My Emergency Fund Now Beats Inflation (Earning 4.35% APR)

I have a $5,000 cash emergency fund, as well as another $5,000 in cash that represents future spending in various budget categories (household maintenance, car repair, etc.). Nothing bothers me more than cash sitting around losing value due to inflation, so I’ve been experimenting with how to put these cash reserves to work. After a bit of research and setup, I am now earning an average of 4.35% risk free on my $10,000 cash; amazingly this is done via a financial product I usually avoid like the plague: prepaid debit cards. I was skeptical when I first started researching, but after a few months of experimentation, I am confident that I’ve found an awesome way to outperform any high yield savings account I’ve had in the past.

Mango Money Prepaid Debit Savings

An online bank called Mango Money offers a prepaid debit card with an attached savings account. The savings account can earn up to 6% APY on a balance up to $5,000. As you might expect, there are a number of caveats & details:

  • The prepaid debit card has a $3/month fee, which will reduce the effective return rate, more so for those depositing less than $5,000
  • $50/month is required in direct deposits to earn the 6% savings account APY (otherwise it is only 2%)
  • The card isn’t designed with an easy way to get money out, once it’s in (without spending it via the debit card)

I’ve had the Mango account open with $5,000 deposited in savings since early October 2014. I’ve added the minimum direct deposit amount of $50 each month to earn the 6% APY rate. Deposited at Mango, my $5,000 is basically earning me 80 cents in interest a day. After subtracting out the monthly fees, I am earning:

$292/year (interest) – $36/year (fees) = $256, which is an effective APR of roughly 5%.

Thankfully I’ve figured out a good workaround to sneak money out of the account without actually using the debit card (no need to take away from the credit card reward spends, right?). I plan to withdraw money every 1-2 months, as interest and direct deposit funds build up. There’s no documented way to withdraw or transfer money from the account, but twice now I’ve successfully done an EFT withdrawal. I initiated the withdrawals in PayPal. If you add your Mango account to PayPal as an external bank account, you can “Add Money” to PayPal, and use the Mango account as the funding source. So far, I’ve had no trouble pulling cash from the Mango account using this method.

Note: I’ve only pulled cash from the “Mango Prepaid” account after first transferring it out of the “Mango Savings” account. Also, I assume that if this is done too often, or for large amounts of money, Mango may choose to close the account.

PayPal Prepaid Debit Savings

PayPal also offers a prepaid debit card with an attached savings account. This card is very similar to Mango’s offering, but differs in a few key ways:

  • The savings account can earn up to 5% APY on a balance up to $5,000
  • The prepaid debit card has a $4.95/month fee, which will reduce the effective return rate, more so for those depositing less than $5,000
  • Interest is only paid once per quarter (not monthly, like Mango)

I opened the PayPal Prepaid and Mango accounts at the same time, and I’ve received one interest payment from PayPal (on December 31st). Deposited at PayPal Prepaid, my $5,000 earns be about 67 cents per day. After subtracting out monthly fees, I am earning:

$245/year (interest) – $59.40 (fees) = $185.60, which is an effective APR of roughly 3.7%.

I use the same technique to withdraw money from the PayPal prepaid card as I use on the Mango card. Obviously, Mango is providing me with a much better rate, but only for the limited $5,000 deposit.

Summary

With an average APR of roughly 4.35%, I am now happily outperforming average inflation rates with my cash. I can gain relatively quick access to this money when needed, an EFT usually takes 4-8 days to hit my checking account (via middleman PayPal). In a true emergency where I can’t wait a week, I can easily utilize the funds via the debit cards that came with the accounts.

So, do you have an extra $5,000 sitting around losing value due to inflation? If so, I encourage you to research the odd world of prepaid debit card savings accounts!

**UPDATE: January 2015**

I’ve transitioned away from Mango and PayPal – read the details in this new post.

Posted in Musings