’t tell you before it lowers your spending limit.
Last edited by nisiprius on Sat Oct 11, 2014 2:55 pm, edited 1 time in total.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by sport »

In a limited way, money can be withdrawn from a CD prematurely, without paying a penalty. When you buy a CD, you have a choice of having the interest accumulate, or paid to you monthly. In my experience, the accumulated interest can be withdrawn at any time without penalty. With today's low rates, that generally would not provide much cash. However, under more "normal" conditions, the amount can be meaningful. For example, if you had a 5% five-year CD, the accumulated interest after 4 years would be more than 20% of the principle amount. Using this feature with a ladder of CD's would allow you to get some of the money out of a CD while waiting for it to mature when you could get to the rest of it, all with no penalties.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Austintatious »

nisiprius wrote:
Austintatious wrote:Does anyone know of instances where a bank or CU has acted on that "fine print" warning that they might not allow early redemption of a CD?...
They have been very rare. They have occurred. I think banks are understandably are concerned about customers' reaction to the idea that they can't get their own money out of their bank. In a phone conversation the state banking commissioner's office told me verbally that there had been cases in our state but declined to disclose details; I was about to open a CD and was trying to find out "if they could" deny early withdrawals, and the banking commissioner's position was that if I'd actually personally been denied an early withdrawal they would be happy to talk to me, but if I hadn't they weren't going to discuss hypotheticals or history and please go away.

Found the link I was looking for: Can banks refuse an early withdrawal request?
Chris at Jumbo CD Investments... remembered two cases in which a bank refused to release funds. In one case, the bank ended up working with him and his client. They were able to have the bank release the funds after negotiating a higher penalty. The other bank would not budge, and it refused to release the funds.

Chris had a good recommendation when banks have this small print about restricting withdrawals: "Some of our clients would issue a letter and have the bank sign, indicating that they would allow for the closure at the stated penalty. This is quite effective. Most banks are willing to sign because they really don’t intend to not allow the withdrawal."
Didn't think about that banking commission thing. It's a good idea, perhaps a good place to ask the question about likelihood and/or frequency of refusal, and perhaps a resource to call upon if one is getting the run around from a bank. And the letter seeking bank signature acknowledging right to redeem is also good idea, in theory. I wonder how many and what kinds of banks would agree to sign such an agreement.

thanks, nisiprius
Last edited by Austintatious on Sat Oct 11, 2014 4:04 pm, edited 1 time in total.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by lululu »

nisiprius wrote:
lululu wrote:...If I need major money instantly, I have credit cards...
Debt is not cash. People sometimes think their credit card spending limit is the same thing as cash, but it isn't. Following 2009, there was a wave of credit card limit reductions, including "chasing the balance" (the bank cuts the spending limit down to the actual balance, and cuts it further as the balance was paid down, so that the cardholder cannot make additional purchases). These limit reductions were not due to the cardholders doing anything wrong or being any less creditworthy, they were done because the banks were short of cash to lend out.Can My Credit Card Limit Get Reduced Without Notification?
While credit card companies are required to give you 45-days’ notice before making key changes to your account’s terms, that usually doesn’t include credit line reductions. In other words, your bank most likely won’t tell you before it lowers your spending limit.
I deal with credit unions not banks, so the slime factor is a lot less. I have never had my credit limit lowered, in 2009 or at any other time.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Phineas J. Whoopee »

lululu wrote:...
I deal with credit unions not banks, so the slime factor is a lot less. I have never had my credit limit lowered, in 2009 or at any other time.
Nonetheless, as nisiprius wrote, debt is not cash, even if you personally haven't experienced a credit limit being lowered. To comment further, banks are beholden to their owners. Credit unions are beholden to their members. If a credit union needs to reduce its potential liabilities, which arise from revolving credit, to protect the interests of its depositing members, it will.

You can take any approach you like, of course, but a revolving credit line is not the same as money in a savings account, or 4-week T-bills, or in sufficiently-aged savings bonds. That point persists.

