Q&A: Should Your Emergency Fund Be Invested?
Episode
59 min
Read time
2 min
Topics
Career Growth, Personal Finance, Investing
AI-Generated Summary
Key Takeaways
- ✓Emergency Fund Structure (Two-Tier Strategy): Keep the first three months of expenses in a high-yield savings account for immediate liquidity. For reserves beyond three months, use a T-Bill and Chill approach — purchase Treasury bills directly through TreasuryDirect.gov and ladder maturities. Buying direct eliminates open-market price fluctuation, ensuring you receive full par value at maturity.
- ✓Emergency Fund Sizing (Risk Capacity Framework): Size your emergency fund based on two factors: psychological tolerance and logistical capacity. Capacity depends on job replaceability, industry hiring trends, household income sources (dual vs. single), home and vehicle age, and local job market size. A dual-income couple with stable careers can safely hold fewer than three months; a freelancer or single-income household may need up to twelve.
- ✓True Return on Emergency Funds: The real return on an emergency fund is not the savings account yield. It includes the ability to raise insurance deductibles on homeowners, renters, and auto policies, eliminating short-term disability coverage costs, and freeing long-term investment portfolios to hold higher-risk, higher-return allocations without the psychological pressure of needing early access.
- ✓Dimensional Funds vs. 1.5% AUM Fee: Dimensional Funds use daily rebalancing and factor tilts — removing probable underperformers rather than predicting winners — to marginally outperform standard indexes. However, a 1.5% annual AUM fee will likely consume any added return. A DIY investor with a well-diversified existing allocation across US large/mid/small cap, international developed, emerging markets, REITs, and precious metals has no practical reason to switch.
- ✓Career Transition Sequencing: Before quitting a job to pursue a new field, first shadow practitioners or pursue part-time internships to understand the day-to-day reality of the target career. This step costs nothing, preserves income, and prevents spending on education for a path that may not match expectations. Only after validating the field from the inside should formal schooling or full job departure be considered.
What It Covers
Paula Pant and Joe Saul-Sehy answer three listener questions covering emergency fund sizing and investment strategies, whether Dimensional Funds justify a 1.5% adviser fee for a Canadian DIY investor, and how to weigh financial stability against personal fulfillment when considering a major career and life change.
Key Questions Answered
- •Emergency Fund Structure (Two-Tier Strategy): Keep the first three months of expenses in a high-yield savings account for immediate liquidity. For reserves beyond three months, use a T-Bill and Chill approach — purchase Treasury bills directly through TreasuryDirect.gov and ladder maturities. Buying direct eliminates open-market price fluctuation, ensuring you receive full par value at maturity.
- •Emergency Fund Sizing (Risk Capacity Framework): Size your emergency fund based on two factors: psychological tolerance and logistical capacity. Capacity depends on job replaceability, industry hiring trends, household income sources (dual vs. single), home and vehicle age, and local job market size. A dual-income couple with stable careers can safely hold fewer than three months; a freelancer or single-income household may need up to twelve.
- •True Return on Emergency Funds: The real return on an emergency fund is not the savings account yield. It includes the ability to raise insurance deductibles on homeowners, renters, and auto policies, eliminating short-term disability coverage costs, and freeing long-term investment portfolios to hold higher-risk, higher-return allocations without the psychological pressure of needing early access.
- •Dimensional Funds vs. 1.5% AUM Fee: Dimensional Funds use daily rebalancing and factor tilts — removing probable underperformers rather than predicting winners — to marginally outperform standard indexes. However, a 1.5% annual AUM fee will likely consume any added return. A DIY investor with a well-diversified existing allocation across US large/mid/small cap, international developed, emerging markets, REITs, and precious metals has no practical reason to switch.
- •Career Transition Sequencing: Before quitting a job to pursue a new field, first shadow practitioners or pursue part-time internships to understand the day-to-day reality of the target career. This step costs nothing, preserves income, and prevents spending on education for a path that may not match expectations. Only after validating the field from the inside should formal schooling or full job departure be considered.
Notable Moment
Joe recounts how a PR professional told his college class that the actual job consisted almost entirely of cold-calling journalists and podcasters who routinely hung up — nothing resembling the curriculum. He argues this gap between perceived and actual career realities makes pre-education shadowing essential before any major transition.
Episode Transcript
Hey, Joe. You know what's been great about being a saver for the past few years? That you, have more money in the bank. And that money over the past couple of years has made a pretty good yield. Yes. It has. And we all remember pre pandemic when money was making zero or near zero. Now it's actually making something, but that's starting to go down, down, down. By the way, I love how we can play the fact that inflation's been really high as a positive. But if you're a saver, you know what that means? Cha ching. Silver lining, Joe. Silver lining. Well, we're gonna talk about that today. We're also gonna talk about bridge loans when you're buying and selling a home, and we are going to That's what a I thought it was a loan on a bridge. Oh, okay. Okay. And we're gonna walk through the question of, do I stay in my job so I can support my family financially, or do I do something that gives me more life but that has some monetary drawbacks? All on one episode? All in one episode. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode ish, we answer questions from you, and I do so with my buddy, the former financial planner, Joe Salcija. What's up, Joe? Well, I'm a little bit sad today, Paula. Oh, why is that? Well, because, you know, you'd look at the news and you hear about different people passing away. And I found out the guy that invented the wind chill died. The wind chill? Yeah. You know, the wind chill factor. Right. Yeah. He was 98 years old, but the good news is he only felt like he was 87. So come on. With that, we go to our first question, which comes from Jeremy. Hi, Paula and Joe. My name is Jeremy, and I'm calling with a question regarding emergency funds. I've been a budgeter for the last five and a half years, and I'm just using my fund for the first time due to unexpected car expenses just in time for the holiday season. Yay. On top of that, with the Fed decreasing the interest rate, that means that the high yield savings account where my emergency fund is stored will also have a decrease in its interest rate. So emergency funds are kind of front of mind for me right now. Would it be worth it to store my emergency fund in a tradable asset like a bond fund or do a CD ladder plan to try and eke out an extra percent or two that would help my money keep up with inflation? Or is that just not a good use of emergency …
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Books, tools, and gear mentioned in this episode
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Tools
- TreasuryDirectRecommended
by U.S. Department of the Treasury
“For reserves beyond three months, use a T-Bill and Chill approach — purchase Treasury bills directly through TreasuryDirect.gov and ladder maturities.”
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