In this article I explore the options for places to stick my emergency cash. This is cash I need in case things go ’bad’ for us. So my primary concern is safety. Below I walk through the options and discuss how I handled things. Since I am not a financial expert and don’t play one on T.V. your mileage may vary.
[Original - 11/27/2011, Updated - 9/3/2014 to add Floating Rate Notes]
1 Safety first
For emergency cash the key goal is safety. The whole point of emergency cash is that when it all hits the fan the emergency cash is going to be there. So for me that means that where ever the cash is it has to be backed by the full faith and credit of the United States Government. We can have a fine conversation about how much that is really worth but compared to the other options I would argue it’s still the best option around.
2 Short term cash
In the short term (e.g. emergency funds used to cover say 3 months worth of expenses) one needs the cash safe and ready at hand. The traditional answer to this challenge is either a checking or savings account kept in an amount that qualifies for government insurance. This is still, I think, a fine plan. But it has a rub. What happens if the bank the money is kept in fails? Weiss (who rates banks) has a great short description of the consequences. The bottom line is - one will get one’s money back but potentially (in an unlikely but still worst case) only after a potentially unknown wait. Having to wait some unknown period for my money to show up doesn’t qualify as a safe place for emergency cash.
3 Which bank is safe?
So I want a bank or credit union that is ’safe’. But figuring out what safe means turns out to be a real challenge. For example, Bauer Financial gives my current credit union, First Technology, a 5 star rating, their highest. Bankrate gives First Tech a ”Safe & Sound” rating of 3 starts, with 5 stars being the highest. Weiss Ratings gives them a grade of D+ with their lowest rating being an E-. What the hell is a sane person supposed to do with that data? It seems like I can get whatever rating I want for a bank. Which one do I trust? [A] [A] There are other bank rating companies, like Veribanc, but they don’t offer free ratings. I did some research and while I found some interesting things on Weiss nothing I found gave me any idea who to trust.
4 Credit union or bank?
In picking a place to put my emergency money my focus is on on credit unions. My theory is that a commercial bank has many conflicts that make them a hard place to put money. First, since Glass-Steagall was repealed a bank could be a bank or it could be a gambling house with a bank attached, it’s hard to really know. Credit Unions are generally restricted to just being banks, not getting into what is called ’commercial banking’. Second, the bank has to keep happy its managers, its owners (e.g. share holders) and its customers. In the conflict between the three, as the last financial crises amply demonstrated, the managers always win. In the case of credit unions because the customers are the owners there is one less party to the conflict. Of course this could still mean that the managers win but at least there are fewer contenders at the table. Credit Unions, unlike commercial banks, are also non-profits so generally it’s much easier for them to focus on making their owner/customers happy rather than figuring out how to make the stock market happy.
The previous paragraph is not an un-reserved hosannah to credit unions. No doubt that a badly run credit union will do much worse than a well run bank but in entering any game I like to stack the deck in my favor and in terms of safety it seems like the odds are better with a credit union.
5 Finding a credit union to put emergency cash in
Here are the steps I followed to find a Washington State credit union in 2011:
- Find Weiss List of top rated credit unions in Washington State, e.g. credit unions that got a B+ or higher. (13 entries)
- Combine with Bankrate’s list of credit unions in Washington State with 4 or higher rating (added another 11 I didn’t already have)
- Bauer’s list was hard to work with so what I did was just look up the ratings for the 24 banks I got from steps 1 and 2 and add in Bauer’s ratings.
- Strike any bank that didn’t get at least a B+ from Weiss, a 4 from Bankrate and a 4 from Bauer (Reduced list from 24 to 5).
- Run quickly through list to find the credit unions whose eligibility criteria my family meets (Reduced list from 5 to 1)
- While the one remaining bank doesn’t have a local branch, that’s o.k. because I’m just using it for savings. But it does allow us to open an account remotely. So all is good. Just to be paranoid I checked the remaining bank out with the BBB and they got an A+.
The winner bank in my family’s case is Whatcom Educational Credit Union. I’ve already opened an account with them and moved money over. Their staff is awesome. Opening an account was reasonably easy. The only annoying part is because we weren’t going to drive out Whatcom county we had to get a notary public witness my wife and I’s signatures on the application form. Appropriately enough we had this done for free at FirstTech. WECU is a full service credit union. They have on-line banking, a really well functioning service to answer any questions, bill pay, etc. They even are already configured to download my banking data to my financial program, Moneydance. What more could one ask for?
Note, btw, that the best bank for you may or may not be WECU even if you do live in Washington. You might quality for different credit unions than I do thanks to where you live, work, worship or who you are related to.