PJW
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Re: How much of your Emergency Fund would you lock up in CDs

Post by trueblueky »

Phineas J. Whoopee wrote:
lululu wrote:...
I deal with credit unions not banks, so the slime factor is a lot less. I have never had my credit limit lowered, in 2009 or at any other time.
Nonetheless, as nisiprius wrote, debt is not cash, even if you personally haven't experienced a credit limit being lowered. To comment further, banks are beholden to their owners. Credit unions are beholden to their members. If a credit union needs to reduce its potential liabilities, which arise from revolving credit, to protect the interests of its depositing members, it will.

You can take any approach you like, of course, but a revolving credit line is not the same as money in a savings account, or 4-week T-bills, or in sufficiently-aged savings bonds. That point persists.

PJW
I hear you. Still, until that happens, if I needed $10,000 for an emergency tomorrow, I'd use the cash-back credit card and pay it off at the end of the month. If that wouldn't work, then I'd transfer enough funds into checking to cover the bill.

I don't consider the credit card an EF as much as it is a convenient way to pay without having to immediately break a CD or move money from savings.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Phineas J. Whoopee »

trueblueky wrote:...
I don't consider the credit card an EF as much as it is a convenient way to pay without having to immediately break a CD or move money from savings.
And on that we completely agree.
PJW
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Re: How much of your Emergency Fund would you lock up in CDs

Post by skylar »

I definitely wouldn't lock up all of it, but some of it is fine. As others have mentioned, it's good to have a few buckets to draw from. For us, it breaks down like this:
  1. 1-4 months of cash in checking, savings, and money market accounts
  2. 6+ months in EE- and I-series savings bonds with a linked checking account in TreasuryDirect
  3. ~1 month in unreimbursed HSA expenses, with enough cash (not investments) in the HSA savings account to cover them
  4. 6+ months in CDs
Just make sure you know how to get at each source of money before a crisis hits.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by ivyhedge »

Toons wrote:Me personally ,,,zero :happy :happy
Agreed. For a true emergency fund: 0%.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by john94549 »

If over 59 1/2, and it's an IRA CD, and you can make partial withdrawals with no EWP, and you won't need the money for a week to ten days, fine.* Other than that, I'd have "ready cash" in a garden-variety savings account. When you start to fiddle with a CD ladder, break here, snip there, it gets messy.

*StateFarmBank's 5-yr IRA CD at 2.25% is about as good as it gets in this category. You can make a partial withdrawal, there's no EWP (if over 59 1/2), and the balance of the CD clicks along at 2.25%.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by JonnyDVM »

I keep trying to come up with ways to make more money on the emergency fund. There really isn't any. If it's locked up in a CD it's not easy to get to rapidly if needed. Considered starting to keep some of our emergency fund in I-Bonds because our current money market rate stinks. Discussed it with wife. Here's how the conversation went.
Me: I was thinking about putting some of our emergency fund in I-Bonds to get a little more interest.
Wife: what are those?
Me- it's a government bond that goes up the same rate as inflation. When you buy them your money is locked up for a year though.
Wife: What if there's an emergency and we need the money?
Me- :?
Wife: I don't like that idea.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by skylar »

JonnyDVM wrote:I keep trying to come up with ways to make more money on the emergency fund. There really isn't any. If it's locked up in a CD it's not easy to get to rapidly if needed. Considered starting to keep some of our emergency fund in I-Bonds because our current money market rate stinks. Discussed it with wife. Here's how the conversation went.
Me: I was thinking about putting some of our emergency fund in I-Bonds to get a little more interest.
Wife: what are those?
Me- it's a government bond that goes up the same rate as inflation. When you buy them your money is locked up for a year though.
Wife: What if there's an emergency and we need the money?
Me- :?
Wife: I don't like that idea.
This is a very good point. I should emphasize that all of our savings bonds are well past one year in age. Before that point, we obviously did not count them as part of our emergency savings.
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mrpotatoheadsays
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Re: How much of your Emergency Fund would you lock up in CDs

Post by mrpotatoheadsays »

None.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by avenger »

None. But I don't have a separate "Emergency Fund."
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Kevin M »

Although I'm a huge CD fan, if I I thought I might absolutely need access to a certain amount of money in an emergency, and I had no other resources like savings, I Bonds more than one-year old, or bond funds (or even stock funds) in taxable accounts, I probably would not put it in a CD for the reason mentioned about the possibility of an early withdrawal being disallowed, or terms changed retroactively to disallow withdrawals.

