Question about long term CD vs MM for emergency fund

[EchoStache]

I currently have my most liquid cash in a MMF with Fidelity earning ~4.1% with instant access. I expect this rate to go up as the FFR rate goes up so this could end up in the 4.5-5% range in upcoming months.  What I like about the MM fund is that its super easy, no lockup, same day access, and rates for practical purposes = to CD's and treasury bonds(given that rate will likely go up in the very near future) However, I also realize that this is far from a guaranteed long term rate for my savings, and that it will likely come down significantly when the Fed lowers rates at some point in the future i.e. maybe a year from now, guessing.  In other words, unlikely to remain >4% long term.

I'm wondering if it might be wiser to move this highly liquid part of my EF( I have 2/3 of it in Bonds) into a 10 year CD to lock in the current 4.6% rate long term no matter how low the FFR goes?

We are able to cash flow most normal emergencies with our income and cash in checking, so we are unlikely to *need* access to our EF even with moderate sized expenses.  It would take catastrophe to need access to the funds i.e. double job loss etc.  I understand that some CD's give access to money before maturity without fees, or at least without egregious fees/penalties.

Thoughts?  If moving into a CD makes sense, would doing so now with current rates make sense, or will 10 year rates likely go up given the certainty of a couple more FFR increases?

[waltworks]

How much money are we talking about here? If it's like $10k, just stay with what you're doing. "Locking in" a few extra bucks a year by going to CD (which might not even be the case going forward) isn't going to be worth the hassle of buying the CD, let alone the hassle/cost of accessing the money.

-W

[sonofsven]

I don't like to lock up any of my e fund as that defeats the purpose of an e fund (to me). I do spread it around churning bank accounts but it is still available.
Having $20k makes me feel warm and fuzzy. 50k would make me feel happy, too, but I decided $20k meets my needs.
Decide how much you want/need in your e fund first.

[VanillaGorilla]

Chasing yields for small amounts of cash always feels like overoptimization to me.

If you manage to eke out an additional 2% of yield for 20k you'll see a grand total of an extra $800 over a year. That hardly seems worthwhile compared to optimizing, say, your transportation costs. Cancel cable or get a cheaper cell phone or do a single DIY car tuneup and you'll yield more for your time.

[Captain Cactus]

I see chasing yields as a generally harmless activity as long as they're in "guaranteed" assets like government-backed things like CDs, t-bills, etc...

Sure, the juice may not be worth the squeeze, but if you have cash on hand for emergencies (Emergency Fund, Level 1), and you also have additional cash that you don't want to invest in VTSAX but still aren't going to do anything with it within 6-18 months (Emergency Fund, Level 2...ie you are saving up to buy a house full of windows when the recession gets hairy), why not get a little more cash out of the deal and lock it up for a little while. 

I like t-bills now due to their short maturity rates (recent 6 month t-bill yields 4.77%) and better than savings account/MMF yields.

[achvfi]

Chasing yields for small amounts of cash always feels like overoptimization to me.

If you manage to eke out an additional 2% of yield for 20k you'll see a grand total of an extra $800 over a year. That hardly seems worthwhile compared to optimizing, say, your transportation costs. Cancel cable or get a cheaper cell phone or do a single DIY car tuneup and you'll yield more for your time.

I think you meant extra $400, 2% of 20K.

[VanillaGorilla]

Chasing yields for small amounts of cash always feels like overoptimization to me.

If you manage to eke out an additional 2% of yield for 20k you'll see a grand total of an extra $800 over a year. That hardly seems worthwhile compared to optimizing, say, your transportation costs. Cancel cable or get a cheaper cell phone or do a single DIY car tuneup and you'll yield more for your time.

I think you meant extra $400, 2% of 20K.

Whoops. Even worse!

[slackmax]

UltraStache,

Nothing wrong with obsessing over interest rates (not that you are, lol). There are worse things to obsess over.

I am focused like a laser on 5 year interest rates in CDs. I want to lock in 5 % there. I scored  some at 4.95% and 4.90 %, a month ago, on 2 and 3 year CDs, but the 5 year 5% CD deals had already disappeared.   :(   

Some folks say if we wait long enough, like a year or two, the 5 year and longer rates will move back up to 5 %, or even 6%.       


 

[EchoStache]

As far as obsessing over a % here or there, I can partially agree, but its also a few mouse clicks to lock in 5% on $20k for 10+ years vs savings account/MM rate dropping to next to nothing when rates go down again.  So maybe it's a 3% spread over time which is $600 x 10 years.  I think it's worth a couple of mouse clicks to add $6,000 of free interest to my EF.

I've got $30k of my EF in Ibonds since they were 7.12%. That's been a very lucrative decision that is giving me around 8% interest on that portion of my savings for 18 months.  $3600 in interest in that short time, plus another $1,000/year interest on the remaining $20k....definitely was worth *my time* optimizing.  All told, optimizing my return on my EF could net $25k of free interest over 10 years.  I'll take it.