I received a question from a Troy FPU participant. He asked "I was researching the money market account my credit union offers. They require a $2500 minimum balance with a 0.100% monthly return. Is this good or are there better money market accounts out there? What would you recommend?"
This is a question inevitably more people are asking. Here are a few suggestions to consider. The reality is at the Baby Step 1 level the interest rate is really irrelevant. At today's interest rates this is $2.00 per year.
I suggest putting your Baby Step 1 Emergency Fund in a Savings Account or Money Market Account at the Bank or Credit Union your main Checking account is at. This way the funds are not in your main Checking account (I don't recommend this). My Credit Union does not pay interest until you have a $2,000 balance. The friend that asked this question indicated his Credit Union doesn't pay interest till $2,500. To keep it simple when on Baby Step One focus less on interest rate and just that the $1,000 represents a mini-emergency fund. Define what constitutes an emergency for you and your family. Get an accountability partner for your emergency fund. This person is who you connect with when you want to use it. Poor budgeting should not be defined as an emergency.
A few more thoughts on Emergency Funds & Sinking Funds. We use Capital One for our Car replacement Fund. It seems to have the highest interest rate @ 0.75%. You can check their current rates here. If you want to maximize your interest for Baby Step 1 this is a good place to go. Transfers are electronic and the account is linked to your main checking account. One caveat - If your new to budgeting having your Emergency Fund at another financial institution from your main checking account will take a few days to get the funds into your checking account.
We talked about SmartyPig last week as a good place for Sinking Fund savings. SmartyPig is great for things like Christmas, Back to School, Property Taxes, or other things you pay annually. SmartyPig is not good for your Emergency Fund. It is too hard to move funds back and forth to Smartypig and when you need the funds you close the Saving Goal, it doesn't allow partial withdraws from a goal either. So I wouldn't use it for Emergency Funds.
Dave Smith is part of the KCC finance staff and a Dave Ramsey Certified Coach.