Where to put semi-accessible savings?

Friends, the Almighty Church of Budgeting has brought me to this place I do not understand, and I need your help. I actually have *gasp* (whispers) savings (/whispers) */gasp*, and I want to be good to it.

Parameters:
- I have $13,000 to put in savings.
- I found an online savings account with a 1.55% interest rate. 
- I found an online five-year CD with 2.5% yield.
- I do not need regular access to this money, but it *is* my holy-sh*t-the-world-has-gone-sideways money, so I need some access in case the world, well, goes sideways (job loss, apt loss, etc).
- I add $250 to it every month

Do I:
- put it all in 1.55% savings where I can get to it if I need it
- put half of it in 1.55% savings and half in 2.5% CD, risking not having access to half of it for five years
- choose a shorter term CD with a lower yield, but still higher than 1.55%
- dump some of it in my 401k (will it really make a significant difference over the long term?)
- some other answer that I don't currently see

 

Thanks!
 

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  • Whatever portion you put into CDs, I wouldn't put it all into a single CD - instead I would start a CD ladder. Put 1/5 into a 1-year CD, 1/5 into a 2-year CD, etc up to 5 years. That way every year you will have something that matures. When it does you can either put that matured money into a new 5-year CD (to continue the cycle of having a CD mature each year) or assess if you need it somewhere more liquid.

    Also, generally you can't add funds to a CD once you open it. For you future $250/month contributions, look at I-bonds.

    Like 1
      • Slugger
      • slugger
      • 3 yrs ago
      • Reported - view

      jenmas What's the advantage to a CD ladder? Why would I want to keep rolling CDs like that?

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      • jenmas
      • jenmas
      • 3 yrs ago
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      Slugger That way only 20% is tied up for 5 years, 20% for 4 years, etc. Every year you have 20% (plus the interest of course!) that you can either cash out or put into the next rung of the ladder depending on your needs. Also if you have to break a CD, you can break them one at a time to minimize the early withdrawal penalties.

      Like 3
      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
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      Personally, I'm moving away from CDs and into I-Bonds. A CD ladder is good, better than 1 or even multiple 5-year CDs for the reasons mentioned, but it's a bunch of extra accounts to manage. The only real con compared to a CD is with I Bonds is you can't touch the money for the first year at all, no exceptions.

      Slugger how many months of expenses does this amount represent? And do you live in a state with income taxes? I ask because I Bonds are free of state taxes.

      I would look at the right balance between getting a decent yield, accessibility, and level of effort vs. chasing yield.

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  • Thank you for that jenmas .  I learned something about starting the CD ladder.  

    Slugger  Had to laugh when I saw this entry.  I am also trying to decide where to put $300 per month.  Will be watching this thread and hopefully learning lots.  

    For my thoughts, I'm thinking about going with: $100 saved for a yearly CD purchase, $100 to stocks, $100 to TreasuryDirect (undecided at this time).   Thinking about, and researching jenmas' recommendations.  Had almost settled on TIPS.  Just opened my account today.

    Thats my thoughts. 

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  • What about investing part of the money in something like Lending Club? I'm thinking maybe $1000 there, $4000 in a CD or CD ladder, and the rest in the savings account. Does that seem like a good balance of risk and reward?

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      • MsTJ
      • YNAB has given me back my future
      • Believer_in_YNAb
      • 3 yrs ago
      • Reported - view

      Slugger I tried Prosper.com , just before the 08 crash. I lost my shirt and will never use them. I lost something like 97%. The rates were horrible when I was investing. Would you take a loan on the site? I would not. As far as I'm concerned, these are all rip off sites. You fund a loan for 20%, which sounds wonderful, then the site takes a about 50% of your returns. On top of that, most loans default. Your return=nothing. My suggestion-avoid these places like the plague.

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      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
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      • Reported - view
      Slugger said:
      What about investing part of the money in something like Lending Club? I'm thinking maybe $1000 there, $4000 in a CD or CD ladder, and the rest in the savings account. Does that seem like a good balance of risk and reward?

       You shouldn't be looking for risk/reward for your emergency fund, which is what this money is per the original post. You're looking for safety and stability. Once you have enough of a stable safe cushion, then you are in a position where you can invest. Stable and safe cushions are FDIC insured accounts (checking, savings, CDs) and inflation-protected bonds (I Bonds).

      Meanwhile, are you maxing out all available tax-advantaged accounts? A workplace plan, IRA, etc.? if not, you should be doing that before you invest a single after-tax cent.

      This Fear Of Missing Out keeps rearing its head. You have to have all your financial ducks in a row first.

      I have a nice growing sum in a brokerage account that we contribute only unneeded money to monthly, but we are maxing out 2 401ks, 2 IRAs and an HSA, and have 6-figures of cash in the bank covering our budget including 6 months of emergency income replacement.

      Like 2
  • First off, I'm impressed that you found a savings account with rates that high, that's a full .3% higher than what I've found.

