It sounds crazy: I keep the bulk of the money I’d use in an emergency fund in a taxable investment account.
But maybe it’s not as crazy as it sounds. When you’re using a so-called high-yield savings account, you have a large chunk of capital sitting there, doing practically nothing. If you have the risk tolerance for it, my tiered approach to emergency savings might just help you grow your wealth while preparing your finances for setbacks.
Tier 1: Bank Account
I don’t put everything in a taxable investment account. Instead, I use a bank account for three to four weeks’ worth of expenses. You can choose the account you want.
I’ve been using a high-yield savings account, but I’m thinking of switching to the Radius Hybrid checking account.
Using a checking account would make the money more accessible in an immediate emergency. I like keeping close to a month’s worth of expenses in a bank account because I can get the money immediately if I need it in a true emergency. It gives me enough to live on while I liquidate the assets in my investing account.
Switching from a savings account, with its limitations and restrictions, to a checking account might make the process easier. However, it’s important to practice discipline. Just because you can access the money easier with a debit card, it doesn’t mean you should. Remember, this is for emergencies.
Now, it’s clear that three to four weeks’ worth of expenses isn’t a sufficient emergency fund, so here’s where we get to the good stuff — the taxable investment account.
Tier 2: Taxable Investment Account
The second tier is where I build my emergency savings through consistent contribution. Each month, a set amount of money goes into my taxable investment account for this purpose. The account doesn’t have a target goal amount. Instead, because I’ve already got automatic contributions going to my retirement, HSA, and travel fund accounts, I just use the account as a way to build emergency savings — and a little more wealth.
I’m actually 100% invested in an S&P 500 index fund for my emergency savings. For some people, this might be too much risk to stomach. I know investors who prefer different asset allocations, using funds to split their emergency savings into 50/50 stocks/bonds, or doing something like a 70/30 split. However you decide to do it, it has to be something you’re comfortable with.
Over time, I’ve been able to build up the account to the point where it can handle almost any emergency, including a few months’ worth of covering my expenses. And it’s growing regularly, thanks to the fact that I don’t have it all sitting in an account with a comparably low yield.
How Do I Access My Emergency Money?
Accessing the money is fairly simple. I’ve only needed it twice in the last decade or so. The first time was when my basement flooded in 2010. We ended up with a bill to set things to rights.