Don’t be a normal idiot, be a wealthy one; maintain a healthy emergency fund

February 27th, 2021 by D.C. Poc
Sharing

The EF (Emergency Fund) is one of the foundations of personal finance. The EF allows you to sleep soundly at night knowing your lifestyle and loved ones are protected. Whether it be from job loss, or an unexpected illness, having the ability to pay 4-6 month of expenses with savings is a game changer. Because of this, you want the EF to be invested in something fairly liquid - meaning, you can withdraw the funds quickly in order to pay for the emergency expense. You also want to ensure the EF isn’t invested in too risky of funds, or the money may not be there when you need it.

So you are probably wondering where you should stash this EF we speak of? Well, wonder no more! This is largely based on personal preference but we can run through some of the more common methods used.

High-Yield Savings Account (HYSA)

It is worth noting that I hate this one. Earning .6% interest in a savings account doesn’t sound fun to me, but at the same time, EFs aren’t supposed to be fun. In actuality, interest rates are variable depending on the benchmark interest rate set by the Federal Reserve. They might be .6% as mentioned above, or they could exceed 2% as witnessed a couple of years ago. HYSAs are available at TONS of banks and credit unions, and some of the best rates can be found using online-only banks. These funds are accessible very quickly, if needed. If this is your preferred route, do your research and find an institution and product that works best for you. Avoid the shady characters, as you should have some confidence in the custodian of your money!

Your Regular Checking/Savings Account

Most everyone already has a checking and savings account (or should - we know some of you conspiracy theorists try to stay off the radar, and that’s fine, too). If I was going to use a “traditional” EF, I would opt for this route due to ease of access and the fact that it would be with my everyday banking institution. With that said, the interest rate would typically be very low. In personal finance, you’re sometimes required to trade return for convenience. That is the case here.

The Mattress or Backyard

I don’t like either of these, but I can certainly understand them! Some people don’t trust banking institutions and I get that, but there are some inherent risks of stuffing benjamins in your mattress or burying gold bullion by the oak tree in your backyard. One of these risks is inflation (moreso with the cash). The mattress money will slowly devalue as inflation rises. Technically, your mattress money is getting smaller by the day. You also have the heightened risks of theft, destruction (fire, flooding, etc.), and possibly just forgetting the money is there (you can read plenty of news articles about this). Either way, this is a viable option.

To elaborate on the inflation risk associated with this, see the scenario below:

Let’s say Bob has $20k from the sale of his first home. Rather than spend the money, he wants to save for the future. It’s 1995, and Bob planned on working until 2020, so he’s going to hide that money under his mattress until his golden years approach. One problem - INFLATION! Since 1995, inflation has occurred at an average rate of 1.07%. Because of this, Bob's $20k now has the spending power of $11,776. That’s right, over the course of 25 years Bob has lost approximately $8,224 at the hands of inflation. Crazy, right? This same concept applies to all money that doesn’t have a means of ‘outrunning’ inflation.

Taxable Brokerage Account

Some people, like me, can’t stand to see their money earn .6% interest. For these types, a taxable brokerage account is likely the best alternative. Here, you have the ability to invest in stocks, ETFs, and mutual funds. You can take as much, or as little, risk as you want. Heck, you can even buy penny stocks (not recommended, but also not financial advice). This type of account is especially helpful if you have a large balance where only a small portion will represent your EF. In emergencies, this would give you the opportunity to tax-loss harvest (TLH) or realize some gains on that penny stock pick you made 6 months ago! Either way, this is a very viable EF choice.

The Roth IRA

Traditionally, this isn’t the first place your mind travels to when talking about emergency funds. Ideally, you want to leave all retirement accounts (especially Roth as they grow tax free and are withdrawn tax free) alone until retirement. But the Roth IRA has a special provision that allows you to withdraw contributions at any time without penalty. Let’s say you’ve contributed $6k for 2019 and $6k for 2020 and your account has grown to $14k with interest. You can still access the $12k in contributions tax and penalty-free, but not the earnings. This makes the Roth IRA a very attractive EF.

Everyone’s personal finance story doesn’t read the same, nor should it. For my family, we no longer keep a dedicated EF at all. Instead, we have growing Roth IRA balances that give us a fallback. We also have very secure jobs, which contributes to our overall financial planning strategy. Maybe you have a job in an up and down industry that has 8 year layoff cycles and you feel that a 1-year emergency fund would be more suitable. That’s fine, these decisions should be based on personal circumstances and preference. Your choice should allow you to sleep well at night. There is no hard science behind this.

Long story short - assess your needs and determine what, if any, EF works best for you and your family. None of these solutions are the gold standard. In fact, at Wealthy Idiots, you can expect us to share a ton of different methods to become wealthy, and stay wealthy! Stay tuned for more!


D.C. Poc
Co-founder of The Wealthy Idiots, Index Fund Investor, Real Estate Investor

D.C. joined the Marine Corps right out of high school. When he left active duty, after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time) he quickly realized he needed to learn how to save to secure his future. After nearly ten years of research, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!

Disclaimer: The Wealthy Idiots is not a financial advisor and nothing on this site is intended to be used as financial advice. This site operates as a generator of ideas, which sparks financial curiosity and leads to growth in financial knowledge and understanding. If you need specific advice, it is recommended that you speak with an estate attorney, fee-only financial advisor, tax consultant, etc., depending on the area of expertise your question requires.
Sharing
Recent Articles
How to protect your loved ones with term life insurance
The HUGE benefits of the Health Savings Account (HSA)
Pay attention; don’t let fees eat your investment returns
End of year checkup; how I keep tabs on my finances
Social Security; what it is and how you should include it in your retirement planning
How to pick the right brokerage firm for you
Keep more of your hard-earned coin; understand tax write-offs and credits
Retirement Money 101: Where to put it and in what order
The unforeseen downfalls of the FIRE movement
Compound interest for idiots; don’t short-change yourself
Why a 6.2% COLA is not good news for the average person
Don’t fear the stock market, dive in head first!
Take your retirement savings to the moon with these simple tips
JOHN, THE GUY ON FRIES
Continuing the pursuit of wealth; rental property #2
Do you know your net worth? You should and here is how to calculate it!
Making Cents of Retirement Accounts
Get richer, quicker: 10 tips for the Wealthy Idiot
MLM will kill your pursuit of wealth
Property taxes: how to beat a rigged system
The investors mindset; what does this Wealthy Idiot think about?
DEBT: The Good, The Bad, and the Ugly
Don’t miss the tax law change that can lessen the blow of childcare
BUSTED: Retirement Myths
The path to early (Age 57) retirement; long-term rental properties
Babies are expensive - be prepared!
First step to being wealthy: fire your financial advisor
Show me the stimmy; What you need to know about your 2021 stimulus check
Side Hustle: Real Estate Agent (Part 2)
Side Hustle: Real Estate Agent (Part 1)
Highway to Retirement. Do not miss this overpowered tax cheat code! Roth IRA
Stay the course; don’t let soundbites and talking heads curb your personal finance strategy
Your bank might not “be there for you” during these difficult times - always know your banking fees!
Save thousands with a low mortgage rate
Don’t Miss Out on Massive Savings with these Tax Secrets - Contribution Limits for 2021
Stimulus Checks 101: Don’t get left behind!
You're paying way too much in taxes; Spend more time working for yourself
The Case for a High Savings Rate; Building Wealth to Secure Your Future
8 Financial Truths Every Wealth Builder Needs to Know
Copyright © 2021 Wealthy Idiots. All rights reserved. Privacy