    Personally, I'd say leave at least half of the money in the savings account.  A CD ladder sounds like a good plan for the other half.  As for Lending Tree and the like, I would stay away from that until you had enough that you're comfortable with the possibility of losing 40% (why 40%?  I dunno, it seems like a reasonable number to me) of your invested amount when you need it.  If there's a huge recession like 10 years ago, the people who have borrowed the money are as likely to be in those straits as anyone else in the country, and paying on their unsecured loans that you're funding may be their way of getting by.  If there's the accompanying stock market crash, it could crash by that much too if you invest it in the market.

    Like 1
      • Slugger
      • slugger
      • 3 yrs ago
      • Reported - view

      TheTabby Yeah, the stock market may be booming now, but my read of this political situation is that it is supremely unstable. I might throw a bit in there that I'm willing to lose, but not a significant amount.

      It also sounds like LC might be quite a bit of work? I can't quite tell how hands on you need to be to get the desired results.

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  • For what it's worth, I did some back-of-the-napkin calculating. I used the 1.55% savings interest rate from CIT Bank, plus the CD calculator at Barclay's that has the highest or close to the highest CD rates.

    Option 1: All in 1.55% savings, add $250/mo
    5 year Yield: $29,632.97

    Option 2: Two thirds savings; one third CD
    $8,400 in 1.55% savings, add $250/mo: $24,662.54
    $4,600 in one 2.4% five-year CD: $5,191.80
    5 year Yield: $29,854.34

    Option 3: 50/50 with CD ladder
    $6,500 in 1.55% savings, add $250/mo: $22,609.54
    $6,500 in five-year CD ladder: $7,228.20
    5 year Yield:  $29,837.74

    Option 4: Two thirds savings; one third CD ladder
    $8,400 in 1.55% savings, add $250/mo: $24,662.54
    $4,600 in five-year CD ladder: $5,115.34
    5 year Yield:  $29,777.88

    What jumps out at me is how there really isn't much of a difference. If I went for the highest tolerable yield (option 2), I only get $221 more over five years than the lowest yield ($44/yr), and I don't have access to a chunk of change for five years. I decided the 50/50 option doesn't leave me with enough liquid cash, so I scrapped option 3. Balancing yield with access in option 4, I only get $144 more than just dumping it all in savings ($28/yr) and I have to monitor it over the years and make sure to stay on target (something I am historically bad at).

    So I think I'm going to dump it all in the savings account. That gives me flexibility to invest as it grows, and the adaptability to roll with whatever life tosses at me. I might still consider throwing $1,000 in to Lending Club, just to see what happens, as a 6-8% return is marked enough to make a difference.

    Like 6
  • Oh, Congratulations! Well done!   It's so wonderful, getting to that place where you have bank account balances with commas and extra zeros in them.  I have just arrived at that same place myself, and I find it very satisfying.  Pinch me! 

    But what is enough? and what is too much? That is frequently the subject of interest and meditation for me. Isn't it interesting how you never actually get to the end of this journey, you just get to the next way station on a journey of ever-changing financial goals.

    After much reading on the two YNAB forums and elsewhere, I am now convinced of the wisdom in keeping a healthy emergency fund in a state of total liquidity.  It earns next to nothing, yes, but more importantly it also keeps me from experiencing the stress of crisis and from having to prematurely cash out an investment at the wrong time. I'm still feeling my way through this subject and trying to figure out the enough/too much question for myself, so I'm very  interested in seeing what prevailing opinions and experiences on the subject are.

    For now, I'm keeping my e-fund of 3 months of take-home income in a bank account earning 1%. This represents almost 6 months of bare-bones expenses for me because my true expenses categories are also healthy and full. Like you, I plan to continually drip more money into the e-funds, adding one month's income per calendar year. I'm also investing monthly in more aggressive investments in my retirement accounts.

    Again, congratulations.

    Like 3
      • Slugger
      • slugger
      • 3 yrs ago
      • 5
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      Michele Yeeessss!!! It feels AMAZING! I never thought I would be here, I really didn't. I remember about four years ago when I saw an atm receipt that someone had dropped and they had over $10K in their checking account, and I was like, "I literally CAN NOT imagine having that much money." And now, here I am!

      So I'm very much in the "what do I do with all this" place, like you. I'm currently planning everything around a four year plan (which is another reason why I didn't like the five year CDs) - if all goes according to plan, I will be debt free in 3.5 years. That's another thing I never could have imagined - only a few years ago I was on the 25 year plan, now I can almost taste it. So I'm timing everything so I can do a full reset in four years. I figure by then I will have gotten more used to this new not-bare-bones life (or life will have thrown more major curve balls, as it does). I'm also saving for a massive vacation to celebrate being debt free. :)

      As for how much, I don't know, You're right, it is a moving target. My current plan is to get as much return as I can but still have easy access to my money. Once I have enough saved that I could weather until long-term investments became available (say, a CD ladder and one year of income), maybe I'll look at something else. I might also decide to invest in a change of scenery. This is a whole new world for me - my family never had this kind of money, and we never learned to budget. So I feel like I'm making it up as I go!

      Good luck to you, and may we both find all kinds of awesomeness!

      Like 5
  • Thank you for a great thread Slugger.  Learned a lot.

