My Thoughts on Emergency Funds
I read an interesting article at Blueprint for Financial Prosperity that raised the question of whether one’s emergency fund should be located in a Money Market or High Yield Savings account. The author comes to the conclusion that you should keep part of your emergency fund in a high yield savings account and part in a local bank, and while I somewhat agree I thought I would share the plan I just put into action less than two weeks ago. I think it will work fairly well but would appreciate any comments or suggestions.
First, some background facts…
1.) Some time ago I opened a MMDA (Money Market Deposit Account) at Capital One Direct Banking. Currently it earns 4.40% APY.
2.) We are also in the process of changing banks from KeyBank back to Bank of America, due to a combination of the random and unpredictable fees that KeyBank repeatedly charged to our account and the generally lackluster customer service they provided to us.
An Interesting Side Note: I opened a standard ‘free’ checking account and linked savings at Bank of America. Normally they only waive their checking account fees with Direct Deposit but I explained my convoluted system I am setting up and they agreed to waive the fees. They may do the same for you, as the only thing that seems to matter is that funds are electronically deposited to your account on a regular basis.
Now, the plan that I have laid out is as follows…
1.) All revenue received, from any source, will be deposited to our Capital One MMDA via one of two methods a) electronic – such as direct deposit or wire transfer or b) deposited to Bank of America savings and transferred via ACH.
2.) I have setup a bi-weekly transfer from Capital One to Bank of America that will be sufficient to cover all our bills and provide spending money for Holly & I. This is far less than the income being deposited to the Capital One account which will provide for an automatic savings plan as we’ll never see it.
3.) I currently have set aside $500.00 in our Bank of America savings account, and have been transferring anything exceeding that amount to Capital One. The savings account doesn’t ever earn much interest but we are signed up for Keep the Change, so we do end up with excess funds in that account. I don’t really have a schedule for transferring these founds out yet, but I’m going to try and find a time slot every other week that I can dedicated to making sure all these transfers are happening as they should.
Why I Chose an MMDA instead of a High Yield Savings Account
There are quite a few reasons actually, with the most important being that I will have much easier access to my funds via a good old fashioned checkbook. This will allow me to keep a much lower balance in the low yield (~0.50% APY) savings account at Bank of America, while still providing semi-easy access to my funds.
Thoughts/comments/questions?