In search of a pot of gold or maybe just a savings account that pays interest

When I think of cash for emergency funds, I think of “parking” the funds somewhere accessible and out of mind.  I want those funds to be a line item on the investment statement that reminds my clients — on those occasions when  they review their investment statements — that if they lose their job tomorrow, or become sick, they would be able to pay their bills in the short term. 
iStock_000018545239_ExtraSmallIn reality interest rates change daily, and the best place to put your cash or emergency fund one day may not be the best the next day.  So, I suggest that you might want to review your cash holdings periodically, as you do your other holdings.

I’ve been receiving more questions from my clients on this very topic, so I decided to take a fresh look at where  the best opportunities lie.  I looked at savings accounts, money market accounts, certificates of deposit, brokered certificates of deposit and, just for fun, a source of floating rate demand notes, the wild card, as it’s unsecured debt not insured by FDIC or SIPC.  Brokered certificates of deposit are certificates of deposit purchased through a brokerage house.  They are FDIC insured and allow you to purchase first issues of certificates of deposit. If you want you can sell these certificates of deposits on the secondary market.
I realize that your decision to invest your liquid cash is not all about the interest rates.  You’re smart if you consider a number of other factors as well:
 Are there any account minimums that must be maintained to avoid monthly   fees?
 Are there any regular monthly fees regardless of account balance?
 How convenient is it to make a deposit or withdrawal?
 Are the funds insured by the FDIC or SIPC?
 Is your principal guaranteed?  Remember, if it’s a money market account it is not.And what did my research uncover?The return seemed to be more related to convenience than risk.  I define convenience as being able to walk into a local bank versus doing your transactions through the mail or online.  For example, a Ford Interest Advantage account filled with those risky floating rate demand notes pays 1.01%.  That’s less than a money market account at the Sallie Mae Bank which would earn 1.05%.  Salle Mae Bank is FDIC insured, and your principal is guaranteed.  If you’re aware that U.S. college indebtedness has surpassed credit card debt and have concerns about loan defaults, you might not consider Salle Mae Bank risk free.Still, there are other online bank choices such as Ally Bank and TIAA Direct.  They are paying .99% and 1.25% respectively.  Caveat:  TIAA Direct opened to the public, vs. the educational employees only, in February and is currently closed once again to the public until they re-open at an unknown future date.  If you have a TIAA CREF account, you can set up savings or money market accounts.

What if you’re not comfortable sending your money through the mail or over the internet?  You can get .2% at Luther Burbank Savings with only $1,000 minimum deposit.  If you go to Redwood Credit Union you can get the same tiny rate with a up to a $25,000 deposit.

All accounts listed, except the Ford First Advantage accounts, – are either FDIC or SIPC insured, which protects you if the institutions fail up to $100,000 cash and $250,000 for investments at brokerage firms.  As of 1/1/2013, the amounts of coverage changed once again.  The Transaction Guarantee Program expired, so you no longer are protected up to 100,000 per account, but up to $100,000 aggregated account balance per institution – maybe another good reason to review your cash balances?

If you’re unsure how much you should put in an emergency fund where to put it to best match your needs, and when in general you might need it, that’s a good time to consult an independent hourly planner like me.