As a reality check, I've done early withdrawals from four CDS--two at Ally and two at Barclays.

Barclays was as smooth as silk. A quick phone call, the only question was "where would you like to put the money", to which the answer was "in my online savings account at Barclays". The money was in my savings account the same day (or maybe it was the next day), at which point I opened used ACH transfer from PenFed to pull the money and immediately open up a higher rate CD.

At Ally, the process was also smooth and quick (funds in savings next day as I recall). The only difference is that the rep asked me a few questions about why I was closing the CD. No big deal, just took a couple minutes more on the phone.

So based on my experience I'm quite comfortable that I can tap my CDs early if I want, but perhaps if rates skyrocketed things might be different, in which case I'd just have to wait a year for the CDs to start maturing so I can roll them into the higher rates.

With respect to early withdrawal terms being changed, they have been changed at several CUs I'm with, including Ally and PenFed, but they were NOT changed retroactively. So all of my Ally CDs still have that sweet EWP of 60 days of interest (which I'll probably not end up taking advantage of since rates are competitive with current rates and my CDs start maturing next year).

Ken Tumin has written about the two or so credit unions that changed terms retroactively on his site http://www.depositaccounts.com. Speaking of that site, you can find much better 5-year CD rates there than at Ally. Best nationally available now is 2.52%, and there are several in the 2.25%-2.3% range.

Of course on something like $10K this is only going to be $20-$50/year more before taxes. But then vs. a 1% savings account, a 2% CD is only $100/year more before taxes, so maybe $50-$75 after taxes. So that's the convenience/reliability fee you're paying to keep it in a savings account.

I also would most likely pay for most unexpected expenses with a credit card, but of course I'd want access to cash within 30-60 days to pay the credit card off. I have tens of thousands of dollars in credit card limits that I don't ever come close to using, and none of my limits were lowered or cards closed in 2008/2009. I did just get a letter that one of my accounts is being closed because I haven't used the card in more than two years, but I'll try to get the credit limit of another card with that bank bumped accordingly if I can.

I don't think in terms of EF, but I do think in terms of liquidity. I have been building up cash (selling bond funds, stocks, etc.) in anticipation of better CD rates in a few months (although 2.5% isn't bad; a bit tempted by that one), and to make my second I Bond purchase for the year ($10K for my living trust). However, if stocks keep heading down, I may end up using some of that to put back into stocks, and maybe sell more bond funds to fund CDs and I Bond (and rebalance more into stocks if necessary).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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cfs
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Re: How much of your Emergency Fund would you lock up in CDs

Post by cfs »

Another one.

Another "None."
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Austintatious
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Austintatious »

Kevin, looks like you're preparing for another PenFed holiday special. I hope you'll sound the alarm, should they come through.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by Kevin M »

Austintatious wrote:Kevin, looks like you're preparing for another PenFed holiday special. I hope you'll sound the alarm, should they come through.
You got it, although looking back a few years PF is not as consistent has I had thought about holiday specials. There are so many folks primed for this, I suspect someone else will beat me to it in posting here if it happens. If it doesn't happen, we all get coal in our stockings instead :-(--or make do with something like the 2.52% 5-year from Chartway CU (if something like it still available).

With the 5-year treasury at 1.55%, a 2.52% CD is a steal, especially with an EWP of 180 days of interest (PenFed is 365 days of interest on the 5-year and above).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: How much of your Emergency Fund would you lock up in CDs

Post by placeholder »

I just don't have enough in the EF to make it worthwhile to do anything besides keep it in an interest bearing checking account and even there I don't rate hop to get the best one.
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