Where Should I Invest My Emergency Fund?

After figuring out what my emergency fund should be when it’s fully funded(3-6 months of expenses), I was amazed at how much money it was.

Going bare-bones and tightening the belt each month requires about $3000 minimum income for my household to keep us afloat. The minimum monthly income is based on my absolute, only necessary items, monthly expenses—mortgage, utilities, food, and car to get to and from work, store, etc.

All worked on a simple spreadsheet I put together to keep track of my monthly bills, minus all the unnecessary luxury items like streaming services and ordering food delivery.

Now that I needed $9,000 (3 months emergency fund minimum) to $18,000(the entire fully funded six months emergency fund), I need a way to plan how to save or hold this money.

$18,000, even $9,000, is a lot of money for me, and that money sitting around doing nothing can hurt my financial growth.

So, going to cover my thinking process, and I hope you weigh in on what you are doing or how I can do better. Please leave a comment below.

Remember, I’m an average person, not a tax advisor, investing guru, or financial professional.

I am trying to devise an easy plan to allow my emergency fund to grow passively while I focus on more pressing items like retirement investing. All based on my current understanding of money.

How Much of My Emergency Fund Should Be Liquid?

All my emergency money should be liquid within a time frame(the amount of time the emergency fund will cover my monthly expenses).

Quick Fund Setup Example for the starter emergency fund:

I have the starter emergency fund of $1,000 in a high-yield savings account(HYSA) tied to my checking account. That is very liquid(Fast Cash), and being that liquid, it also is not growing very fast. Where Is My Starter Emergency Fund Kept?

But the rest of the money can be ‘less’ liquid, allowing it to grow, or be saved in places with higher yields.

Let’s imagine I lose my job—a complete loss of income.

For the first week, I have the $1,000 starter emergency fund.

I need cash available after one week without an income for the first money, say the remaining $2,000 for the first month.

For the second month, another $3,000, I only need that money 30 days after losing my job.

For the third month, another $3,000, I only need that money 60 days after losing my job.

It’s possible to have different levels of liquidity for portions of the emergency fund, which can allow a little growth planned for the money.

Is Saved Money The Same As Invested Money?

For the sake of argument, let’s demonstrate the phrases saving money and investing money.

Saving money is where you economize, spend less than you make, and set aside the residual cash into a separate holding or account.

https://www.thefreedictionary.com/Saving+(money)

Investing money is where you put your money to work for you and expect a return.

https://www.thefreedictionary.com/investing

What Is Saved Money?

Saved money is the money that you have yet to spend. It simply exists, without making any, if at all, growth.

An example of savings is taking excess cash from economizing your lifestyle and storing it in a place where it sits. Like stuff into your mattress, virtual mattress, or a bank savings account (with almost no interest).

The amount of money you have today is the same amount you will have a year from now, two years, or more.

What Is Invested Money?

The invested money is taking excess cash from economizing your lifestyle and storing it in a place where the money will earn a return. Hopefully greater than the inflation rate, but at least the balance will significantly grow with time.

Examples of this are the stock market(S&P500) or even High Yield Savings Account(HYSA).

Your money today should increase a year from now, two years, or more. (That is our plan, right?)

Why Is Saving Money Bad And Worse For An Emergency Fund?

One word: inflation.

When I did my minimal monthly budget, I needed less money to survive in 2018. Fast forward to today, the cost of living has skyrocketed.

My emergency fund money sitting in a standard bank savings account would have grown at a compounded(almost) 0% interest.

While my emergency fund needs would have grown 5+% compounded over the last few years.

The ends would not meet, and I must refund my emergency fund each year. My goal would be to have six months of monthly minimum expenses in my emergency fund, but each year with the rise in costs, it would shrink to 5 or fewer months.

It’s hard to keep six months precisely calculated with ever-increasing expenses and worse with an emergency fund that shrinks in buying power as time continues.

So my emergency fund must help maintain its valve by passively growing. It must generate its passive income allowing it to compound in value as my expenses compound in their costs.

So put, my emergency fund must grow with time; if it does not keep up with inflation, at least soften the blow, and I need to refund it continuously.

Where Can I Grow My Emergency Fund?

I’ve established that some emergency funds must be liquid and available immediately. The rest can have delayed liquidity; let’s see if I can plan for my emergency fund to grow slightly.

Let’s look at options to save and invest in the emergency fund and evaluate how liquid those saving options are.

*- Savings or Money Market Account – Very Liquid, often the money is available imitatively or the next day. Which includes parked investment funds sitting in a sweep-account( Best Charles Schwab Sweep Account Rate Of Return? ).

*- Certificate Of Deposit (CD) – This can be liquid, but often at the cost of an early termination fee or delay in a deposit into your account. But liquid enough after the first 30 days of needing the emergency fund.

*- The Stock Market – Can be very liquid but at significant risk of market fluctuations. A declining economy that leads to layoffs can cause stock market declines and a shrinking emergency fund balance—not recommended.

*- Bonds – Some Savings Bonds are liquid, but when I looked into I Bonds for the first 12 months, they were not liquid. , Afterward, if cashed in < 5 years, you will surrender the last three months of interest. In an emergency, losing three months’ interest isn’t a concern, but not having access to your money for the first year of investment into an I bond is a no can do.

*- At Home – Very liquid. The cliche of keeping your money in the mattress makes money very accessible, but it isn’t safe and doesn’t grow either. It is not recommended.

