Emergency Fund Investment Options

Yesterday we heard from Golbguru and Silicon Valley Blogger about different factors that determine how much is enough money to keep in your emergency fund. Today Sun looks at a combination of three different options that we have for keeping our emergency fund liquid but also earning a return on our money while it sits waiting for an emergency.

Sun @ The Sun’s Financial Diary
The purpose of establishing an emergency fund is to have some money in place that is enough to cover your daily expenses when your income stops, such as lose your job. The appropriate amount of an emergency fund really depends on you spend every month on average. Multiplying the average monthly spending by the time (in months) that it will take you to find a new job will be the amount that you should set aside as en emergency fund.

There are suggestions that the emergency fund should be enough to maintain your normal life for six months, but at least 3-month worth of fund is necessary. Since the emergency fund is only supposed to be used in case of an emergency, it’s possible that one may be over-prepared by putting too much into an emergency fund. In my opinion, you don’t need a 12+-month cushion.

Money in the emergency fund should be easily accessible, meaning that you can’t use the money to make a long-term commitment such as investing in stocks or buying a long-term CD and you don’t want to put it a brick-and-mortar bank’s checking account which earns you close to nothing either. Several years ago your neighborhood bank might be your only choice, but not now. Here’s what I do with our emergency money.

1. Checking Account
I put several thousands in my local bank’s checking account so I can withdraw the money right away without any delay. If all the sudden I have a big bill to pay, in most cases I can pay it with credit cards, so I don’t have to keep a large amount of cash in my checking account. The rest of the money goes to the following:

2. High-yield Online Savings Account
There are many online banks now pay 5+% APY for your money. If you are looking for big names, Citibank (4.50% APY), HSBC (5.05% APY), ING Direct (4.50% APY), and GMAC Bank (5.10% APY) are possible choices. Some small players offer higher rates, such as Amtrust Direct ( 5.36% APY), UFB Direct (5.31% APY), and IGoBanking (5.30% APY) with low minimum deposit requirement, and they can also provide excellent customer service.

3. 4-week T-bills
This is my favorite for short-term investment that generate decent returns. Currently 4-week T-bill pays 4.939% APR, which is equivalent to 5.05% annual yield. However, since interests from T-bill investments are exempted from state and local income taxes, your actually yield will be higher (here’s a formula to calculate your equivalent yield).

From what I can see, there two drawbacks of investing in T-bill. First, T-bill rates change every week, so you don’t know in advance what you will get for your next investment (a couple of weeks ago you could earn 5.36% APY). Second, you money will be tied up for four weeks, but that’s a small price to pay for a better return, in my opinion.

Emergency Fund Overview
Check back tomorrow when we’ll summarize the input from fellow personal finance bloggers and readers on how much to have in your emergency fund and where to keep your money.

• Everything You Ever Wanted to Know About Emergency Funds
• Lazy Online Banking
• FNBO Direct Online Savings Account - Another Option for a High Yield Savings Bank Account
• Should You Use Your Emergency Fund to Pay Off Credit Card Debt?
• Online Banking vs. Local Banking, Which is Better?