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Find Shelter For Rainy Day Savings

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The Tampa Tribune

Published: October 21, 2007

Krista Swetz and her husband are just a few months away from reaching a money milestone.

The Maryland couple will soon have saved the three months' worth of living expenses I'm always telling folks to have stashed away in case of an emergency.

Once they reach their goal, Swetz wanted to know where they should keep the cash.

First, keep in mind that this money should remain readily accessible. You'll want to be able to withdraw it quickly without having to sell an investment or pay a penalty. This is your safety stash so you don't want to put it in any long-term holding.

You have several options for where to put your rainy-day money. Whatever you select is fine because there really isn't a wrong choice among these options:

Simple savings account. Before you shout 'no, no way,' you should know that even in this low-interest-rate environment you can find institutions offering a good rate on a savings account. But you may have to move beyond your comfort zone. Some of the institutions offering the best rates are not your typical brick-and-mortar banks.

For example, E-Trade is offering (as of Oct. 8) a 5.05 percent annual percentage yield on savings accounts. ING Direct, an Internet-only bank, is offering (as of Sept. 19) a 4.3 percent annual percentage yield. Deposits at both institutions are federally insured. Getting your money is pretty easy. With a click or two, you can transfer money to a regular checking account at any bank.

When going with a nontraditional financial institution, check the fine print because transfers can take a few days and you may be limited to a certain number of withdrawals a month. But none of these terms should deter you. After all, this is your emergency money and you don't want it to be too easy to withdraw.

To search for the institutions with the highest savings account rates, go to www.bankrate.com. At the top of the Web site, click on the link for 'Compare Rates.' Under 'CDs & Savings,' select the option for money market accounts and savings accounts.

Certificates of deposit. Short-term CD rates are pitiful these days. The rates for longer CDs are better. But, of course, you wouldn't want to lock up your emergency money in a five-year CD. However, you could 'ladder' your CDs. Laddering allows you to take advantage of typically higher rates offered by longer-term CDs while maintaining access to some of your money. With this strategy you divide your money up and buy a series of CDs that mature at different times. Bankrate.com has an online calculator to help you figure out how to ladder your money in CDs. Look under the link for calculators.

Money-market deposit account. These are interest-earning savings accounts offered by FDIC-insured financial institutions. Money-market deposit accounts offer many of the same privileges as checking accounts, but you are limited in the number of transactions you can make in a month. These accounts have a minimum balance requirement. If you are going to use this type of account to hold your rainy-day money, be mindful of any monthly fee, especially if your balance drops. Also check to see if you get a higher rate if you deposit a larger amount.

And in case you don't know, your emergency fund should include not just your rent or mortgage payment but also any expenses for cars, food, utilities, gas and other ordinary household needs.

You might as well throw cable into the calculation and the average amount you spend eating out or for entertainment. Don't underestimate what you need in an emergency because I've found that even in a crisis, it takes several months before the average family cuts back on their expenses to accommodate a reduction in their income.

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