[USER]

I have about $20k in my Fidelity MM account for my emergency savings which would cover about 3.5 months (have goodr job security).

I would like to have a total of 6 months of emergency savings, but is there a better way to invest the remainder?

With inflation and needing to pay taxes on dividends earned from the MM account it’s seems I’m basically breaking even or losing money yearly (tell me if I’m wrong), so wondering if there is a better way to make my money work for me.

[Ron]

I use the golden butterfly portfolio for what I called an extended emergency fund.

It’s 20% each US total market, US small scale value, US ST treasuries, US LT treasuries and gold.

It has good rolling 3 and 5 year returns and minimizing max downturns.

Hope this helps!!

[Sean]

Yes, it is breaking even, but that’s all it’s there for. To have an amount you need in case of emergency, and know it will be there in that amount.

You could put some in a brokerage account that you can access whenever you want, but just know it may not be as much in there, when you need it.

[Prasad]

There’s an approach to deal with the tax situation if you have a decent amount in taxable brokerage.

Say you need $6k/month for living expenses. Six months emergency fund is $36k.

The idea is to use a tax-deferred account to hold this in a money market fund, so you don’t pay taxes.

In your taxable account, you need to have at least twice i.e. $72K or more invested in VTI (or equities).

The idea is if you need to dip into your emergency funds, you sell some VTI in your taxable and use it, and in your tax deferred account move the same amount from money market to VTI.

That way you pay taxes only on VTI’s qualified dividends (which is also low) and hopefully LTCG taxes if you ever sell VTI (or TLH) and still have your asset allocation intact.

The reason for twice your emergency fund in VTI is the market can drop 50%, so you want to be prepared.

[Matt]

Savings is defensive, not offensive. It will not seek to beat inflation, just not lose too much to it via the highest safe return possible.

It’s primary purpose is to 100% be there for you when you need it. MMA (SPAXX at Fidelity) or HYSA.

Do “right size” your savings. 6- month should be more “essentials”… as you’d turn off all non-essential expenses after 2 months of having no indication of new income for month 3.

Do add in any known near-term major goals/expenses, though…car replacement, high priority vacation, etc.

This then allows you to put more funds that would otherwise be tied up in savings to better use.

[Christopher]

FDLXX is a treasury only money market fund that is usually exempt from state taxes – depending on the state you’re in, it may be a slightly more tax efficient cash holding for EF stuff.

There may be a state-specific municipal money market fund for your state that’s also federally tax exempt.

You can also roll treasuries directly, especially if you’ve got more than a few months saved.

This tends to he a fair amount of work to set up for negligible gain though.

[Frank]

No, there really isn’t and that is not what this money is for.
Are you sure you need six months, though? “Good job security” and “few or no dependents” usually means you need less of an emergency fund.

Here is what our 20-somethings do:

(1) max out long-term savings and investing first in 100% index funds;

(2) have a small emergency fund that would last a few months;

(3) take the excess and put it into an intermediate term investment account (ordinary brokerage) that will cover assorted things like house down payments, vacations, replacing cars, etc.

The intermediate investment account is invested like a retirement portfolio so that it has about half the volatility of the long-term investments.

It also serves as a backup emergency fund.

[Jason]

I’d say unless you can get your emergency fund to the point where you could sell it in a ‘down’ market. Go nuts and say 40% down… Where you have it is fine.

You’re keeping up with inflation.

Better than a savings account that isn’t.

I’m ok with knowing if I NEED the money.. I won’t care if I’m up or down at the moment of real need.

[Mark]

Emergency fund is not for investing. Its insurance for emergencies so u arent pulling from invested money.

It’s not suppose to make money for u. Some ppl with a comfortable brokerage will use that for an EF or CC.

standard practice is 3 to 6 months expenses in a hysa or mmf. Do whatever works best for u

[Rick]

Two schools of thought on this
Breaking even after fees, taxes, and inflation is actually pretty good over the long run and it is really the desired goal for ultra short term therefore ultra low risk cash equivalents.

The other tact is to start evaluating the actual risk. What if the market is down when you need the money is the most common risk.

And the answer is usually to hold cash. But wait..why is that the common immediate answer.

It treat this as binary, black or white, all one way or all the other way. First, many people can handle the what if it is down risk.

Well then it is down. It’s that simple.

When young starting your journey or starting over due to divorce or similar, this may be a big deal. But for nearly everyone else, the answer could be well I will pull money from one of my half dozen other assets.

I won’t be thrilled about it but it is an available option. Second, how do you evaluate the very very high chance it won’t be down and within the first year or two of having the money.

After a year or two, the “what if it is down” would come from your gains. Being up 80% over 8 years to then have it drop 30% makes the “what if it is down” question fairly laughable.

So, evaluate the risk, your options, and include “what if the market is down….after 1 year then after 3 years or 5 years or…you get the idea”.

This is so often made to be a binary decision when it is just not.

[Author]

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