# blog.sei.sh

## Allocating a personal emergency fund: an analysis

I've recently been wondering where I should store my emergency fund to cover my expenses for 6 months. In case others are considering something similar, I've organized my thoughts into a short post below. We'll be taking a look at the following three cases and analyze their net yields:

## Analyzing Ally Bank Online Savings Account

I use Ally Bank for my checking and savings accounts since their customer service has been historically excellent and their interest rates higher than their competitors, e.g. Bank of America, JPMorgan Chase.

As of June 28, 2019, the annual percentage yield of Ally Bank's online savings account was 2.10%. All yields from this account are fully taxable at federal, state, and local levels. In my case, I would have to pay:

• A federal income tax rate at 35%
• A New York state income tax rate at 6.57%
• A New York City local income tax rate at 3.88%

The net yield after taxes can be calculated as follows: $$net\;yield = gross\;yield-(gross\;yield)(\sum{i=0}^n tax\;rate_{i})$$ $$= gross\;yield-(gross\;yield)(\sum{i=0}^n tax\;rate_{i})$$ $$= 2.10\% – (2.10\%)(35\%+6.57\%+3.88\%) \approx 1.15\%$$ I would have an effective interest rate of about 1.15% with Ally Bank's online savings account. Let's now see what other options can offer.

## Analyzing Vanguard Treasury Money Market Fund (VUSXX)

As of June 28, 2019, the 7-day SEC yield of VUSXX was 2.32%. The interest paid by U.S. Treasury bonds is exempt from state and local income taxes, so I'd have to pay the following:

• A federal income tax rate at 35%
• An expense ratio of the mutual fund at 0.09%

My net yield after taxes would then be: $$2.32\% – (2.32\%)(35\%+0.09\%) \approx 1.51\%$$ I would have an effective interest rate of 1.51% with VUSXX. How about VYFXX?

## Analyzing Vanguard New York Municipal Money Market Fund (VYFXX)

As of June 28, 2019, the 7-day SEC yield of VYFXX was 1.73%. The interest paid by these municipal bonds is exempt from federal, state, and local income taxes, so I'd have to pay the following:

• An expense ratio of the mutual fund by 0.16%

My net yield after the expense ratio would then be: $$1.73\% – (1.73\%)(0.16\%) \approx 1.73\%$$

## Comparing the options

In terms of net interest rates, VYFXX appears to be the most appealing option, followed by VUSXX and Ally Bank's online savings account. If you can have higher interest rates with VYFXX and VUSXX, then why should you even consider the said savings account? One critical factor in favor of the savings account is the double protection of your funds. If you have your funds in a bank account, they are guaranteed by both the bank and the government. On the other hand, U.S. Treasury bills and municipal bonds have only the guarantee from the federal and state governments respectively.

A minor benefit to a savings account is a comparatively higher liquidity than with the listed tax-exempt mutual funds. With a bank account, you can convert your funds into cash almost immediately. With the other options, however, you'd have to wait for the mutual funds to finish selling the holdings and for the funds to settle in your account before withdrawal.

With this in mind, I'm planning to keep my emergency fund in an online savings account at Ally Bank. While net interest rates are higher with other options, I prefer to have much higher liquidity and double protection for something like my emergency fund. That being said, I do think that tax benefits of U.S. treasury bills and municipal bonds cannot be understated and am planning to keep a portion of my investments in these vehicles.

If you've made it this far, thanks for reading! I hope that you found this post helpful.

Note: The thoughts expressed in this post are the personal views of myself and do not necessarily reflect the views of my current employer. Nothing in this post constitutes investment, tax, legal, or other advice for the reader.