A good friend of mine met up with a financial planner to get his affairs in order, great plan right? Well that depends of course on the financial planner. First off, I am not a financial planner, but I play one on the Web. So I offered to weigh in for him on what his planner might recommend and he took me up on the offer. After all of their meetings and conversations, he concluded that my buddy is on the right track and the one thing he should do is move his $30,000 emergency fund. Where should he move it? Why to a High Yield Bond Mutual Fund of course! . Let’s look at the details:
The Financial Planners Emergency Fund Investment Recommendation
Starting Investment: $30,000
Investment Vehicle: High Yield Bond Mutual Fund
Front Load: 4.75%
5 year Total Return:3.05%
Amount Invested after Fees: $28,575
Liquidity: 5 Business days would be typical to get it somewhere you could use it.
Risk: Low, although funds are not backed by FDIC.
So essentially the planner is recommending that the emergency fund be used as an investment, which also means that it carries some risk and honestly a small amount of reward especially after you add the $1425 front load fee for purchasing this mutual fund.
FiscalGeek’s Emergency Fund Investment Recommendation
I don’t want to be misleading because my recommendation is to effectively not treat the emergency fund as an investment rather it’s use is for “EMERGENCIES!” That means that it needs to be there when you need it with no risk. The planner’s recommendation does not meet those goals.
Starting Investment: $29,000
Investment Vehicle: Ally Bank High Yield Online Savings Account
5 year Total Return: Not a straightforward calculation, Ally’s current rate is 1.70% but within the last year they’ve been at a high of 3.75%. They consistently are in the top of all online savings rates, as interest rates rise so will your return. Source
Amount Invested after Fees: $29,000
Liquidity: 2 business days would be typical to get it to another bank account, open up a lower yield money market and you can withdraw with a check card immediately.
Risk: I can’t with good conscience say none, but your money is protected by the FDIC up to $250,000 so unless the entire U.S. federal government goes insolvent (which some may argue they already are) your money couldn’t be much safer.
Hold on, you have only $29,000 as the starting investment, where did the other $1000 go? This depends on your paranoia level, but I would argue that it makes sense to have $1000 cold hard cash stashed somewhere nearby. Not your mattress, not your underwear drawer, but somewhere you could get at it in a matter of minutes if needed. This is the ultimate in liquidity and could come in very handy in some situations. No you’ll get no return on your investment, but that’s okay, that’s not what this money is for, it’s for your piece of mind. Frugal Dad has some great advice for places to hide cash, but I would only use these as inspiration just to be safe.
Why Ally Bank?
I don’t have a particular brand affinity for online savings accounts and many would work just as well. It’s just that Ally has one of the highest savings rates around and has consistently done that. Although today’s rate of 1.7% is nothing to write home about, it’s still free money, it’s terribly easy to use and setup an account online. And you can very easily transfer funds from your other checking/savings accounts to and from your Ally account. I’ve recently opened an account with them and it works fantastic. You could just as easily find a local credit union or neighborhood bank to deposit your emergency fund savings although doing some serious looking I could not locate a better rate. My credit union is small and offers a fantastic 7.71% on your first $750 account balance but after that it drops to .71%.
A High Interest Checking Account
Another option for those willing to jump through some hoops would be to open a high interest checking account, you can find many options at CheckingFinder and currently you can get rates up to 4.30% but it does come with a catch. You have to sign up for direct deposit and make at least 10 debit card purchases a month. This kind of defeats the purpose of an emergency fund. You should not be funneling your daily purchases through your savings. I would strongly recommend against this option, but wanted to present this as an option to the highly diligent and disciplined among you of which I am not a member.
So am I suggesting to my friend that he shouldn’t invest in mutual funds? Absolutely not, I think his next steps would to be just that assuming he’s paid off any outstanding debt. In fact I’d go so far as to say if he currently has outstanding debt that he should use a portion of his $30,000 to attack that debt first, and then go after the 3-6 months of expenses in an emergency fund, and then investing. Mutual funds are a great way to invest, it’s how I have directed my meager 401k savings to date, and what I will invest in once we are debt free and have saved our emergency fund. I would just suggest that you arm yourself with as much knowledge as possible and don’t take the advice solely of one individual on where to put your money. I love the statement that Dave Ramsey frequently makes which is that you should never put your money in anything you don’t understand. So it’s in your best interest before you act on anything to do some research.