How To Invest Your Emergency Fund?

[Humdrum]

So I've have a 6 month emergency fund sitting in a low interest savings account and am wondering what would be the best way to invest it to try and keep with the rate of inflation, but still keep it liquid. I've considered the following three options below, but would like some feedback.

2 months worth of savings in I Bonds
2 months worth of savings in a Vanguard Short-Term Bond Index (Roth)
2 months worth of savings in a High Interest Savings account

If I keep it in a High Interest Savings account, then what would be the best bank to use? Of course I know that a bank needs to be FDIC insured.

Also,I will admit though that I am hesitant about the idea of a Roth Vanguard Short-Term Bond Index, with the fees and the possibility of interest rates rising.

[fredjohnson]

You won't keep up with the rate of inflation with an emergency fund. It has to be kept liquid. If it was me, I'd probably put it in the Vanguard short term bond fund or short term municipal bond fund. You'll make around 1% a year which beats a mm. You could put all of it in a 1 yr cd paying around 1% also and then pay the early withdrawal penalty in case you need to spend it.

[dozer183e]

I'm in the process of laddering mine in 5yr CDs. Every Quarter I buy a new 5yr CD. In the end this will mean 1/20th of my emergency funds will be maturing every quarter, which may pose a problem if I need a lump sum, but I actually have access to other cash savings that could get used in a pinch, and let the CD's "reimburse" those later. Or if needed, I could cash in the CD early, and paying the penalty will still beat the MM rates after a year.

[anil686]

Just remember the I-bonds cannot be redeemed for one year - therefore they cease to be liquid for an emergency fund if you go that route. You may consider adding another 2K in just I bonds (total 8K) and then moving 2K from either the high interest checking or bond fund in one year. Agree with the above, outside of Ibonds (which are at zero) there is no other liquid form (after one year) that can keep up with inflation. Of course you are taxed on the gains of I-bonds at your current rate. Therefore, in a high tax bracket, a short term municipal bond fund may be an option. I am in a high tax bracket but choose to keep my EF (nine months) in HY savings. I use cap one (formerly ING) just b/c I had been using them before the switch - hope that helps.

[Humdrum]

Just remember the I-bonds cannot be redeemed for one year - therefore they cease to be liquid for an emergency fund if you go that route. You may consider adding another 2K in just I bonds (total 8K) and then moving 2K from either the high interest checking or bond fund in one year. Agree with the above, outside of Ibonds (which are at zero) there is no other liquid form (after one year) that can keep up with inflation. Of course you are taxed on the gains of I-bonds at your current rate. Therefore, in a high tax bracket, a short term municipal bond fund may be an option. I am in a high tax bracket but choose to keep my EF (nine months) in HY savings. I use cap one (formerly ING) just b/c I had been using them before the switch - hope that helps.

Are you referring to the Vanguard Short-Term Bond Index Fund Investor Shares (VBISX) as a municipal bond fund??

[Louis Winthorpe III]

I'd keep it all in an online savings account.

[AviN]

I allocate mine like this:

5% in cash (paper money)
20% in Wells Fargo checking (no interest)
25% in Discover Bank savings (0.85% APY)
50% in Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) (current SEC yield is 1.58%)

I assume the Tax-Exempt (municipal bond) fund is likely to lose some value, but my emergency fund is large enough to sustain it.

I used to include the Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares (VNJTX) fund in my emergency fund for the state income tax exemption as well, but recently concluded that I'm taking on too much risk by extending duration and failing to diversify.

5-year CD's with flexible withdrawal policies are also a reasonable option, but I'm a little concerned that the bank will change its policy and I wont be able to withdraw the money in an emergency.

Avi

[anil686]

Just remember the I-bonds cannot be redeemed for one year - therefore they cease to be liquid for an emergency fund if you go that route. You may consider adding another 2K in just I bonds (total 8K) and then moving 2K from either the high interest checking or bond fund in one year. Agree with the above, outside of Ibonds (which are at zero) there is no other liquid form (after one year) that can keep up with inflation. Of course you are taxed on the gains of I-bonds at your current rate. Therefore, in a high tax bracket, a short term municipal bond fund may be an option. I am in a high tax bracket but choose to keep my EF (nine months) in HY savings. I use cap one (formerly ING) just b/c I had been using them before the switch - hope that helps.