6 What about daily banking?
If I wanted to I could easily use WECU for all of my banking. I can use any of the ATMs that are members of the CO-OP Network which includes the Credit Union Service Centers (CUSC). There is a CUSC ATM just down the street from where we live. But in practice I intend to stay with FirstTech for daily banking needs. I really do like them, the only reason I looked some place else for my emergency cash is that I wasn’t happy with their credit ratings. But for normal banking, bill pay, etc. They are awesome. So while I could use WECU for everything, I don’t intend to. This is generally good because it means I can choose a bank for our emergency money that just holds money, I don’t have to worry about other bells and whistles (like branch location, bill pay, etc.) because FirstTech has that all covered for us.
7 What about other options?
7.1 Treasury only money market fund
When it comes to cash savings there are other options. A very safe one as suggested by Weiss is to use a Treasury Only Money Market fund. This is intriguing but current rates are about 0.01% (yes 1/100th of a percent). Unfortunately this is another example of how hard it is to tell what the ’truth’ is. SEC rules require that Money Market accounts advertise their interest after expenses. So when they say ”0.01%” that’s what you should actually get. Unfortunately banks are not required to make the same disclosure. In the case of FirstTech, for example, they advertise an interest rate of 0.55% for instance access accounts with more than $10,000. I manually calculated the rate I’m actually getting and its 0.54%. So that’s not a bad discrepancy at all. But YMMV. BTW, the reason (in theory anyway) that a bank can pay more than a treasury fund is that the bank can make money off the money you give it while the Treasury money market fund can only get whatever the market is currently paying for government debt.
7.2 Treasury bonds
IBonds in particular are very nice in theory as a place to stick cash as they adjust for inflation (or, well, the government’s version of it, but that’s a different discussion). One also doesn’t have to pay any taxes on the interest of an IBond until it is redeemed. But any money put into IBonds cannot be redeemed in under 12 months and any money pulled out in under 5 years will pay a penalty of 3 months of accrued interest. So IBonds are not, I think, a great place to put emergency cash.
7.3 Short term government bonds funds
There are plenty of mutual funds that invest in short term government bonds. Unlike money market funds which typically invest in 30 or 60 day debt, short term government bond funds can invest in debt that matures in 2 years or so. The problem with these funds is that they respond to interest rates conditions more than a treasury only money market fund would and therefore one can definitely lose money if interest rates go up. While the loss probably wouldn’t be horrendous nevertheless it is a loss and we are talking about emergency cash. So I don’t think these funds are a good idea for our current purposes.
7.4 Floating Rate Notes (FRNs)
These are two year bonds issued by the U.S. Treasury. Normal folks can buy them through TreasuryDirect. FRNs can be sold before they mature so they act like cash and when they do mature they can be rolled over into new FRNs. The interest rate is a combination of two parts. There is a spread which is determined when the FRNs were initially auctioned and stay the same for the life of the bond and an index rate which is based on the 13-week Treasury Bill rate and re-set every week. The combination determine the actual interest rate. At the time I am writing this the latest spread was 0.070% and the 13 week treasury was 0.025% so the effective interest rate is 0.095%. This compares to even an average bank money market account which at the same time had around 0.50% (with some going above 1%).
Unlike IBonds the interest on FRNs is fully taxable when received (quarterly) not when sold. The main benefit of FRNs is that you aren’t locked into a particular interest rate (or at least not all of it), they can be sold early without penalty and there is no practical (unless you are part of the 1%) limit on how much you can buy.
Unfortunately selling them is difficult. You can’t actually sell them via TreasuryDirect. You have to have the bond transfered to a bank or broker by filling out a form and mailing it (yes, mailing it) to the Treasury who will then do the transfer. And one suspects that the banker/broker selling the FRN is going to take a fee as well. So FRNs just aren’t a great choice for emergency cash.
7.5 Zero-Percent Certificate of Indebtedness
This is an option available via the U.S. Treasury’s TreasuryDirect service. It is a zero interest holding fund for money that is intended to be used to purchase various types of treasury securities. But it is a treasury debt so it should be backed by the full faith and trust of the U.S. Government. There also doesn’t seem to be any limit to how much one can buy. Money can only be moved in by transferring it from a bank and it can only be moved out the same way. And remember, it’s a ”zero interesting” holding fund, so it just keeps the cash. It’s like putting it under your bed except backed by the U.S. Government. Since the introduction of floating rate notes using a Zero-Percent C of I doesn’t make much sense but I keep it here for completeness.