When it comes to your emergency fund, liquidity is key. If you can't access the money easily, it isn't exactly effective when an unanticipated event strikes. Despite the need for liquidity, you can still get a sizable rate of return on your emergency money.
Putting your emergency money in a regular savings account is an easy option, but it won't get you much as far as interest. In fact, it won't even keep up with inflation. One Bankrate.com chart shows that in 2005 the average rate for a standard savings account was around 0.5 percent. Today, rates are even lower.
Fortunately, there are better liquid options for stashing your emergency fund. Here are five lesser-known places to consider stowing the money:
1. Online bank. Due to lower overhead costs, online banks such as Ally Bank and Capital One 360 can offer better interest rates than traditional brick-and-mortar banks. According to recent data from MoneyRates.com, Ally's average savings account rate is approximately 0.87 percent, and Capital One's is about 0.68 percent.
While such rates are still relatively low, they're better than what you'll get at a traditional bank - and with debit cards and other conveniences, accessing your money in these accounts is easy.
2. Mango Money Card savings account. Prepaid cards aren't for everyone, but the Mango Money Card comes with some nice perks, including attractive rates on its savings account. If you set up direct deposit on your Mango Money Card, you can open an attached savings account that will earn 6 percent interest on the first $5,000. Customers without direct deposit can earn 2 percent on the first $5,000, which is still significantly higher than average rates - even for online banks.
After the first $5,000, the interest rate drops to 0.10 percent. As such, it's not the best option if your emergency fund significantly exceeds that amount, but if you're just getting started saving for an emergency fund, this can be one viable way to do it.
3. No-penalty certificate of deposit. Regular CDs are set up to hold money for a certain amount of time. If you pull the cash out before the designated time period is up, you could pay a lot of money in penalties. This lack of liquidity rules out regular CDs as a sound emergency fund option.
However, no-penalty CDs offer better-than-average rates and don't penalize for withdrawing money early. Rates can start to approach 1 percent, though no-penalty CD rates are normally lower than rates for traditional CDs. Be sure you read the fine print, so you know what "no penalty" means.
4. Pay down revolving debt. My wife and I used this approach when we were climbing out of debt. Rather than storing an emergency fund in a savings account, we used our extra cash to pay down our home equity line of credit. The interest rate on the line of credit was higher than what we could earn on a savings account, and if we encountered an emergency, we could have easily pulled the money out.
5. Money market account. Like savings accounts, money market accounts are generally insured up to $250,000 by the Federal Deposit Insurance Corporation, but banks have more freedom when investing funds in an MMA. This means they tend to come with higher interest rates.
Although MMA rates are expected to shift downward this year, according to a forecast by Bankrate.com, you can still get a rate of about 1 percent, which is more than you'll get with an online bank's regular savings account. One caveat is MMAs typically have higher minimum opening deposits.
Rob Berger is the founder of the popular personal finance blog, the Dough Roller.
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