Lately, it seems like things are really falling into place for our finances. All the hard work that H and I have done over the last 12 months have paid off. We’ve killed our cable bill, dropped our phone bill by 66% (and possibly savings more to come), Cut our Internet costs by 50% per month, and lowered our yearly home and auto insurance rates (will post on this later). Obviously, I can look back from may 2014 and say this because now it just seems like everything is happening, but a lot of work went into this – at least a years worth, and probably more.
This has brought on a question that I have never once had to deal with in my almost 30 years. What should we do with our emergency fund? Right now, we keep it at Capital One 360, and have had that (and other savings accounts) there since they were ING Direct in 2009. Like all other banks, they pay a paltry rate on their savings (it’s like .75% right now). The next best rate I can get is a measly 12 basis points higher from Ally bank. I’m not interested in “rate chasing” for that small of a spread.
However, we are currently opening a(nother) account with vanguard for our kids college savings (a 529) and I have been feeling that a bit of simplicity is needed. Right now, we have accounts with one bank for our home loan and checking account, capital one for savings accounts and vanguard for all investment accounts.
I talked with a friend and mentioned that I was tired of all these accounts and logins, and he told me that he kept his emergency fund in a money market account with his investment house to simplify. It had really never occurred to me to keep our emergency fund in something other than a savings account. It would not change the amount of time that it would take us to get funds in the event of an emergency, and it would simplify our financial lives quite a bit. Unfortunately though, mutual funds to carry a bit more risk and do cost a bit of money (.17% for VMMXX) – which our savings account does not.
The fund that I’m looking at specifically is the Vanguard Prime Money Market Fund (VMMXX) for a portion emergency fund, as well as the rest of our savings that we plan to spend in 12-24 months (just about all accounts listed in the monthly reviews). We would put a portion of our Emergency fund in the money market (say 2 months expenses, then the rest in a low risk bond fund to get a little bit more return on our cash – like the Vanguard Total Bond Market Index Fund (VBMFX). The difference between the fees is a measly .03% and historical returns for this bond fund have been in the 6% area, which would be far better than what we have now.
Unfortunately, if there were a real emergency that would eclipse the amount that we had in the money market account and we needed to sell some shares, we could be forced to do so when the price is depressed. This wouldnt be the end of the world, because if prices dip severely enough in that fund to cause us to incur a huge loss selling off, there will be other things to worry about.
In my financial journey, this is a problem that I never really imagined myself having. Back when I was 55k+ in debt 5 years ago, I would have said you were crazy if you told me I’d have 10k sitting around in case something bad happened and I would need a good place to put it. We have worked hard to get here and it’s nice that we finally are and can focus on other goals, but I’d still like to optimize this portion of our savings.
Where do you keep your Emergency Fund?