Building an emergency fund is one of the most critical aspects of creating a financially secure lifestyle. Sadly, most Americans do not have $1,000 in savings to cover a minor emergency.
Today, I want to cover some reasons to have an emergency fund and how we can use our emergency fund as an investment vehicle. Let’s make our large pot of money into additional revenue streams!
Why have a small-sized emergency fund? Let’s review why we have an emergency fund. Dave Ramsey (“Baby Step Millionaires”) is a massive proponent of emergency funds. He recommends saving $1,000 before paying down debt.
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This quick fund keeps little emergencies from forcing us to take on debt. Things like car repairs, dental emergencies, and housing issues can happen instantly. I recommend keeping your $1,000 in a high yield savings account (HYSA) separate from other checking and savings accounts.
The importance of multiple accounts. I love having multiple checking and savings accounts. I think I have over five savings, eight checkings, and five brokerage accounts.
It’s great to stash $100 to $200 in an account and not see it every day. When I am looking for money to pay for an urgent stock investment, I find this cash. Having little pockets of money can give your psyche a boost.
I like to record all my accounts on a Google spreadsheet to remember to check them from time to time.
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Middle-sized emergency fund. It is good to survey your lifestyle once you achieve your $1,000 emergency fund in a high yield savings account. There is one crucial question you need to ask yourself.
“What is the most expensive emergency that can happen to me right now?” Answering this question will give you your next savings goal. Let’s look at some qualifying questions?
- Do you have medical insurance? How much is the copay or deductible? If you have a high deductible, say $5,000, you want to have that amount in savings.
- Do you have auto insurance? If so, how much is the deductible? If you only have liability, how much will it cost to buy another used vehicle if the other one is lost?
- How old is your vehicle, and is it under warranty? I like to drive older cars, so having at least $3,000 for vehicle repairs is a must for my situation.
- Do you own a home? If you are a homeowner, you’ll need at least $10,000 in an emergency fund. This is to cover a new roof or air conditioner.
As you can see, your life determines what medium-sized emergency fund you need to carry. Having these funds available contributes to your peace of mind and stress freedom.
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The large-sized emergency fund. Finally, we can aim for a large emergency fund that will eventually set us free from the workforce. The large emergency fund will cover two years’ worth of living expenses.
Now, keep in mind I said “living expenses” not “salary”—many people confuse the two. Just because you make $100,000/year doesn’t mean you need to have $200,000 in an emergency fund.
The importance of the large-sized emergency fund. The large-sized emergency fund is essential because as we retire from the workforce, we don’t want to depend on one passive income stream overly.
There are multiple income streams that we can retire on, but depending on just one can lead to ruin during a bear market or recession. For example, if I retired on rental income and the housing market crashed. Or I was counting on social security, and my payments got cut in half.
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I explained how to retire on an assortment of income streams in my living overseas series, so that I will link those articles below.
Build a High-Yield Emergency Fund. Once I have $5,000 in an HYSA, I would look to earn some type of yield on my emergency funds. There are many ways to achieve a safe gain outside the stock market. Let’s review some of them.
- High Yield Savings Account. This is a great place to keep $3,000 to $5,000 for quick fix emergencies. I have my Discover HYSA linked to a checking account with a debit card.
- Savings “I” Bonds. Keep your money growing along with inflation. You can redeem these bonds and have the cash in your account in about three days.
- Treasury Bonds. I like to keep a large allotment of my savings in 30-Year Treasury Bonds. Again, (after one year), you can redeem these and have the money back in your account in about three days.
- USDC Stable Coin. The Voyager platform pays a whopping 9% yield on USDC. They will be releasing a debit card linked to your USDC account soon, which will give you instant access to your cash.
Combine these methods. By combining these techniques and accounts, you’ll get the best performance from your savings. If you don’t trust USDC, then you can avoid it.
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Alternatively, if you trust USDC, you can keep a large amount of your savings there. The actual allocation percentages depend on your lifestyle, family, and goals. Only you can decide what’s right for you.
You can also aim for an investment percentage goal. Let’s say you want to achieve a 5% return on your $50,000 emergency fund. Then you’ll have to lean heavily on USDC to reach that level of return. If your goal was 3%, you could rely on Treasury bonds.
Another alternative way to save. Leverage is the act of using a loan to increase returns. Leverage can be great in good times and horrible in bad times.
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If you have a nice emergency fund set up, you may want to jump into the market with index funds or a dividend growth portfolio. Just because you invested that money doesn’t mean you can’t utilize it for emergencies.
M1 Finance offers the ability to take a loan against your stock assets (up to 40%). If the market is in a downturn, it may not work in your favor.
However, if the stock market is good, it may be an excellent way to avoid using your emergency fund for non-emergencies. Let me explain.
I have $20,000 in my M1 dividend growth portfolio. I can borrow up to $8,000 at a 2% interest rate. I don’t have to apply, and it doesn’t show up on my credit report.
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Let’s say that I need to buy a $5,000 water heater for one of my homes. Instead of using my emergency fund money to buy the item, I would use my M1 Finance loan.
Loans aren’t for everyone. Some people will use their emergency funds for these situations. It’s all up to personal preference. I like to take a loan because it forces me to pay it back. Returning your cash to an emergency fund can be difficult, as things always arise.
I would rather take my $5,000 loan upfront and arrange to pay back $500/month out of cash flow. This way, my emergency fund stays intact, my DGI portfolio remains unchanged, I buy the water heaters, and I can pay for the loan out of future cash flow.
If my situation changes, I can use the emergency fund to pay off the loan quickly. Again, that is just my train of thought. If someone is offering a 2% loan, I will use that instead of taking out my money, earning 9% in USDC.
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Conclusion. It may take a few years to get to a middle-to-large-sized emergency fund. Life happens. Don’t let life get you down.
Remember, you can create other income streams like renting your car or house-hacking to accelerate your saving rate. Think outside of the box, and you’ll have a remarkable emergency fund in no time.
Be creative with your emergency fund. Don’t let inflation eat all of your cash. Even earning 3-5% can be excellent against 8% inflation. It’s better than earning 0.5%.
In the end, having an emergency fund, multiple streams of revenue, and passive income will all contribute to a Happy Cash Flow Retirement. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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