Where oh where should I put my emergency fund?

So baby step 1 is to establish $1000 for an emergency fund and put it into a savings or money market account. Eventually, in baby step 3, the idea is to build the emergency fund up to 3-6 months of expenses, but while getting out of debt, doing baby step 2, $1000 is enough for minor emergencies.

Last year I put my $1000 into my savings account, which is attached to my checking account. Being the person I am, it was too easy to dip into it for non-emergency spending. I needed to make it difficult enough to access that it takes effort to get to it. So I put my $1000 into an Internet savings account – not a money market, but with similar interest rates. I realized quickly that it takes nearly a week to transfer money into, and out of this account. Unfortunately emergencies normally require a little quicker access to money.

So the bank, where I started my emergency fund savings account also offers free checking with a MasterCard ATM card. I decided to open a checking account with them in order to have easier access to my emergency fund when necessary.

I don’t carry my emergency fund debit card with me – instead, I’ve tucked it away in a safe in my home. This way if/when I need it, I have access to it within a reasonable amount of time. It is still inconvenient enough to get to it that I won’t be inclined to use it carelessly.

I’ve also been thinking about baby step 3 a little bit. I once visited a financial advisor, who recommended a kind of tiered approach to saving. Basically if memory serves me, she wanted me to keep 1 month of expenses in my checking account. The next tier was to keep 2-3 months of expenses in the attached savings account. She then recommended keeping 6+ months of expenses in rotating CDs. So each month for several months, open a new CD – and keep renewing it at the end of each term. This way you have 4 months of expenses/emergency fund always immediately available, and new monthly CDs coming to the end of a term each month. It seemed overly complicated to me – and CDs don’t offer rates that are really all that great, considering you have to keep them tied up for a set amount of time.

I do kind of like the tiered idea – and I have to be honest I’m not sure that 6 months is enough in our economy, and especially for a web developer who watches layoffs happen as often as I do. I’m thinking about keeping 1 month of expenses in my checking account as padding. Maybe another 3 months of expenses in my attached savings account, and then my fully-funded emergency fund of 6 months of expenses in my Internet savings account – which pays like a money market. That’s 10 months total, and well, I might even decide to make it a full year and put an extra 2 months of expenses somewhere.

Anyway I’m not yet in baby step 3 – and for now I’m very much inclined to keep it simple and just follow Dave’s advice. After all, his advice seems to work well.