*- T-Bills – Can be liquid, but with short-term T bills( 3 months or less), you can set up a ladder with T bills rotating and expiring every few weeks to a month; if set up correctly( How To Build T-Bill Ladder Emergency Fund (My Plan) & 4-Week T-Bill Ladder For Weekly Income Strategy ). In this case, it can be liquid enough for money needed >30 days after losing income. FAQ: What Is A T-Bill Ladder Strategy?

So, Should My Emergency Fund Be Invested?

I recall Dave Ramsey of Financial Peace University saying, Your emergency fund is an insurance policy, not an investment policy.

I agree with what he said, so when I talk about investments, I’m not talking about locking up my emergency fund and placing it where it will lose value.

With inflation alone, an emergency fund will lose value. My emergency fund can some handle poor judgment, but loss of buying power is guaranteed with inflation.

But this isn’t rocket science; it’s common sense money management working within a person’s comfort level. I am comfortable having my emergency fund in stages of liquidity while targeting returns I can live with without ever putting my emergency fund balance at risk.

Are There Investment Vehicles For Saved Money?

There is. Let’s break this down, and we’ll see how I can build stages of liquidity and find investment vehicles to maximize my return and minimize the effects of inflation.

My Emergency Fund Disaster Scenario:

Lost my job, no job right around the corner.

First Month:

1st Week – I have $1,000 in HYSA(no changes here). Crypto Out, What High Yield Investments I’m Considering.

I need the remaining $2000 available for the rest of the month.

Second Month:

$3,000 available, or $750 available per week.

Third Month:

Another $3,000 is available, or again $750 per week.

So on and so on.

Simple Starter Emergency Fund Solution:

Put the whole emergency fund into an HYSA, and move on.

This solution might be the best for the average person. You can earn 3-4% compounded interest today and focus on the rest of your investment planning.

The old forget the pennies(6 months of income) when you can focus on the dollars(rest of life retirement income).

There are other options without distracting from the dollars.

What Investment Is Great For Emergency Funds?

Well, if you got this far, you can figure out what direction I am looking towards with passively growing my entire emergency fund while it sits and waits and secures my peace of mind should I lose my job.

It’s T-Bills.

I wish to put my emergency fund in my favorite passive income generator(dividend stocks). Still, if you follow the stock market, you notice the balance of stocks would continuously fluctuate, putting the initial balance at risk.

So T-Bills it is. Not because T-Bills are the greatest return I can have, but because they are set up for people like myself who want to build a safety net, have money available for emergencies, and earn a return simultaneously.

I am not the only one that thought of this. People stagger the maturity dates of T-bills always to have one or more, maturing within a week or month, depending on their needs.

This investment process is called T-Bill laddering.

Keep this part simple for me to understand.

How To Build A 13 Week T-Bill Ladder

Today(Month 0):

I can buy a 13-week t-bill today(#1) with auto-renew.

Result: T-Bill #1 is available in 3 months.

One Month Later(Month 1):

I buy another 13-week t-bill(#2) with auto-renew.

Result: T-Bill #1 is available in 2 months, and T-Bill #2 is available in 3 months.

Another Month Later(Month 2):

I buy another 13-week T-Bill(#3) with auto-renew.

Result: T-Bill #1 is available in 1 month, T-Bill #2 in 2 months, and T-Bill #3 in 3 months.

Another Month Later(Month 3):

I do nothing; let auto-renew happen.

Result: T-Bill #1 matures and auto buys another 13-week T-Bill. So T-Bill #1 (auto-renewed) matures in 3 months. T-Bill #2 matures in one month, and T-bill #3 matures in 2 months.

If I don’t need the money, I ensure the auto-renewal happens, and I’m only one month away from a T-Bill From Maturing, and the money becomes accessible penalty-free.

So What Do I Do If I Need The Money?

I turn off auto-renewal and let the T-Bills mature, and the money becomes accessible again.

How Do I Set Up The T-Bill Emergency Ladder?

I keep my first month of emergency funds, the $1,000 starter emergency fund, and the remaining $2,000 in the HYSA.

Then take the balance of the remaining months, 2 through 6, and divide the balance into three piles.

The first pile will be T-Bill #1, the Second pile of money will be T-Bill #2, and Third Pile will be T-Bill #3.

All invested, with auto-renew turned on.

So, Where Is The Best Place to Invest An Emergency Fund?

For me, a staged liquidity solution using a combination of HYSA(Month 1 of expenses) and T-Bill ladder(Months 2+ of expenses).

Did You Look At FPU’s Suggestions To Keep Your Emergency Fund?

If you go to Dave Ramsey Solutions’ page: https://www.ramseysolutions.com/saving/quick-guide-to-your-emergency-fund, you’ll read:

A simple savings account connected to your checking account is good.
A money market account with easy access, like a debit card, is good.
A bank with higher than average interest rates, where the money can be quickly directed into your banking account.

FYI, what they used to call a “bank money market account” that came with higher than regular savings accounts appears to be today’s High Yield Savings Accounts (HYSA) without delays in withdrawals. You might want to consider a HYSA.

Having quick access to your money works both ways. I could fund the starter emergency fund quickly, pushing my extra dollars and pennies into it, completing Baby Step #1 as fast as possible.

Also, I could use that fast cash when an emergency arises.

In the meantime, the money is safe, not in the mattress, and grows with some interest, like a small passive income generator.

Your Feedback?

Have you invested in your emergency fund? How are you storing your cash? Are you using a T-Bill ladder, and what are your thoughts?

Please leave a comment.

Tom, Growing His Passive Income Generators.