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Why You Need An Emergency Fund, And Where's The Safest Place To Invest It

Saturday, July 13, 2013 - 7:02 PM
The best place for your emergency fund is in a liquid (easily accessible) account. A liquid account might be a regular savings account at a bank or credit union that provides some return on your deposit, and from which your funds can still be withdrawn at any time without penalty.

http://www.pbs.org/newshour/busin...est-it.htm
6
ShorebreakShorebreak2,622 posts since
Apr 6, 2010
Rep Points: 14,215
1. Saturday, July 13, 2013 - 7:47 PM
"I agree wholeheartedly with this advice and with the reasoning behind it. What it fails to do, however, is explicitly recommend Series I Saving Bonds as the preferred asset class for your emergency fund. I will explain why I-Bonds are the best place to hold your emergency reserve funds."

The key point for this article by Zvi Bodie is to use I-Bonds for emergency fund. 

Problems: (1) very low interest rate, (2) has to be kept for at least a year or longer; five years without penalty (not liquid so it is not for emergency fund by definition), (3) annual upper limit is $10K.

Thus it is not a prudent way for emergency fund.  RCA (Reward Checking Account) with an average of (3%, $25K) is the best way for emergency fund.  One can get several of RCAs for the 3-6 months expense preparation.  Say one spends $10K per month per household.  One can have two RCAs for $50K and put the rest $10K in another (4%, $10K) RCA.

How to get into one of those RCAs is a challenge; but entirely possible.
4
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,426
2. Sunday, July 14, 2013 - 3:49 PM
Re: 51hh @ 1. Saturday, July 13, 2013 - 7:47 PM

I really like the concept of the RCA and think it is a very good method of getting a decent interest rate on an account of $25k. Posting only for myself, I probably couldn't take advantage of an RCA as perhaps someone else could.  First, I probably wouldn't make that many, let's say 15, purchases per month utilizing an ATM card. Second, I don't want to, or am too lazy to keep track of the number of purchases and/or date that the financial institution sets as the due date. Again, these reasons only apply to myself so take them with a grain of salt. An RCA may be the greatest thing since sliced bread to someone else and an ideal way to maintain an emergency fund. I look at an emergency fund as money I don't touch unless a true emergency arises and I have one in a top-tier savings account.  Good points however 51hh.
5
ShorebreakShorebreak2,622 posts since
Apr 6, 2010
Rep Points: 14,215
3. Sunday, July 14, 2013 - 8:51 PM
SB,

Thanks for your take on RCA.  I can undestand your concerns, adding the debit card fraud risks. 

On the debit card requirements, I started with gasoline purchases at gas station (usually two transactions per card, I could do 4-5 cards without any issues).  That was tough in NE Winters.  Now I do all debit card transactions online; e.g., utility, insurance, Amazon Payment, etc.  I can complete all the debit card requirements during the the first three days of the month.  Yes, I keep a running record for all RCAs and usually exceed the required number of debit card transactions by 3-4.

It is indeed a chore (and I will be very happy when it is over; i.e., my RCAs drop below (3%, $25K)); but it is well worth it considering the RCA offers I am getting. 

But, you're absolutely right, to each his own. 
2
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,426
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