Are you referring to the Vanguard Short-Term Bond Index Fund Investor Shares (VBISX) as a municipal bond fund??

Sorry - was referring to Limited Term Tax Exempt BF - sorry about the ambiguity

[yosef]

6 months is not enough to bother with tiering it IMO. I'd just throw it in an online savings account and be done with it. I personally use Ally.

[Humdrum]

6 months is not enough to bother with tiering it IMO. I'd just throw it in an online savings account and be done with it. I personally use Ally.

I've actually been considering Ally. How do you like Ally and is the interest rate on your account good?

[tigerman3]

I have a 5 year CD ladder with low EWPs. On the front end of the ladder I have a high yield savings which pays 1%.

[Makaveli]

6 months is not enough to bother with tiering it IMO. I'd just throw it in an online savings account and be done with it. I personally use Ally.

I've actually been considering Ally. How do you like Ally and is the interest rate on your account good?

I use Ally as well. Three different accounts for different purposes: 0.1% interest checking account, 0.85% interest MM account, 0.9% savings account. Great customer service on top.

[VirginiaBob]

I'm a big fan of rewards checking accounts for emergency funds. Mine pays 2%, but others are out there that pay over 3%.

[digit8]

Of course I know that a bank needs to be FDIC insured.

NCUA insurance through a credit union will give you the same protection (and, I'd argue, better service if not always a better rate).
I go with 6 months in high interest savings, plus depositing all my coins through a handy-dandy machine at the local branch, periodically dumping the excess into IBonds.

I would generally argue against short-term bonds as an emergency fund: at today's rates you're getting all of the negatives (no insurance, the ability to lose principal) with none of the positive (the extra risk has brought no corresponding extra return for the last few years). At best, I'd use it as a backup by setting a portion of my Roth in it.

[runner9]

Ours is $10K in ibonds, $20K in an Ally 5 year CD paying 1.89% and $7.5K mostly in Ally Savings (0.9%) with a little in Ally Checking (0.1%)

[gabriel1970]

I put all my emergency fund in VBTLX.

[dbnarley]

Wife and mine is in Capital One 360 (Formerly ING). Linked to our secondary checking account. Works great.

[john94549]

I've crunched the numbers on just about all the alternatives mentioned thus far (at one time or another), and always came back to a convenient, garden-variety, savings account. Ours at Alliant CU yields 0.8%. We regard it more as a "ready cash" fund, where we can move dollars from savings to checking (no fees, no minimum balance) as needed.

[gardemanger]

Emergency funds ought to be liquid at all times. They are not investments. Beating inflation is not the goal, although keeping up with *your* personal rate of "inflation" may be - i.e., periodically reexamine whether your emergency fund amount, which should be <x> months of your expenses, is in line with what your current expenses really are. That's not something you need to perpetually monitor unless something suddenly happens to substantially change your monthly expenses. Otherwise, I'd say just cast your eye upon it every year when you rebalance your investments.

I keep 6 months liquid at all times, and a second tier in laddered I bonds. If it happens that I never need to dig into that second tier, then I can consider it a very secure little pocket of my retirement portfolio, but I'm always careful not to confuse liquid emergency funds with investments.

[avenger]

I keep my cash needs inside my employer sponsored retirement plan in a stable value fund yielding 3.20%.

[Peculiar_Investor]

This topic seems to occur fairly regularly. There is lots of knowledge spread across some 200 previous topics that might be worth reviewing, check out Emergency fund - topic search. Another useful resource is the wiki, Emergency fund.

[ctreada]

Does anyone here use the Lifestrategy Income fund or Target Retirement Income fund for emergency reserves? Is this a terrible idea?

