High Yield Savings account options
Hello,
I have recently started my FI Journey. I am very excited and my wife is on board. That being said, she is very big on having a designated emergency fund that is rather large. The number we got to was $20,000. I understand that Roth IRA contributions could be used for this, etc etc. That is not a battle I want to get into when my wife is in for optimizing in basically all other ways.
That being said, my friend reccommended Capital One as a HYSA option, specifically because it has seperate "buckets" contained inside. I want to start saving money for vehicle replacement each month in addition to possible savings buckets for other short term goals. Any long term goals I plan to use a taxable brokerage accounts. I do not know if other companies' HYSA options have this convenience feature. Capital One seems to be in the middle of the pack for interest rates Since this is something I am going to carry long term, I don't necessarily want to lose out on a higher interest rate.
All thoughts appreciated, Thanks in Advance,
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You could listen to 10 different people talk about how they came up with their floor for their emergency fund, but it's usually a compromise between you and whoever you share this resource with to define that floor. The rule of thumb might not be a good enough floor for people with only 1 income stream, 6 kids, or preexisting medical conditions that always reach an out of pocket max (or all 3 of those variables combined!). My wife and I both work (no kids), and have 12+ months of expenses covered in an HYS with SOFI. We sleep great at night knowing that we could both leave our jobs and do nothing for a year if we really wanted to. Once you define that floor, I wouldn't hesitate to keep adding to that same account and get a little interest from the HYS until you hit a goal and want to draw back down to that floor. Treasuries is the T-bill and chill method I heard not too long ago, but too much effort for the .25% extra you might get vs the HYS in my opinion.
Capital One 360 is fine and an excellent pairing with Fidelity as your 2 financial institutions. At Fidelity, open a Cash Management Account to do most all things "banking", better. Hold SPAXX there for the HYSA-like "interest". The ONLY thing Fidelity cannot do is cash deposits, which is where Capital One 360 lets you deposit cash at any CVS or Walgreens.
Don't go chasing rates at other places. It's a waste of time.
I think if you're looking for both high interest and a "buckets" feature, Ally is your best bet. They consistently have some of the highest interest rates, and they have a buckets feature. I personally use them and they're great.
Capital One is not a bad choice either, but I think Ally is better for what you're looking for.
You don't mention what your monthly expenses are, but the rule-of-thumb for an emergency fund is 3-6 months' worth of living expenses. If your monthly expenses are between $3.3K and $6.7K, a $20K EF is within that range.
While you can withdraw Roth IRA contributions at any time tax-free, it's better to leave that money invested for the long term. I find it helpful to think of every dollar having a job. The job of Roth IRA dollars is to appreciate in value as much as possible. The job of EF dollars is to be an insurance policy. So I'm on Team Wife 😊
Capital One and Ally both offer "buckets" in their HYSA, but I wouldn't prioritize this feature over interest rate. Consider using Money Market Funds (MMF) at your brokerage for cash savings instead of banks. Banks do stuff like this all the time:
thehill.com
https://thehill.com/business/5084563-capital-one-sued-interest-payments/Whereas MMF simply pay you the market rate of the moment. The Finance Buff has a great article walking through the differences between bank savings accounts and MMF.
Ditch Banks — Go With Money Market Funds and Treasuries