I had $30,000 in my high-yield savings account until a financial expert convinced me that was a bad idea

PFI Disclosure 1

If I had to pick one financial move that impacted my life the most, it would probably be building an emergency fund.

Having a cushion of cash reserves on hand to cover unexpected expenses has brought me peace of mind, not just when I’ve had to shell out money for a new transmission in my car or weather a low-income month, but even when I don’t actively need that money. Knowing it’s there if I do keeps a lot of my anxieties at bay.

However, I still have this nagging feeling that I’m wasting that money by letting it sit in a savings account. While I earn hundreds of dollars in interest each year by using a high-yield savings account, my earnings don’t usually outpace inflation. This means that in terms of buying power, I’m actually losing money.

Then, a prominent money expert and financial writer keyed me into a secret about making that money work for me: I could invest my emergency fund — or at least part of it. Miranda Marquit has written about this strategy numerous times, and her advice caught my attention. It was equal parts scary and intriguing, so I decided to ask her what she thought I should do before making a decision.

Should I invest my emergency fund?

One key factor in my situation is that I have more money saved than I need saved for my emergency fund. Most guidelines recommend six months of basic living expenses, and I have an entire year. While my job as a freelancer is less stable than a full-time job, I don’t have kids or own property, and I work remotely, so it would be easy for me to live off very little if I needed to.

Because I have a healthy amount of money saved up, Marquit told me that it makes sense to invest some of it. “That large amount of money sitting in a savings account isn’t doing as much as it could be,” she explained.

And she’s right. 

I currently keep $30,000 in a high-yield savings account (in addition to a $5,000 cushion in a credit union savings account that’s linked to my checking account). As of this writing, I’m earning a 1.80% APY on that $30,000, which is one of the highest interest rates on a savings account available right now. In one year, I would earn $540 in interest on that money.

That probably sounds like a lot for folks with savings accounts at national banks, where you typically earn pennies — maybe a few dollars — in interest each year. However, it’s not so much when you consider that the inflation rate in 2019  has hovered at around 2%, and the historical average stock market return is 10%.

Investing your emergency fund puts your savings at risk

Of course, investing my money doesn’t mean I’m going to get 10% returns. That’s an average taken over the long run, and it’s great for estimating returns on your retirement savings but not on investments I might need to pull out in a year, or even a few months. 

Once I invest that money, I could potentially lose it. In a savings account, my money is guaranteed, insured by the FDIC. And because I never know when a financial emergency is going to hit, it’s impossible to wait and sell my investments at a profit.

“You might be stuck selling your investments at a loss,” Marquit told me. “However, if you have the stomach for it, it’s possible to see a silver lining.” That silver lining is a potential tax deduction

That’s what happened to her when she had to sell off a small number of shares when groundwater got into her basement and did some expensive damage. “I had to sell at a loss but then was able to deduct that loss on my taxes,” she explained. “So, I had access to the capital I needed, it didn’t wipe out my account so there was still money left, and my emergency became tax-deductible.”

To do this, you have to be able to accept that you might end up selling your investments at a loss. This was the main point Marquit drove home, and as someone who’s never been afraid of a little risk when there’s potential for reward, I decided that investing some of the extra cash in my savings — about a third of it — was the right move for me.

I plan to invest short-term savings differently than long-term

Marquit explained that she takes a tiered approach to her own emergency savings. “I keep about three to four weeks’ worth of expenses in a high-yield savings account. The rest is in a taxable investment account,” she said. That way, she can use the money in her savings account immediately, and if she needs more, those funds will cover her while she liquidates her investments.

I was most worried about the risk. I knew that I wanted to have easy and quick access to at least a portion of my emergency fund, and I didn’t want to invest the rest in anything too risky or complicated.

I also knew that I needed my investments to be fairly liquid — in other words, I could sell them off quickly and not face any penalties, like the early withdrawal penalties you’d face for cashing out a retirement account at a young age. 

Marquit explained that she allocates her emergency fund differently than she would a long-term investment. While her retirement account is 90% stocks and 10% bonds, her emergency fund is split 50/50 between stocks and bonds. In theory, this mitigates a lot of the volatility investment accounts can experience.

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