For what it’s worth: a lot of people think emergency fund means cash in a normal savings account, but this is not a good approach. Instead, buy bonds or money market funds with your emergency savings, or put them in a specialized high yield savings account (which to repeat is likely NOT a savings account that you get by default from your bank).
Or just put the money in equities in a liquid brokerage account.
I think typical financial advice is that emergency funds should be kept in very low-risk assets, like cash, money market funds, or short-term bonds. This makes sense because the probability that you need to draw on emergency funds is negatively correlated with equities: market downturns make it more likely that you will lose your job, or some sort of disaster could cause both market downturns and personal loss. You really don’t want your emergency fund to lose value at the same time that you’re most likely to need it.
Yeah, my understanding is there is debateabout whether the loss in EV from having an emergency fund in low yield low risk assets is offset by the benefits of reduced risk. The answer will depend on personal risk tolerance, current net worth, expected career volatility, etc. The main point of my comment was just that a lot of people use default low yield savings accounts even though there’s no reason to do that at all.
Thanks for this, Trevor.
For what it’s worth: a lot of people think emergency fund means cash in a normal savings account, but this is not a good approach. Instead, buy bonds or money market funds with your emergency savings, or put them in a specialized high yield savings account (which to repeat is likely NOT a savings account that you get by default from your bank).
Or just put the money in equities in a liquid brokerage account.
I think typical financial advice is that emergency funds should be kept in very low-risk assets, like cash, money market funds, or short-term bonds. This makes sense because the probability that you need to draw on emergency funds is negatively correlated with equities: market downturns make it more likely that you will lose your job, or some sort of disaster could cause both market downturns and personal loss. You really don’t want your emergency fund to lose value at the same time that you’re most likely to need it.
Yeah, my understanding is there is debate about whether the loss in EV from having an emergency fund in low yield low risk assets is offset by the benefits of reduced risk. The answer will depend on personal risk tolerance, current net worth, expected career volatility, etc. The main point of my comment was just that a lot of people use default low yield savings accounts even though there’s no reason to do that at all.
Definitely agreed on that point!