Emergency Fund: Quest for the Best Online Bank Account

Post written by Steve Otto. Follow me on Twitter.

We’ve been following the Dave Ramsey Total Money Makeover program and are on Baby Step #3 – fully funding our emergency fund. The first step is to save up $1000 emergency fund. Step two is pay off all of your debt (not including your mortgage) and step thee is saving up three to six month’s worth of expenses as your full emergency fund.

Available but not too Easy. You want to have your Emergency fund some place where you can get to it when you need it, but not someplace where you can take money out on a whim. Making it slightly inconvenient will help prevent those impulsive moments when you find a great deal on a Disney Vacation package and it suddenly becomes an emergency that your family sees Mickey.

Going Online. We could easily have created another sub account in our local bank, but it would be all too easy to transfer funds over to our existing checking account. So we decided that a separate online bank account was the way to go.

Most bang for your buck. There are two ways that you can earn money when signing up for an online bank account. The first is, obviously, interest. And interest rates are pretty crappy right now. I did some research on all of the most popular FDIC insured online banks and they are all running about the same. The highest rate I could find (with a bank I feel comfortable with) was 2.25% from a bank called Ally (formerly GMAC). The second way you can earn money is from a signing bonus or referral bonus. The best program I came across was ING Direct’s refer a friend program. ING Direct, however, has an interest rate of 1.5%.

Earn up to $525. With ING Direct’s refer a friend program, you simply have someone who already has an account refer you and you’ll get an email on how to sign up. When you do sign up, you’ll receive a $25 bonus and your friend who referred you will receive $10. You can refer up to 50 people.

Bonus vs. Interest. So the key comes down to determining if you will make more money from the difference in interest rates (2.25% vs. 1.5%) and the bonuses from signing up and referring friends. We are going to start out with $5000 and using the Savings Calculator on Ally’s website, I determined how much interest we would earn in a year from the two banks. Ally (2.25%) would earn us $114 in interest from our $5000 and ING Direct (1.5%) would earn us $76 in interest. That’s a difference of $38. However, that’s where ING Direct’s refer-a-friend program comes in. I would get $25 right away for signing up and then another $10 per friend that I refer. So as long as I can refer two friends (giving me $45) I would earn more than the difference in interest.

Best of both worlds. I figure, why not sign up with ING Direct and earn as much as I can from referrals and when I have helped out as many friends as I can (earning me $10 each for my thoughtful acts) then I would transfer that money over to Ally and earn the better percentage rate on my savings.

Keep it rolling. Another idea is that once you have a fair amount of money saved up, say $15,000, then divide it into thirds. Place one third of your emergency fund into a 6 month CD. Then in three months place another third into a 6 month CD, and that would leave one third always available in case you did have an emergency. But it would also allow you to earn a little more interest on your money.

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