I had a lot of money in Ally for the .9% but started moving some of the money into these two after reviewing the charts & seeing that any loss in value to date has been pretty quickly gotten back to break even, even in '08.

[aude]

Yes. I use Lifestrategy Income for a portion of my efund. So I have about 10% equity exposure across the whole efund. It works for me.

[XtremeSki2001]

We plan to put our emergency fund in our ROTH IRA (currently not funded for FY14) and select an appropriate investment based on our risk appetite. We can access our contributions at any time without penalty.

[aw82]

Here's my strategy (we have low expenses, so this is really about 5 months of necessary expenses for us):

1. My credit card limits well exceed my emergency fund balance, so if something happens, it goes on the credit card immediately (then is paid off in full from the e-fund, so no interest is accrued). This gives me time to access the slightly less liquid parts of our e-fund. Plus I can earn 2% cash back using a credit card.

2. (most liquid) $6,000 is in high interest savings along with our general long-term savings (typically Ally bank, but right now it's at Chase so I can get the $200 new account bonus [effectively 5% APY for three months], then it will be back at Ally). Also looking into 2% rewards checking at a local credit union.

3. $1,000 is in an HSA. We have spent more than this on medical expenses this year, so we could withdraw it if needed.

4. $6,000 is in three PenFed 5 year CDs (3%, but a big penalty for early withdrawals). I might ladder another if PenFed has another CD sale this winter

5. (least liquid*) $3,000 is in an ultra-conservative Roth IRA. The plan is to switch these dollars to non e-fund savings. I just did this to take advantage of IRA space that we couldn't fill at the time.

I'm sure people will say that this isn't liquid enough, but I'm comfortable using credit as a stop-gap since I can liquefy everything in a matter of weeks and avoid paying interest. My thought is that if you keep a month or two entirely liquid and can liquefy the rest in a month or so, there's no reason to not maximize the amount of risk-free interest you can earn on your e-fund.

*from the standpoint that I would loose the Roth IRA space

[backpacker]

Does anyone here use the Lifestrategy Income fund or Target Retirement Income fund for emergency reserves? Is this a terrible idea?

Lifestrategy income is a great place for an emergency fund. It's a bit better to hold 80% in VBTLX and 20% in VTSAX. The reason? Then you can get check writing privileges for the bond portion of your emergency fund, meaning that 80% of the money is ready for use at a moment's notice.

[XtremeSki2001]

Here's my strategy (we have low expenses, so this is really about 5 months of necessary expenses for us):

[snip}

3. $1,000 is in an HSA. We have spent more than this on medical expenses this year, so we could withdraw it if needed.

4. $6,000 is in three PenFed 5 year CDs (3%, but a big penalty for early withdrawals). I might ladder another if PenFed has another CD sale this winter

5. (least liquid*) $3,000 is in an ultra-conservative Roth IRA. The plan is to switch these dollars to non e-fund savings. I just did this to take advantage of IRA space that we couldn't fill at the time.

I'm sure people will say that this isn't liquid enough, but I'm comfortable using credit as a stop-gap since I can liquefy everything in a matter of weeks and avoid paying interest. My thought is that if you keep a month or two entirely liquid and can liquefy the rest in a month or so, there's no reason to not maximize the amount of risk-free interest you can earn on your e-fund.

*from the standpoint that I would loose the Roth IRA space

Wouldn't the ROTH IRA be most liquid of the HSA and CDs since you can use your ROTH IRA contributions (sans earnings) tax and penalty free?

[bcjb]

We have 30% in I bonds and 70% in a high-yield savings account (0.95%).

[aw82]

Here's my strategy (we have low expenses, so this is really about 5 months of necessary expenses for us):

[snip}

3. $1,000 is in an HSA. We have spent more than this on medical expenses this year, so we could withdraw it if needed.

4. $6,000 is in three PenFed 5 year CDs (3%, but a big penalty for early withdrawals). I might ladder another if PenFed has another CD sale this winter

5. (least liquid*) $3,000 is in an ultra-conservative Roth IRA. The plan is to switch these dollars to non e-fund savings. I just did this to take advantage of IRA space that we couldn't fill at the time.

