thu posted: Thu 2018-03-01 10:38:52 tags: n/a
Nagging counterproductive? it's human nature

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A distinct emergency fund: it's a smart thing to have. Reading up on how much money to keep readily-accessible in an emergency fund, we hear figures like "$10,000" or "3 to 6 months expenses" or even "3 to 6 months salary". Liquidity doesn't mean you have to let it rot in checking, losing full ground to inflation, though.

My credit union "share" account returns only .05% APY, i.e. every $1000 earns 50 cents per year. This may as well be nothing. Interest checking pays 1.21% on the first $1000, so it makes sense to hold at least $1000 there at all times. Balances beyond the first $1000 fall back to the .05% rate, though, so the next thing you could do there for instant liquidity is open a distinct savings account, again with 1.21% APY on the first 1000 (and .05% thereafter). There's only $2000 of your emergency fund, returning $24.20 per year.

There's a big gap to the next level with full liquidity: $25K minimum balance to earn 1.00% in a money-market account. For most working stiffs, that amounts to a very significant opportunity loss. It's utterly foolish to subject $25,000 to "inflation rot" just to keep $10,000 liquid. It would be much better in any 10-year long run to park the 10K, even in a zero-interest position, if it frees up 15K to invest properly.

So if you didn't want to tie up that much money, at that crappy of an interest rate, their next most flexible option was a CD. At 1.66% APY for a 21-month certificate compounding monthly, 8K socked into a 21-month CD today comes back as about $8,234 in Dec 2019. Not exactly exciting returns, but very acceptable compared to having to sell a risk-bearing investment at a loss just because you suddenly need a root canal or transmission rebuild.