After reading around and doing some research, I am starting to wonder if our emergency fund can be put to better use. Right now, it’s just sitting in our savings account, earning practically zilch waiting for an emergency that may never happen to occur. Considering our aggressive strategy to save and invest as much as we can, I think there are better ways in which this money can be deployed and put to work. But first, we need to get comfortable with the idea of not having a traditional safety net of cash sitting in the bank.
You see, for the longest time, I operated on the belief that having cash on hand was king and that the sky could fall at any moment. I’m a natural saver and like a hoarding squirrel, I love to collect and stash away as many nuts (a.k.a. cash) as I can, just for the sake of having it. This discipline has always come in handy for unexpected purchases and opportunities. I was able to buy my first property at 22 because I had saved most of my income from my college internship and jobs. By having cash on hand, I’ve always been able to pay for an unexpected bill and take advantage of investment opportunities.
So how can my husband and I get comfortable with the idea of not having excessive cash just sitting in our bank account for emergencies? Especially, since recently, we have been confronted with big bills out of the blue; a $4,000 federal tax bill for a mistake made on our 2014 taxes, and a possible $7,000 bill for my husband’s dental work. What if we lose our jobs or have another unexpected bill or emergency? Follow our thought process on how we are getting to a 100% comfort level with blowing our emergency fund:
Continue to Fund & Utilize Sinking/Rainy Day Funds for Specific Emergencies
Here are just a couple of the sinking funds we carry in our budget:
- Home Maintenance fund for fixing/buying anything home related which includes roof issues, furnace or central air issues, replacing windows, buying new appliances, etc.
- Car Repair/Maintenance fund for taking care of any car related issues, oil changes, brake replacement, etc.
We will continue to fund these sinking funds along with the 8 other sinking fund categories in our monthly budget. We are saving for most of the unexpected but probable emergencies that may occur. This brings our comfort level to 40%
Have Money in Accessible Investment Accounts
Ok, so we think we are covering most of the money disasters life can throw at us, but what about the unexpected things that we cannot predict (ex. the $4,000 federal tax bill and possible $7,000 dental bill)? Where would we have found the money to pay for these things outright without going into debt if it weren’t for having an emergency fund?
I think the solution to this is having money in accessible investments accounts. This would be the taxable investments through Vanguard in mutual funds and index funds. These funds can be accessed within a couple days or less and of course, we would make sure a portion of the money is invested in moderate to low risk funds. This brings our comfort level to 60%
Have Access to Multiple Lines of Credit
But what if we need the money today? Like right now? We have no debt other than our mortgage and have access to multiple lines of credit such as credit cards and a home equity line should we need immediate cash for an emergency. Our discipline is such that we use credit card spending to our benefit. In fact, we pay for most things on our credit card and pay it off in full every month to rack up the points and cash back for travel. Should we need access to money right away, we would be able to use one of our lines of credit to cover the emergency while we adjust our budget or access our taxable investments accounts to pay the debt back as soon as possible. This brings my comfort level to 80%
Have Secure Jobs
Let’s be clear, no job is completely secure. If you are getting a paycheck from a company, there is a chance that they may go belly up or just decide they don’t need you anymore. For the most part, our jobs are not in volatile industries and are stable institutions. As a teacher, my husband has achieved his tenure which means they require a just cause for firing him. My job is also for the most part “secure”. I’ve been there for 11 years and have seen the company go through 1 layoff period of employees during the downturn a few years ago. Those that were let go, were either low performers and/or were close to retirement and negotiated their way out. Most of the employees at my company have been here for decades. It’s a running joke that once you start working there, you become a “lifer” and never leave.
With all that said, I still would not put it past any organization or company to keep me as an employee forever. If one of us were to lose our jobs, we would have access to our taxable investments and lines of credit to get us through a unforeseen tough period. If worst came to worst and we couldn’t replace the income needed to pay our bills, I would sell my investment property. This brings our comfort level to 90% (almost there)
Deploy the money in the right way
If we are going to BLOW the emergency fund money, we are going to put it to work for us. It will not be squandered on depreciating purchases. A couple of options we have are to:
-Use a portion of it to pay down our primary mortgage (we want to pay off the mortgage as soon as possible to make our life after the 7 year launch period more financially comfortable on my husband’s salary). For example, using $10k of the emergency fund to pay down the mortgage principal today would shave off 1 ½ years off of the maturity date!
-Invest a portion in mutual funds or index funds
-Move a portion of it to a high yields savings account to earn more interest
This brings our comfort level to 100%
While we still have not decided exactly how we are going to put our emergency savings to work, I am confident that we can utilize it in a way that does not put our family in financial jeopardy. We will continue to hoard and stash our nuts but in a more efficient way.
I love your thought process.
And wow an extra $10k would shave 1.5 years off the maturity date, that is fantastic.
We don’t have an emergency fund either but have a ‘redraw’ fund in our mortgage which we put extra principal payments into (and reduces the interest) but we can access it immediately if we need to. Could you do that with your home equity loan and be able to access it immediately if you need it, or does the feature not allow you to do that?
I went through this exact same thought process a few weeks ago!
Awesome potential plan! Makes so much more sense than having it sit there earning barely nothing!
Thank you! Yes investing it wisely is a much better alternative
The key is the expenses. Being able to survive on one salary would give me 100% feeling of security. Not there yet but working on it. I like your plan of investing the money and earning a return, provided the investment vehicle is in the “safe” category. Good luck, I enjoyed reading this.
Thank you! It’s a calculated gamble to invest it but i think the reward will be worth it.
This is a nice blogpost. we are in the same struggle with our cash position. We are actually loosing money to inflation in Belgium right now. One of the things we consider is a lump sum payment to the mortgage and use the lower monthly mortgage to rebuild a part of our emergency fund.
Some of your reasons to reach a 100 pct comfort are helping out.
Awesome, glad it was helpful!
Great post. I been having the same thoughts lately as our emergency savings is just sitting in an account. I considered CDs and conservative investing. Even though it won’t be as liquid it will at least be able to keep up with inflation. Thanks for the extra suggestions on what to with it.
Thanks for reading! I still need to actually follow through with putting money to work by index investing.