I'm sure people will say that this isn't liquid enough, but I'm comfortable using credit as a stop-gap since I can liquefy everything in a matter of weeks and avoid paying interest. My thought is that if you keep a month or two entirely liquid and can liquefy the rest in a month or so, there's no reason to not maximize the amount of risk-free interest you can earn on your e-fund.

*from the standpoint that I would loose the Roth IRA space

Wouldn't the ROTH IRA be most liquid of the HSA and CDs since you can use your ROTH IRA contributions (sans earnings) tax and penalty free?

Good point. Maybe "least liquid" isn't the right term. Comparing the CDs vs the Roth IRA, it's really more which has a bigger penalty. If i liquefy the CDs, I'll lose around $150 in interest. If I liquefy the Roth IRA, I loose $3,000 of IRA space, which could have a big effect years in the future.

Regarding the HSA, I could withdraw the money without any penalties since we have already had over $1,000 in medical expenses this year, for which we did NOT withdraw from the HSA. Instead, I took money out of our online savings account, effectively "transferring" a portion of our e-fund to our HSA. So if the car broke down, I could withdraw from the HSA to pay myself back for past medical expenses, then use the money (which is now sitting in the bank account) to pay the mechanic to fix the car.

[dmwahl]

I put all my emergency fund in VBTLX.

Same here. It's liquid enough that I can have it in checking within a few days.

[asif408]

So I've have a 6 month emergency fund sitting in a low interest savings account and am wondering what would be the best way to invest it to try and keep with the rate of inflation, but still keep it liquid. I've considered the following three options below, but would like some feedback.

2 months worth of savings in I Bonds
2 months worth of savings in a Vanguard Short-Term Bond Index (Roth)
2 months worth of savings in a High Interest Savings account

If I keep it in a High Interest Savings account, then what would be the best bank to use? Of course I know that a bank needs to be FDIC insured.

Also,I will admit though that I am hesitant about the idea of a Roth Vanguard Short-Term Bond Index, with the fees and the possibility of interest rates rising.

I use all 3 of the options you noted. I'm building up my I-bond allocation slowly, however, since I have to hold them for a year and don't want to have too much money tied up that I can't access (I'm making small purchases every 6 months). I have an online savings account with Ally that pays 0.9% interest (my primary emergency fund), and I also have some money in BSV (Vanguard Short Term Bond ETF, ETF version of VBISX) in a taxable brokerage account which serves as my second tier emergency fund.

I think there are several decent options for online banks. I just picked Ally because I've seen good feedback about them recently and their rates are competitive.

Interest rate rising predictions have been around for several years. I choose to ignore the prognosticators mainly because they've been wrong so many times. Even if rates do rise you won't be hurt much because of VBISX's short duration. It's been around since 1994 and never had a year with a negative return (the worst year for VBISX was 2013, when it returned 0.07%; it's worst quarterly return was -1.8% in 2004). VBMFX (Total Bond Market) has has 3 years of negative returns in that time, though the worst year was a loss of less than 3%).

[pennstater2005]

Personal preference here: Half in Ally online savings account for instant access and half in Lifestrategy conservative growth for a taste of equity (few days to access but credit cards could easily hold that over).

[Rob Bertram]

I keep about 1 month in checking with the rest invested in taxable according to my AA (80/20) which is about 4-5 years of expenses. I have automatic transfers into my taxable account every month. If I need to buy something expensive, I stop the monthly transfers in advance. I was laid off in 2009 and again in 2012, so I'm fairly comfortable with this level of risk. Your tolerance may vary.

Edit: There seems to be a lot of loss aversion in this thread that can be compensated by adding a couple more months to the EF. What is the most that a bond fund is expected to drop 10-15%?

[downshiftme]

I keep about 1 month in checking with the rest invested in taxable according to my AA (80/20) which is about 4-5 years of expenses.

