Semi-liquid savings?

[two_cents]

I'm interested in the options for an 'accessible' savings plan. One that provides better interest than a money market, but I can still get funds out if I really needed to (job loss).

Does such a thing exist?

I ask because I have 6mos expenses (30k) in a money market. That seems like too much to be only earning 1%.

Thanks!

[J Savvy]

Yes a money market or online savings account will be your safest bet for your emergency fund. 1% obviously isn't awesome, but it's better than zero.

If you wanted to take on a bit more risk you could do a bond fund like LAS suggested (something like VFSTX, which is returning ~2%/yr). Depending on your risk appetite and general financial situation you could also put that into a conservative portfolio of stocks and bonds. Something like 40/60, for example.

That route will open you up to more downside risk, but with more risk there is more reward. You could actually beat inflation going down this route. That said, many aren't a fan of this option because it means your emergency fund is at risk of losing value, which would defeat the purpose of it being there for emergencies.

I'm in the middle on it. A lot depends on your risk appetite - will you get nervous when the market drops? How secure is your income? Is it recession proof? Can you cover expenses another way in case something happens? Will you still be able to sleep easy knowing your emergency fund carries downside risk?

Most of the time you wouldn't necessarily need that full $30k on day 1 of an emergency, so having to wait a couple of days for funds to transfer shouldn't be a big deal. If you did need a big chunk immediately, you could also use credit cards to pay while you wait for your funds to transfer, then pay off the cards with the fund.

[two_cents]

Thank you for the insight. Sounds like my best bet is to keep it in the money market, and pay extra on the auto loan @ 3%.

[index]

Ally has 2.25% on 5-yr CD's. The penalty for breaking the CD early is 6 months interest. So if you break it after a year, you are doing slightly better than the money market; every year after that is significantly better up to 2.25%. I've cashed them out before, it is pretty easy. Takes 1 business day to move it from the CD to a checking account.

[Scortius]

Thank you for the insight. Sounds like my best bet is to keep it in the money market, and pay extra on the auto loan @ 3%.

I'd say your best bet is to keep it in a money market, and invest the excess in a tax-advantaged retirement fund first, or a simple brokerage account second.  Don't pay off a 3% loan early.

[two_cents]

Don't pay off a 3% loan early.

That loan is part of the reason for my original question. It's the only loan I have other than mortgage (30yr @4.75%).

On one hand I could pay off the auto loan @3%, but be reduced from 6 mos emergency fund down to 2 mos. This would give me a better return (3% vs 1%) and free up monthly cash.

[RWD]

I ask because I have 6mos expenses (30k) in a money market. That seems like too much to be only earning 1%.

You should try and reduce your expenses so that 6 months isn't such a large number. $60k/year is double what many of us are spending here.

Either way, I agree that that is too much to have uninvested. Unless you're saving up for something specific you don't need that much liquid. You can sell stocks/bonds fast enough to pay off any emergency credit card transactions. See MMM's thoughts on the 6 month expenses in savings here:
https://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

[Hotstreak]

Don't pay off a 3% loan early.

That loan is part of the reason for my original question. It's the only loan I have other than mortgage (30yr @4.75%).

On one hand I could pay off the auto loan @3%, but be reduced from 6 mos emergency fund down to 2 mos. This would give me a better return (3% vs 1%) and free up monthly cash.

3% and 1% are both very low compared to expected market returns of 5-8%.  I would invest the extra cash.

To your question of where to keep your 30k to earn a better rate, you might look at a CD ladder.  You might keep 10k in your money market at 1.00% put another 10k in a 12-month CD at 1.50%, they wait 6 months and put the remaining 10k in a 12-month CD at 1.50%.  This way you keep 10k available for instant access, and every 6 months a CD matures which you can use for living expenses.  You can get CD's with minimal break fee's so if you need to terminate early you won't lose any principal.

[two_cents]

Yes we are trying to lower our monthly expenses too.

Thank you for the article on "springy debt". I like that idea.

Is a "retirement CD" the same as the CD you're talking about?

[inline five]

Don't pay off a 3% loan early.

That loan is part of the reason for my original question. It's the only loan I have other than mortgage (30yr @4.75%).

On one hand I could pay off the auto loan @3%, but be reduced from 6 mos emergency fund down to 2 mos. This would give me a better return (3% vs 1%) and free up monthly cash.

3% and 1% are both very low compared to expected market returns of 5-8%.  I would invest the extra cash.

To your question of where to keep your 30k to earn a better rate, you might look at a CD ladder.  You might keep 10k in your money market at 1.00% put another 10k in a 12-month CD at 1.50%, they wait 6 months and put the remaining 10k in a 12-month CD at 1.50%.  This way you keep 10k available for instant access, and every 6 months a CD matures which you can use for living expenses.  You can get CD's with minimal break fee's so if you need to terminate early you won't lose any principal.

The difference in $20k getting 1% vs 1.5% over a year is $100

That is a lot to keep track of for $8/month. IMO.

[Ocinfo]

I ask because I have 6mos expenses (30k) in a money market. That seems like too much to be only earning 1%.

You should try and reduce your expenses so that 6 months isn't such a large number. $60k/year is double what many of us are spending here.

Either way, I agree that that is too much to have uninvested. Unless you're saving up for something specific you don't need that much liquid. You can sell stocks/bonds fast enough to pay off any emergency credit card transactions. See MMM's thoughts on the 6 month expenses in savings here:
https://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

I too use a form of springy debt by having credit cards I can get balance transfer direct deposits from for 0% for ~15 months with 4% fee upfront. I keep 1 month expenses in a checking account and everything else is in the market (stocks, a few bonds). If I need money, I can sell some investments. If the market is down (or way up and taxes would suck for selling) then I get a balance transfer deposit (Citi and BoA will deposit money right to a checking account in 2-3 days). This system greatly reduces the odds of having to sell stocks low.

Main message is that there are a lot of ways to have a nice cash pad without having $30k sitting idle. Keep $10k in cash (whatever makes you emotionally comfortable), secure some easy access to credit (home equity line of credit, Citi Simplicity care, etc...), and put the rest to work in bonds/stocks based on risk tolerance.

Many on here don't agree with this approach but from an optimization perspective, it's the way to go.


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