    Like 1
      • Slugger
      • slugger
      • 3 yrs ago
      • 1
      • Reported - view

      TryingToGetAhead I'm glad! So did I!

      Like 1
  • If this is your emergency fund, I wouldn't put it in a CD where there could be penalties to withdraw it (read the fine print, maybe CDs have changed since I last used them?). 

    I would keep it in an online savings like you already thought of.

    Like 1
      • Slugger
      • slugger
      • 3 yrs ago
      • 2
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      Heather Yeah, that's what I decided, too. Honestly, I'm overwhelmed by the idea of having this much available cash. My emergency fund in the past has always been on the order of $2000-3000 - not with a 1 in front of those! So the idea that I could actually keep my apartment while looking for a new job, or that I could stay in the city and find a new place if I lost my apartment, are really new and foreign concepts to me. Thus, my first thought was, "Get rid of the money! Sock it away! Make it impossible to touch! It will disappear if you look at it!" I had to have a quiet moment with myself to realize that four years of really responsible budgeting, in which I have withdrawn from my savings account exactly once to fund a CD (a long and weird story), means that I can and should have this available in case something happens. 

      Like 2
      • Heather
      • YNAB-Obsessed since 2014
      • estheticianbabe
      • 3 yrs ago
      • 2
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      Slugger That's really great.  You've done a great job!  It is an odd feeling, isn't it, to see the bank balance high?  We spent many years of our adult life in debt with little savings that when I look at our net worth in YNAB (over six figures), it's a bit overwhelming.

      We haven't had to touch our emergency fund either at all since we started paying off debt back in 2015 (I know we drained pretty much all our savings during two lulls of unemployment in 2010 and 2013) and now that we're debt-free, there's more than enough income in our budget to cash flow most anything, so truly our emergency fund is for a job loss, but our budget has some fluff in it that could be cut.  We set up our fixed living expenses so that we don't have to touch our emergency fund (hopefully) if one of us is ever unemployed, keeping those living expenses as low as we can.

      If you're single income, however, I'd definitely make sure to beef up the emergency fund so you could survive for six months or more and keep the fixed living expenses reasonably low.

      Sorry, that's totally not advice you were seeking.  :) 

      Like 2
      • Slugger
      • slugger
      • 3 yrs ago
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      Heather Ha, no worries! Yeah, single income is kinda scary. I have my budget set up so that I can strip down to the bare basics almost instantly, should the need arise. It took me a LONG time to be willing to actually comfortably spend money without guilt - basically, I decided that having a security net is good and reduces a LOT of stress, but I only get to live this life once, so I'm not going to waste it on always scrimping. I've struck a nice balance of spend and save so that I get to enjoy today AND tomorrow. I went from dipping in to my savings every month or so to not touching it in four years (wait...*five* years!), and from making sure it was always right there at my fingertips in case anything happened to being willing to give it some space to breathe and grow.

      High five for doing this stuff!

      Like 1
  • One more option to consider for the semi-liquid part of your semi-emergency fund (the 3 to 6 months of living expenses, not the my-car-broke-down-on-a-holiday-weekend): A Roth IRA.

    You can put $5500 a year ($6500 if you're over 50) into a Roth IRA fund. This is post-tax money and you can do this even if you have a 401k or similar fund through work. You can open an account somewhere like Vanguard or Schwab and invest in whatever you like (something very safe and solid, given the purpose of this money). You can withdraw any earnings after five years without penalty. But, and this is the most important part for this kind of savings, you can withdraw your contributions (the $5500/year) at any time, without penalty. So, if you need your money, you can get it in within a few days.

    Why this is a good option for some people: 

    • interest or earnings rates are higher than your bank account even with very safe investment options
    • it's a good place to park some long-term savings that you might need, but you hope you don't and aren't planning on spending
    • the interest or earnings grow tax-free and you don't have to pay taxes on them if you withdraw them during retirement (plus you've already paid taxes on the principal deposits)

    Some downsides:

    • potentially, depending on your investment choices, you could lose some money (though keep in mind, if your money is parked in CDs right now, they're probably not earning enough interest to keep up with inflation and cost of living increases, so they're losing, too)
    • if you take out earnings before the five-year mark you will pay taxes and there's a penalty

    If you make over $120k (single, more if married) you might need to look into a "Backdoor Roth" instead.

    Personally, I have money in the bank, cash in the sock drawer, a credit card I never use, and some money in a Roth IRA. All useful in different ways.

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  • Another suggestion:

    Put half in Ally Savings, no minimums, no hassles, no fees, 1.45%: https://www.ally.com/bank/online-savings-account/

    Put the other half in Short or even Intermediate Term municipal tax-exempt mutual fund with Vanguard:

    https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0041&funds_disable_redirect=true

    https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0042&funds_disable_redirect=true

     

    Both accounts will be liquid almost immediately.

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  • Besides my checking account, I spread mine across 2 savings accounts, 1 money market account and a couple of 12 month CD's.  I use multiples of savings and money market because of federal limits to the number of withdrawals and transfers per month for online savings/money market accounts.   In certain situations, you never know how often you might need/want to use parts of your money.  

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