So, one case of bronchitis and one case of flu later…

A funny thing happens when you sit down and try to blog when you have two illnesses at the same time.  My wife was reading over my shoulder, and when she pointed out that one of my sentences wasn’t really a sentence, and that a couple of the words had no vowels, I decided I’d wait a while before blogging about something as important as your money.

Now that the fog of medication is lifting, I want to dig back into the emergency fund discussion.  I’ve gotten some e-mail messages from folks who keep their “rainy day” funds in a variety of forms.  The most popular (in order):

<!--[if !supportLists]-->1)      <!--[endif]-->Online money-market (or higher-yield savings) account

<!--[if !supportLists]-->2)      <!--[endif]-->Regular bank or credit union savings account

<!--[if !supportLists]-->3)      <!--[endif]-->Cash on hand

<!--[if !supportLists]-->4)      <!--[endif]-->Certificates of deposit (CDs) or investment accounts

I must say, I was surprised by the number of people who keep their emergency money in CDs and investment accounts.  For the (embarrassingly short) period of time we’ve had an emergency fund, I’ve always thought of an emergency as something like when the transmission on the car drops, I’m in an accident, or some other catastrophe that requires cash quick.  That’s why, until now, I’ve been hesitant to even go into an online money-market or savings account.  Until now, that is.

Certified Financial Planner Arthur Stein straightened me out.  “If you’re in a situation that you need money within 24 to 48 hours, you’re still going to have your credit cards or debit cards.  You’re going to be able to get money.  The reason you’re saving up to nine months of expenses is to cover what you need for an extended period of time.”

After I hung up with Art, it occurred to me that this concept opens up an interesting prospect for your emergency fund, one that usually applies to someone’s portfolio — diversification.  Say you’ve got a fund of $15,000 to divvy up.  Maybe you’ll want to have one or two thousand in your bank’s savings account, only earning 1 percent (or less) but linkable to your checking account so that you could literally have the money in minutes.

Another chunk can go into an online account that is transferable into your checking account — most online accounts execute transfers within two to five business days.  The rest can go into a short-term CD or some other instrument that earns a little bit better return in exchange for not being quite as liquid. 

Something else to consider: the online banking world has almost eliminated the difference in interest rates between CDs and money markets; in some cases, you can get better rates in the money-markets than the short-term CDs.  And remember, we don’t want to do long-term investing here, this is strictly short-term, so we’re looking to be pretty liquid and pretty low risk.

What do you think?  Post your comments, tell me how YOU do it, and in my next post, I’ll tell you what we’ve done at my house.