Conventional wisdom calls for keeping enough cash in a rainy day fund to cover three to six months of routine living expenses as well as all insurance deductibles. But sequestering tens of thousands of dollars in a savings account that earns a miserly 0.01% is painful.
There are better ways -- like the four alternatives that follow -- for an emergency fund to earn more.
These FDIC-insured accounts at a bank or financial institution offer slightly higher annual yields, currently 0.35% to 0.56%, than savings accounts. Plus, an amended federal regulation lifted the six-per-month restriction for check writing and ATM withdrawals, but check with your bank first.
Vanguard Money Market Funds: What You Need to Know
Sponsored Content
2/4
CD Ladder
Certificates of deposit offer higher yields because you lock up your money for a specified time, from months to years. If you tap the funds earlier, you pay a penalty, usually a certain number of months in interest depending on the CD term. Current annual yields for a one-year term range from 0.50% to 0.70%.
You can earn more without tying up all your money by building a ladder of CDs with staggered maturities. "That way you know there's money always available," says Zaneilia Harris, a certified financial planner in Upper Marlboro, Md., and author of Finance 'n Stilettos. For example, you might create a ladder by investing $5,000 each in a six-month, one-year, 18-month and two-year CD. Every six months, one of the CDs matures, freeing up $5,000. If you don't need the money, reinvest it in the ladder.
A money market fund from a mutual fund company invests in cash and short-term debt securities, such as Treasury bills. These low-risk funds can be cashed in easily, although they aren't FDIC-insured.
Like a money market fund, a short-term bond fund delivers higher yields in exchange for slightly higher risk. These funds invest in Treasury bonds, municipal securities and corporate debt with shorter durations. Because the funds tend to remain fairly stable in price, you generally can sell shares in an emergency without risking big losses.
Ted Halpern, president of Halpern Financial in Ashburn, Va., likes low-cost, short-term muni bond funds like the JPMorgan Short-Intermediate Municipal Bond Fund (JIMIX), which has a net expense ratio of 0.25% and an average 52-week return of 1.41%. Short-term muni bond funds provide tax-free interest and better rates than CDs without locking up the money for a set term. This is especially important if rates rise, he says. "Munis are very attractive now as states are well capitalized after receiving multiple rounds of stimulus payments."
The 25 Best Low-Fee Mutual Funds You Can Buy
Sponsored Content
4/4
Credit Lines
In a pinch, your home might be a source of cash. A home equity line of credit costs just a few hundred dollars to open, and some lenders waive closing costs and maintenance fees if the loan is linked to a checking account at the same financial institution. The HELOC should be in place before you retire, when your income is relatively high and your credit is good, says Harris. "Don't tap it. Have it there just in case of an emergency." Rates for home equity lines of credit usually hover about a point above the prime rate, or slightly above the rate of inflation, with interest payable only if you draw money from the HELOC.
Similarly, you can set up a securitized line of credit tied to your investment account, with no closing costs, says Halpern. Like the HELOC, you only pay interest on the balance you draw from the credit line.
The more credit you can tap immediately, the lower your reserves need to be in other emergency accounts. Halpern recommends keeping the equivalent of two months of expenses in bank accounts and one month or more in a bond fund, in addition to credit lines.
Revisit the size of your emergency fund periodically and beef up your cash savings to cover anticipated expenses, such as a home remodeling project or car purchase, says Sunit Bhalla, a certified financial planner in Fort Collins, Colo. Bear in mind, "the more frugal you are in life, the less you need in your emergency fund," says Derek Sall, who blogs at Life And My Finances, in Grand Rapids, Mich.
Tap Home Equity for Extra Income
Sponsored Content
Katherine Reynolds Lewis
Contributing Writer, -
Katherine Reynolds Lewis is an award-winning journalist, speaker and author of The Good News About Bad Behavior: Why Kids Are Less Disciplined Than Ever – And What to Do About It. Her work has appeared inThe Atlantic, Fortune, Medium, Mother Jones, The New York Times, Parents, Slate, USA Today, The Washington Post and Working Mother, among others. She's been an EWA Education Reporting Fellow, Fund for Investigative Journalism fellow and Logan Nonfiction Fellow at the Carey Institute for Global Good. Residencies include the Virginia Center for the Creative Arts and Ragdale. A Harvard physics graduate, Katherine previously worked as a national correspondent for Newhouse and Bloomberg News, covering everything from financial and media policy to the White House.
A rainy-day fund is money you set aside to pay for unexpected expenses. It typically covers lower-cost items like an unexpected doctor's visit or fixing a broken appliance. It can be a great way to give yourself peace of mind and avoid unnecessary debt.
Where should I keep rainy day funds? High-yield savings accounts are a good place to stash and grow your rainy day savings. Consider using more than one account, or an account with subaccounts, to keep your funds organized. Use a savings calculator to see what your balance would be with different APYs.
Having a rainy day fund with enough money to pay for those uncommon expenses can be a huge relief. It can take financial stress off your plate and protect your family's finances from debt. And remember, even a small amount of savings is better than having no savings at all.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much do I need? Ideally, 6 months' essential expenses – for example, rent or mortgage, utility bills and groceries. If you're just starting out, you could set a smaller target – such as 3 months' essential expenses – to begin with. Any emergency fund is better than nothing, so don't be discouraged.
It's best to keep your rainy day fund in a savings account at a bank or credit union. These accounts offer low risk and allow you to access your funds quickly and as needed. When choosing a savings account for your rainy day fund, consider a high-yield savings account.
You should keep your emergency fund somewhere that you can earn interest on your savings without sacrificing easy access to your money in an emergency. The best options include high-yield savings accounts, money market accounts and certificates of deposit (CDs).
A rainy-day fund is smaller than an emergency fund and is often used for one-time small, unexpected expenses. A rainy-day fund should generally have $500-$1000 to ensure you have enough cash on hand to cover things such as car repairs, new appliances, etc. without affecting your monthly budget.
Instead of chopping a few dollars off your customers' bills, add tasty value to their shopping experience. Offer complimentary hot beverages such as cocoa, cider and tea. Consider getting a permit to serve wine. Lay out a spread of cheese, crackers, fruit and other appealing foods.
Catch up on TV shows and movies. When rains compel you to spend time indoors, make the most of it by finally streaming the series you've been wanting to watch on your Smart TV. ...
Use your rainy day fund to cover smaller expenses — like car repairs or fixing a furnace — that could force you to open your wallet when you least expect to. Other examples include: Medical procedures.
“A rainy day” has been used as a metaphor for hard times or times of misfortune since the late 1500s- according to Idiom Origins. Prudent people have been quoted to be saving for rainy days by putting money away in anticipation of such times.
Budget experts, including credit rating agencies, recommend using the reserves to limit painful service cuts or tax increases when states face budget shortfalls caused by temporary events such as recessions or natural disasters.
Is your rainy day fund in the right place? Many people keep their rainy day fund in a low-interest account (like a current account). Current accounts often have low rates of interest and are used for everyday banking.
Hobby: Web surfing, Skiing, role-playing games, Sketching, Polo, Sewing, Genealogy
Introduction: My name is Maia Crooks Jr, I am a homely, joyous, shiny, successful, hilarious, thoughtful, joyous person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.