What’s a good way to structure a larger emergency fund?
My husband and I are buying an older home so we’d like to increase our immediately available liquidity from 8k to 30K in case we have any unexpected repairs. The current balance just sits in my checking account, but I’d like to shift it somewhere easily accessible and highly liquid, while also have it earning enough to at least keep up with inflation. Possible options I’m aware of:
- HYSA (not available at my current banker, boo, but I could open another account)
- Money market fund
- Money market account
- more VTSAX and chill (accepting the risk that we might have to sell in the future if something does come up).
- ???
Curious to hear people’s thoughts and philosophies on the topic. This is our first house and we’ve both always rented, so not something I’ve really considered in depth before.
I’d probably stick with a HYSA.
Another option could be a T bill ladder for a portion of your savings. This reduces your immediate liquidity but if you build a 4 week ladder, you could liquify it in time to pay off a credit card bill.
HYSA would be my first choice (4% APY). Highly liquid and hassle free, and literally the purpose of it is for what you are describing. Second would be SPAXX/VUSXX (>5%) which is where I also keep my emergency fund. Though these take like an extra day to cash out compared to HYSA, at least for my bank. I wouldn’t keep in index funds as you described there is a risk to it.
I have mine structured like this:
- ~50% - ibonds - they’ve matured past the 1-year lockout period, so they’re very liquid
- ~25% - t-bill ladder at brokerage (13-week t-bills purchased every 2 weeks)
- ~25% - money market fund at brokerage
My brokerage is also my main bank account, so it’s really quick to transfer money to my “checking.” In fact, I hold my t-bills in my “savings.”
I’m probably going to sell my ibonds and either repurchase at the higher fixed rate or add to my t-bill ladder. If I did it today, I’d probably just go with t-bills.
The main point of an emergency fund is liquidity and risk mitigation, so the first three options make sense, as does something like a no-penalty CD.
I think the missing context here is where you are financially— How much money is $8-30k for you relative to your other liquid (and accessible) assets? If you’ve got a huge taxable brokerage account, for instance, some people just forgo the concept of an emergency fund altogether.
We have about 100k in a taxable brokerage account, 99% VTSAX, plus more in retirement accounts that we don’t want to touch.
Presumably the 8-30k would otherwise be invested in your taxable brokerage, seems to come down to a question of risk tolerance. At that balance It’s very unlikely you’d find yourself in a situation where you couldn’t pull those totals out of the brokerage even in a severe market downturn. It’s true in that situation you’d be selling down, but keeping it cash forgoes market returns in the mean time.
Personally I’m pretty risk averse and like to keep a cash buffer in HYSA/CDs/I bonds despite having a significant taxable brokerage balance. This was true even before the interest rate situation became more favorable.
None of the approaches you’ve listed seem outright wrong for your situation. I’d concentrate on what your risk tolerances are and back out your approach from there.