This is by far my favorite plan. Years ago when I had less savings than I do now, I also subscribed to the idea that Emergency Fund needs to be liquid in a savings account or similar. But now that I have more assets saved, I no longer need to keep as much liquidity. I have several months of cash sloshing around in various savings and checking accounts, maintaining minimum balances to avoid fees or making monthly budgeting easier by having a month of cushion in checking.

The rest of emergencies I intend to cover with credit cards and judicious liquidation of taxable investments if it comes to that. Since I have been doing this for decades, money that would have been in a low yield savings account as "EF" but instead was invested has now grown to several times it's original amount. Even taking a 50% or greater haircut if markets are down will still leave me considerably ahead compared to what I would have had if I kept with only the most liquid investments for EF.

And my experience has been that any emergencies that did arise (job loss, medical and big ticket house/car repair) were always manageable accessing the EF over time. No one emergency ever required access to the entire EF on short notice.

[VirginiaBob]

I keep mine in all in my bitcoin account, the currency of the future.

[Humdrum]

How about moving some of it into the Vanguard Target Income Fund or even the LifeStrategy Income Fund?

[siamond]

I keep about 1 month in checking with the rest invested in taxable according to my AA (80/20) which is about 4-5 years of expenses.

+1

[gardemanger]

If you plan to tap into a Roth IRA for emergency needs, liquidity is certainly not the only consideration. You are using up tax-free space from the past that you can never get back. In taxable space, you can replenish the account at will.

[Professor Emeritus]

This has been hashed over and over and over again. The basic facts never change

Emergency funds tier 1 Cash checking accounts anything that gives you real money TODAY

Emergency funds tier 2 Anything that gives you real money without any problem at the end of the week

Emergency funds tier 3 Steady flow of cash for the next X months at Y per month

Vanguard and similar are not suitable for tier 1 or 2. Fine for tier 3

Brick and mortar banks work for tier 1 Tier 2 depends.

We only need tier 1 and 2
It's in the bank

To estimate needs for emergency funds, imagine you lost your job today and you are not getting your final paycheck or severance.

How much do you need over the next 6 months ?

[Ketawa]

I keep most of my emergency fund in Mango, Union Plus, and Santander checking accounts. By jumping through some hoops to set up and automate the process, you can make 5%+ FDIC insured on up to about $12k. A couple can raise that to $24k. They are as liquid as the amount of time it takes to ACH pull. Search the forum or for blog posts by The Finance Buff for more details.

[Wricha]

If you are established get an unsecured line of credit for emergency fund and invest the rest.

[aw82]

I keep most of my emergency fund in Mango, Union Plus, and Santander checking accounts. By jumping through some hoops to set up and automate the process, you can make 5%+ FDIC insured on up to about $12k. A couple can raise that to $24k. They are as liquid as the amount of time it takes to ACH pull. Search the forum or for blog posts by The Finance Buff for more details.

Wow, thanks for sharing this. I'll definitely look into these options.

[Professor Emeritus]

If you are established get an unsecured line of credit for emergency fund and invest the rest.

A line of credit is not an emergency fund. It can get cut off in a moment.

[avenger]

This has been hashed over and over and over again. The basic facts never change

Emergency funds tier 1 Cash checking accounts anything that gives you real money TODAY

Emergency funds tier 2 Anything that gives you real money without any problem at the end of the week

Emergency funds tier 3 Steady flow of cash for the next X months at Y per month

Vanguard and similar are not suitable for tier 1 or 2. Fine for tier 3

Brick and mortar banks work for tier 1 Tier 2 depends.

We only need tier 1 and 2
It's in the bank

To estimate needs for emergency funds, imagine you lost your job today and you are not getting your final paycheck or severance.

How much do you need over the next 6 months ?

Out of curiosity, what are the facts?

[Professor Emeritus]

This has been hashed over and over and over again. The basic facts never change

Emergency funds tier 1 Cash checking accounts anything that gives you real money TODAY

Emergency funds tier 2 Anything that gives you real money without any problem at the end of the week

Emergency funds tier 3 Steady flow of cash for the next X months at Y per month

Vanguard and similar are not suitable for tier 1 or 2. Fine for tier 3

Brick and mortar banks work for tier 1 Tier 2 depends.

