||Ask the Dollar Diva
Where do I stash my emergency cash?
Dear Dollar Diva,
I have approximately $2,500 in a savings account that earns minimal
interest. Generally, I don't touch this money unless I get in a
bind. For instance, I pulled $500 out a few months back because
I needed to pay a first- and last-month's rent when I moved. I want
quick access to the money if I need it, but I'm wondering what I
can do to make this money earn more than just a few dollars a month.
I already have an investment account but no certificates of deposit
or individual retirement accounts.
Take $100 out of your wallet and burn it. That's how much you're
throwing away every year by keeping your money in a minimal-interest
savings account. That being said, where do you stash your
short-term cash? Here are three better choices for your emergency
stash: taxable money market mutual funds, U.S. Series I bonds and
certificates of deposit.
Taxable money market mutual funds
You can think of them as low risk mutual funds.
They're not 100 percent risk free, but they're safe enough. The
Securities and Exchange Commission regulates these funds and limits
the kinds of investments fund managers can make -- primarily U.S.
Treasury issues, and other securities carrying the highest credit
You can get money market funds made up of U.S. government
securities, but the cost in lost yield outweighs the benefit of
the minuscule increase in safety.
You can also get tax-exempt money market funds, which
only make sense if you are in a very high tax bracket or have very
high state income-tax rates.
What should you look for when shopping for a fund?
- Low management fees. You want to pay less than
- An initial minimum deposit between $1,000 and $5,000
will probably be required. Find out if there's a penalty for letting
the balance drop below the minimum initial deposit, or some other
figure. The lower that figure, the better.
- Watch out for fees for check-writing privileges
or electronic transfers from the fund to your checking account.
- What's the minimum check size? Expect it to be
between $100 and $500.
- Do you want a "sweep" account? You have an investment
account now -- would you like to be able to "sweep" money in and
out of this account when you buy and sell securities?
- Expect a yield that is more than a short-term CD
(three to six months) and less than a long-term CD or Series I
You've got to shop around. Large, reputable financial
institutions are your best bet. They are a good place to start.
Like any other mutual fund, you want to read the prospectus
before you part with your money. Many investment companies will
let you download prospectuses right from their Web sites. If you
use an investment firm, talk to someone there or visit the company's
Web site to see what it has to offer.
U.S. Series I bonds
The Diva likes them. Here's why:
We all know there is no free lunch in this world,
so here are the very small down sides:
- You must hold the bonds for six months before you
can redeem them.
- If you redeem the bonds during the first five years,
there is a penalty equal to three months of interest. If you redeem
a $500 bond early, and it's earning 5 percent a year, the penalty
is $6.25. That's no biggie.
Certificates of deposit
CDs generally offer a higher return than savings
accounts and bank money market accounts, but a lower rate than Series
I bonds. They're insured by the Federal Deposit Insurance Corporation
for $100,000 per bank.
Here's what you need to consider:
- CD terms run from three months to about five years.
- The minimum deposit for a short-term CD generally
runs from $500 to $2,500, but can be higher or lower.
- Rates and penalties for early distribution vary
- You can make the terms work for you by buying a
three-month, $500 CD each month until your $2,500 is used up.
This will take five months. Within three months, you'll be on
a schedule of a CD maturing every month.
- Check Bankrate.com for up-to-the-minute rates on
- What's the worst thing that can happen? An emergency
comes up and you have to redeem one early and pay an early
withdrawal penalty. Not so bad.
You mention individual retirement accounts in your
question, but it's not related. We're talking here about a safe,
accessible place to put the cash you've accumulated for short-term
needs. The Roth is a long-term, retirement instrument.
-- Updated: Nov.
-- Posted: Sept. 21, 1999