However, because the bill didn’t need to be paid immediately, I was able to sell some shares in my taxable investment account. Once the trade settled, I moved the money to my primary checking account and used it to pay the bill.
The second time I accessed my emergency savings was just a few months ago. After having my debit card number stolen in a data breach, my bank account was emptied. I used my short-term (tier 1) account to pay expenses while the issue was being sorted out. Then, I sold a small amount of my shares to replenish my account and bring it back up to a month’s worth of expenses.
Related: How Should You Invest for the Short Term?
It’s important to plan ahead when using this strategy. It takes seven to 10 days for me to complete a transaction with my online brokerage and have the money shifted into my bank account. With index fund settlement, and ACH transfer, you need a little lead time. That’s why I like having the short-term account. I can tap it while I liquidate the stocks.
Switching to a checking account would make things easier. I had to move a lump sum from my short-term emergency savings account into an alternate checking account in order to conveniently use it. Using an interest-bearing checking account could change the equation. I’d be able to just use the debit card with no issues during an emergency.
What if Your Portfolio Loses Value?
The biggest concern I see when I explain my approach to emergency savings has to do with stock losses. And it’s true. In 2010, I sold at a loss to cover my emergency costs. However, even so, I still had capital in the emergency fund — and that’s the point of the emergency fund. If you are fortunate enough to have lead time before your first emergency, you’ll probably not deplete it all in one go.
On top of that, because I sold at a loss, I was able to claim a tax deduction. Not only did I have the funds I needed, but my emergency ended up being tax-deductible. That’s not a terrible thing. And, because I automatically contribute to the account each month, I was able to rebuild the fund quickly, especially as the stock market bull run began.
In the end, how you manage your emergency fund is up to you. I’ve had good results from my tiered approach, and I like that I build my net worth while protecting myself in the case of emergency.
This article has been republished with permission from Modest Money.