We only need tier 1 and 2
It's in the bank

To estimate needs for emergency funds, imagine you lost your job today and you are not getting your final paycheck or severance.

How much do you need over the next 6 months ?

Out of curiosity, what are the facts?

The facts are you need different kinds of access to emergency cash.

Tier one They tow your car, you lose your wallet and you are locked out of your house. What do you do? I walk up to bank of America and take out cash to pay the locksmith and guy who towed the car . This level keeps you alive

Tier two is buying groceries and gas and car repairs etc keeping yourself going. This level keeps you functioning.

tier 3 is paying your bills as they come due without having income.

Now the quantity of money you need varies with circumstances. No problem, but the timing is fairly constant.

[supernova]

Emergency funds are for emergency, not for investing, so mine is in a savings

[abuss368]

We keep our cash very liquid and available: savings account at the bank. Peace of mind.

[Noobvestor]

So I've have a 6 month emergency fund sitting in a low interest savings account and am wondering what would be the best way to invest it to try and keep with the rate of inflation, but still keep it liquid. I've considered the following three options below, but would like some feedback.

2 months worth of savings in I Bonds
2 months worth of savings in a Vanguard Short-Term Bond Index (Roth)
2 months worth of savings in a High Interest Savings account

If I keep it in a High Interest Savings account, then what would be the best bank to use? Of course I know that a bank needs to be FDIC insured.

Also,I will admit though that I am hesitant about the idea of a Roth Vanguard Short-Term Bond Index, with the fees and the possibility of interest rates rising.

I'd do: save two more months' worth, then put two months in I Bonds and the rest in High Interest Savings, then repeat each year until you have 8 months in I Bonds but can cash 6 of those out. Kind of a slow approach, though - could also save 6 more months, dump it in I Bonds, etc...

[Bfwolf]

I keep about 1 month in checking with the rest invested in taxable according to my AA (80/20) which is about 4-5 years of expenses.

This is by far my favorite plan. Years ago when I had less savings than I do now, I also subscribed to the idea that Emergency Fund needs to be liquid in a savings account or similar. But now that I have more assets saved, I no longer need to keep as much liquidity. I have several months of cash sloshing around in various savings and checking accounts, maintaining minimum balances to avoid fees or making monthly budgeting easier by having a month of cushion in checking.

The rest of emergencies I intend to cover with credit cards and judicious liquidation of taxable investments if it comes to that. Since I have been doing this for decades, money that would have been in a low yield savings account as "EF" but instead was invested has now grown to several times it's original amount. Even taking a 50% or greater haircut if markets are down will still leave me considerably ahead compared to what I would have had if I kept with only the most liquid investments for EF.

And my experience has been that any emergencies that did arise (job loss, medical and big ticket house/car repair) were always manageable accessing the EF over time. No one emergency ever required access to the entire EF on short notice.

This is my strategy as well. I always have a month of spending in the checking account--not really for emergency purposes but rather for working capital, but it suits both purposes. I have credit cards with tens of thousands of dollars of spending ability. I have a taxable account with hundreds of thousands of dollars invested in Total US Stock and Total Int'l Stock that can be redeemed and in my checking account in under a week.

I have yet to hear anybody propose a reasonable emergency that I could not deal with. Keeping an additional 5 months of money liquid for the rest of my life would give up significant investment potential for no good reason.

[Professor Emeritus]

I keep about 1 month in checking with the rest invested in taxable according to my AA (80/20) which is about 4-5 years of expenses.

I have a taxable account with hundreds of thousands of dollars invested in Total US Stock and Total Int'l Stock that can be redeemed and in my checking account in under a week..

This is certainly a liquid investment , which satisfies one prong of the emergency fund. So do Krugerrands.
However I thought the second prong was indifference to current market conditions. I have many years of consumption in the same stock funds, but I don't think of them as emergency funds.