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August 30, 2017

My Emergency Fund Strategy

Let’s talk about Emergency Funds. Most people say to keep X months expenses, and X is always more than you can afford want to keep in a low interest bank account. So you keep some in a 1.15% bank account like an Ally Bank Savings Account, and some goes into a more volatile investing platform that give you relatively quick access to your money. At least that’s what I do!

I keep a few hundred bucks in my Ally account as my formal “emergency fund”, and add $150 every paycheck.  The goal is to not touch this account unless I need it… but I find myself emptying it out every few months because I want to invest it. One month I had $30 in it, and one of my friends was shocked. He said something along the lines of “you’re good with money, why don’t you have 6 months savings in your emergency fund?” The rest of my informal emergency fund is in individual dividend stocks, with a select few penny stocks that I only lose money on.

 

I use Robinhood for buying (and rarely selling) individual stocks. I’ve got another post highlighting why I like Robinhood, but it’s pretty simple. No fees, I buy the stocks, I get the dividends, I buy more stocks. If I need money, I can sell the stocks and move the money into my main bank account. My goal was to get about $5,000 into stocks by the end of this year (2017), and I’ll pass that pretty soon (October probably). I put $50 a week in right now, but I change that amount constantly. Sometimes $50, $75, even $100 a week.

I like this approach because I get better much returns on dividends than in a bank account, not even accounting for individual stock growth. Right now I get about $200/yr in dividends, and that is going up quickly. So that’s about a 4% return per year, just in dividends. I’m mostly picking blue-chip stocks and REITs, because getting a dividend every month is so nice! My main holdings are GE, because I think they’re low right now, and ORC, because of the great monthly dividends.

If I need access to that money that is invested, I can sell some or all of my stocks, then have access to that money in about a week. The liquid emergency fund should always be enough to hold me over — but I do always keep an extra $1000ish in my main checking account too.

 

So there you have it. I keep 2% of my emergency fund in a 1.15% bank account that is very liquid, and 98% in stocks that I have access to within a week if I need to sell. Many conservative financial advisors would hate this strategy, but some would agree completely.