Take a look at the progress bars in my sidebar! We’ve completed our emergency fund in just about 15 months and it feels FANTASTIC! Over the past year, we’ve saved about 30% of our income. Not too bad, huh?
We weren’t projected to complete it until next month, but I went ahead and moved some of our Europe fund into our Emergency fund to finish it up. Now we can focus on funding one savings account.
Over the weekend, we stashed our emergency fund in an ING 12-month CD. The interest rate on our ING Direct savings account has been steadily dropping since we opened the account. We started with a 3% interest rate, and about 15 months later it’s down to 1.3% and still dropping. With the CD, we lock in a 2.1% interest rate for 12 months.
I know what you’re going to say. Isn’t the Emergency fund supposed to be liquid savings? Doesn’t a CD smack you with penalties for early withdrawal? Well, here’s the thing: The penalty for early withdrawal is 3 months of interest regardless of when we withdraw. So the penalty is the same if we withdraw tomorrow or 11 months from now. If we leave the money alone for 12 months, we’ll earn at least an additional $80 in interest. Worst case scenario, we have a catastrophe and we have to withdraw early. If that happens, we’ll lose a little of that extra interest.
Based on my calculations, 3 months of interest would equal about $20. So even if we withdraw early, we’ll still make about $60 more with the CD than our regular savings account (and that’s if our savings interest rate doesn’t continue to decrease, which is unlikely).
If we run into a little hiccup that requires us to move some money out of savings, we could always borrow from the Europe fund, which is still in a regular savings account, without any penalties.
The way I see it, if we have to withdraw from our CD a little early to cover our car insurance deductible, for instance, then so be it. We’ve really got nothing to lose. We’ll give up a little of that extra interest. So what? The money is still accessible in the event of an emergency, and we’re not technically losing money that we invested. Just interest, which would be fine with me if it was a true emergency.
Another reason we made the decision to open the CD is to protect our savings. Now that we’re banking primarily with ING, it’s a little too easy to move savings into our checking account. I wanted an added layer of deterrent for us to leave it alone now. There’s no way I’m giving up 3 months of interest just because I want to buy something.
This is our second milestone (the first was paying off all of our credit card debt), and it FEELS GREAT. When we first started our emergency fund, I felt so overwhelmed. Our budget was so tight, how could we manage to save such a large amount of money? But I have to tell you, it is so worth the scrimping. Since I opened our emergency fund, I’ve turned into a savings junkie. I love the feeling of looking at our account, and feeling secure in the knowledge that we can handle anything that life throws our way. It’s so empowering.
If you haven’t opened an emergency fund yet, why don’t to grab one of my referral links and get started? :)
Photo by endlessstudio