Should We Shift Some Emergency Fund Money to CDs?

by Kevin on September 10, 2008

ING Direct recently sent me an automated e-mail reminding me that they offer Certificates of Deposit (CDs). Not only that, but that the rates had recently increased.

Here’s a breakdown of the CD offerings as of this morning (effective since August 26, 2008):

  • 6 month: 3.75%
  • 9 month: 3.75%
  • 12 month: 4.00%
  • 18 month: 4.00%
  • 24 month: 4.00%
  • 30 month: 4.00%
  • 36 month: 4.00%
  • 48 month: 4.00%
  • 60 month: 4.25%

We currently keep our emergency fund with our other ING savings at 3.00%. This account is liquid, and we can access the money if we needed it very quickly. However, we have a lot of money saved up for various other goals. I think we’ve got enough to move some of our emergency fund from the liquid savings account and put it into a 6 month CD.

I’ve thought about doing CD laddering, but I really like the flexibility we get from the ING savings account. But if we can maintain some liquidity and earn a higher return… I’m tempted to say the least.

I’m only comfortable doing 6 months right now. If we locked in for five years you earn a higher rate, but there is a chance rates could go up. Of course, there’s a chance rates could go down, too. Being locked in for the long term at that point would be a good thing. However, if rates go down — or we have an emergency and need to pull the money out — you have to pay 3 months worth of interest back.

What would you do?

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{ 11 comments… read them below or add one }

FFB September 10, 2008 at 9:36 am

I have discussions like this with my wife. She worries about putting too much in CD’s but I tell her that if we get to the point where we need to cash our CD’s then that means we went through all of our savings already. And if we did need out CD’s we would only lose 3 month’s interest. I say figure out an amount of your savings that you know you won’t need in a year and go for the CD.

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Jeremy Davis September 10, 2008 at 10:06 am

The way I would figure this out is to see how much extra I would make from the CD instead of just keeping it in ING. If I’m only going to make $12 from going the CD route then it isn’t worth the risk of locking in my money.

I have no idea how much you are planning to commit, but for only doing 6month CD for roughly only .75% more I can’t image you’ll make a significant more from the CD than ING.

If you do have the numbers I’d love to see them, since I always struggle with the proper way to calculate interest rates and could use a good refresher.

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JB September 10, 2008 at 10:44 am

I started putting all of my E-fund money into CD’s because IT IS less liquid. For me, I needed the extra step to stop myself from stealing from my e-fund. I create a new 6-month CD on the first of every month… this makes it so I will always have a CD maturing every month and my funds are still somewhat liquid.

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Marcus September 10, 2008 at 11:20 am

How about this. You said, “However, we have a lot of money saved up for various other goals.” Are any of these “goals” 6 months or further? Is this money already in a higher interest bearing account? Why not earmark that money and put it in CD’s. Depending on the time frame, you might be able to venture into a higher rate/longer term CD. Then you can actually set aside less money, increasing your emergency fund, because the principle + interest at the end will equal your goal. Future Value/Present Value is a wonderful thing.

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Megan September 10, 2008 at 11:41 am

I would put some of my emergency fund in, no question. I have saved up 6 months worth of expenses, and have 3 months worth in a savings account with ING and 3 months worth in an ING CD. I’m actually in a lower rate 6 month cd than they’re currently offering – but it’s still 3.5%, which is more than I’m getting in the savings account. I figure that in a true emergency, I would use the first 3 months of expenses (realizing that I could potentially go through this in a month, depending on the nature of the emergency) and then hit the CD and just risk losing whatever interest I might earn. I have yet to need any of that money, so I think it’s a safe risk for me. But it depends on what your risk tolerance is, I suppose. In good times, it’s nice to earn a bit of extra money with your emergency fund. In bad times, are you really going to care about that relatively small loss of interest if you have to pull the money out early?

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Kimberly September 10, 2008 at 11:59 am

It’s like you read my mind. I got the same email and was going through the same thought process.

I ended up deciding to just let the idea marinate in the back of my head for awhile. I’d rather not lose the liquidity for one point, and no way would I tie it up for 60 months for 1.75 points.

I actually have an account at HSBC as well, and they’ve been giving me 3.50% for awhile, so I’ve been biased towards dumping money in that account. I’ll probably stick with that strategy while I think it over.

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LivingAlmostLarge September 10, 2008 at 12:48 pm

I invest our EF, or a portion of it. 3 months in cash and 3 months invested. I figure as our wealth increases we’ll keep adding to it and so what if it loses money. The taxable money will have to be used if we lose our jobs, pretty much one of three reasons I would touch my EF.

My EF is for job loss, death, and disability. It is not for unexpected expenses. Thats in cash because I should have enough flex in my budget AND i should be budgeting for things like home repairs, car repairs, etc.

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Matt @ Steadfast Finances September 10, 2008 at 9:44 pm

I’ve given up CDs now that savings rates are back up. I found a savings savings account @ 6% for goodness sakes… it’s crazy but true. My thoughts are why lock up cash in CDs when a basic savings account pays more.

I wrote a post about it at SF if you’re interested.

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Kevin September 10, 2008 at 9:47 pm

@FFB: I think that is the route we are going to go, as well as moving slowly. Rather than moving all of it in today, we’ll do it a little bit at a time in set increments to start a CD ladder.

@Jeremy: That’s the thing, even if you have $100,000 the difference is only $750. So it’s going to be small — but it’s still more than you would make otherwise. As I mentioned to FFB, if we start a CD ladder (buying one 6 month CD every month for example) we will still have some liquidity plus the other money in our savings accounts.

@JB: That’s a good idea to help control yourself.

@Marcus: Good idea. We do have some longer term goals out there that we could start socking money into CDs for. I am still wary of locking in for a long period of time though. I love PV/FV as well.

@Megan: Good point. The interest charge is usually pretty small to pull it out (unless it’s thousands of dollars).

@Kimberly: Haha! :) I am psychic… I prefer ING due to the awesome customer service.

@LAL: I guess I’m not willing to risk the emergency fund with the amount of volatility we are seeing. Unless you mean you might be investing it in bonds or something similar (which have also been brought down). You are right though in terms of some of the other savings — I just don’t think everyone has them (we save for those monthly so we’re not ‘fully funded’ but getting there).

@Steadfast: I’d love to hear about that account. It depends on the institution and the amount of money you need to have in the account, etc. I’m very happy with ING due to their awesome interface and customer service.

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LivingAlmostLarge September 11, 2008 at 9:43 am

Nope regular investments. I don’t really think that it matters if you are going to use it all in an emergency to set aside an amount in cash.

As long as I have 3-4 months operating cash on hand the rest is all my EF. Truth is if I lost my job I’m not going to sit there and say I only have a 6 month EF, I can’t cash our my taxable account. Nuh-uh. I’m going to say I need to find a job period. But I have a minimum of 3 months cash or 4 months, since I work ahead and I have 3 years in taxable accounts.

This is why I will NEVER pay off my mortgage early, except in 100% full! You don’t own the house till it’s paid off in full. So until then if you lose your job and own 50% of it, you can’t refinance because you don’t have a job. BUT you still have to pay a mortgage note! And they will take it away even with that much equity, so no way.

I’ll pay it off early maybe, but not unless it’s 100% in full. And not a day sooner. My method mitigates risk, but paying off a mortgage early you only have your EF and whatever extra in a taxable account to live on. I might have 3-10 years to live easy. Especially if I became disabled and needed to retool my career.

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LivingAlmostLarge September 11, 2008 at 4:30 pm

Also the rates aren’t high enough to justify tying up my money. And I’d prefer I-Bonds.

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