Money market fund for emergency fund
I currently have a fully funded (6 months) emergency fund (EF) sitting in my savings account. I was thinking about moving the full EF over into a money market fund (I have been eyeing Vanguard) to stop the impact from inflation. I know we have people here who are much more experienced in investing than I am at this point, so is there any strong arguments against my plan?
1. I've stumbled across some articles warning about possible negative interest rates and extremely low interest rates for MMF's in the current economy (unless I stumbled on old articles, but I doubt I did). I take this to be a situational problem and not a structural problem with MMF's (i.e it will change when the economy improves). Is this a strong enough situation where it is advisable to stay out of the money market funds?
2. I would still be in a stable financial situation after the switch, with enough balances in checking and saving accounts to handle minor emergencies (car breakdown, pipe bursting etc). Moving the EF will not impact my day-to-day financial situation in any way.
Thanks in advance for any advice
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Ally also has a MMF but it's actually a lower yield then that account, because they give you a debit card and checks.
I haven't seen a CD that's even been competitive with ally bank.
Most aren't even competitive with normal banks anymore unless you're willing to forgo it for 5 years, which defeats the purpose of emergency funds.
Really though, 1% will keep pace with inflation well enough.
Right now you can get CDs with over 1.5% APY online (note that I have not checked that one to see what the withdrawal penalty is, so check that out before thinking about it).
Locally it obviously depends where you are but in DC right now the best rates are about 1.85% (www.bankrate.com)
Looks like it's 3 months worth of interest or something to that effect.
Though we're talking about the difference of $15-20 difference on interested earned on 5k for added hassle.
Real talk. Almost everything is FDIC insured. But do you know how you'd actually get the money from that? Do you know how long it would take? Can you possibly imagine how dusty and disorganized that bureaucracy is going to be when push comes to shove? I have no doubt it'll be like the housing relief fund that was allocated back in 2009, where something like 1% of the funds ever got disbursed because nobody could figure out how to cut through the paperwork.
And if negative interest rates are on your radar, which I think they rightly should be, you need to think about bank failures. Because right now european banks are being absolutely crushed under negative interest rates. Their contingency plans mostly revolve around their customers being on the hook for a "bail in", since the governments can't afford to do more "bail outs". And what a bail in entails is that they seize the funds you have in them, and you get pennies on the dollars back, and maybe some worthless stock in banking company. Because that's what needs to happen for the bank to stay solvent.
So these days I have my "I've been laid off" emergency fund in a bank, and my "Oh fuck there's been another 'banking holiday' and I gotta pay for food" fund in a safe bolted to the concrete.
Sure, I might be paranoid. Well, I am paranoid, but perhaps justifiably so? Regardless, I view losing minimal interest on about 5-10% of my emergency money as worth having cash on hand if shit hits.
That's why I pay homeowners insurance, with the contents of the safe specifically added.
The FDIC/NCUA are efficient authoritarian nightmares, actually. There was an interesting story about it on NPR a while back.
In the general case they aren't paying out anything to the customers, because they arrange for another existing bank to take on the deposits.
Basically if your bank fails and your FDIC/NCUA insurance fails, well I hope your safe is filled with farming equipment and guns because some shit has gone seriously sideways.
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
Don't judge.
Also...
It's a cute article, but sort of a misleading best case scenario.
The amount of time it will take to get a refund from your homeowner's insurance is going to be vastly longer than the turnaround on an FDIC payout.
"Hello, it is the Monday after a three day weekend. We just wanted to let you know that your old bank no longer exists and your accounts are now available with this new bank. Have a nice day!"
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
I figure if the banks collapse and my safe gets pried out of the concrete and stolen, I have bigger issues. It's not about any one method being infallible. It's about having multiple methods.
Thanks for your input. It has given me some things to consider. I was not aware of the online savings accounts, thanks @admanb and @Simpsonia
It's relatively rare to get a direct payout. Going off of their list which dates back to Oct of 2000:
There were 545 bank failures, of which only 31 had no acquirer. (5.7%) 2/3rds of those are, unsurprisingly, from '09 and '10. The most recent one was in 2013.
fuck up once and you break your thumb / if you're happy at all then you're god damn dumb
that's right we're on a fucked up cruise / God is dead but at least we have booze
bad things happen, no one knows why / the sun burns out and everyone dies
In my experience most homeowners insurance policies specifically exclude cash as a covered item. Are you certain yours covers cash?
Maybe they don't cover it broadly, but I had a specific list of valuables in the safe added. But perhaps I should read the specifics and not take my insurance agents word for it.
absolutely
Mine didn't cover tech items over a certain value and I had to add a specific addition to my policy to cover it, as well as a total value that was limited by the policy. They didn't expect someone to have multiple computers and TVs and electronics equipment. That shit adds up quickly too it seems.
Any money covered by FDIC is protected until society itself collapses and you're bartering gold bars and hand jobs for cans of beans.
PROTIP: Make sure a can opener is included before the transaction begins.
Yeah, if your don't like banks, fine. But the FDIC is one thing we're doing right.