Certainly, if you want to survive this, or any, economic storm you need something in the way of an emergency fund. In fact, in Ch. 1, Principle 5: Stuff Happens, or the Importance of Liquidity speaks to this very issue, and Ch. 5 which is titled Cash or Liquid Asset Management, is devoted to cash management. But today the problem you face with an emergency fund is: where do you invest your cash? Unfortunately, with interest rates as low as they are, it has been very difficult to earn much on cash or liquid assets. In fact, in response to this rush to safe and liquid assets, the Bank of New York Mellon just announced plans to charge large institutional investors with balances above $50 million – in effect; they will end up paying the Bank of New York Mellon to hold their cash. This new rule probably won’t impact you, but it does go to show that making money on liquid investments is much tougher now than ever before. However, as pointed out in “Where to Park Your Cash”, which you can find in Smartmoney.com, there are some alternatives that are better than others.
Recently a number of banks have eliminated early withdrawal penalties and have even allowed investors to have the interest rate they earn increase if rates rise. For example, Bank of America allows for an early withdrawal on its CDs, while Ally Bank (which is a unit of Ally Financial, formerly GMAC) has a four-year CD that allows investors to have the rate it earns jump to the current rate twice during the four-year period.
Other alternatives include money market accounts, which don’t return too much, but are safe. That said, if you look around, you may be able to find a money market account that provides a return over 1%. Where to look? Probably the easiest place to find the best alternatives is Bankrate.com, a website that will let you find the best money market account either nationally or locally.
- What are liquid assets (look to your book for the answer to this)?
- The SmartMoney.com article “Where to Park Your Cash” discussed reward checking accounts – what did it say about them?
- What is the best money market account rate in your local area (use bankrate.com to find this out)? What is the best national rate?