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Consider the following strategy for maintaining an emergency fund:

  1. continually reinvest ~$40k in 1-month US bonds at ~2.5% APY
  2. pay up to ~$10k using credit cards in case of emergency
  3. pay off credit card each month using ~$5k checking account
  4. draw on ~$40k for larger unforeseen expenditures

Are there any real downsides to this? I can think of a few possibilities but I don't have the experience (yet) to know if they're actually downsides or not really in practice.

  • Claim: It's not worth the ~$1,000 per year to manually invest and reinvest the ~$40,000 as opposed to just letting it sit in the checking account. Counterclaim: even at my regular billing rate of ~$100/hr this is worth ~10 hours of work... and I doubt it would take me that long to invest and reinvest twelve times a year.
  • Claim: The money is illiquid while tied up in the bond and may not be available for emergencies. Counterclaim: While this is true, the ~$10k credit card limit should cover all the small-ticket stuff I can imagine, and big-ticket things typically allow deferred billing or installment plans anyway. My living expenses never go over $5k and all my insurance deductibles are less than $5k as well. I just don't see any scenario really requiring me to come up with more than $15k in less than a month; and, if one does, wouldn't I be eligible to take out a loan for it in the (extremely unlikely by my reckoning) event that I turn out to be wrong?
  • Claim: This strategy is essentially good but there is one substantially similar but with a better outcome. Counterclaim: What is it? Assume that the money in play remains ~$45k and the credit card limit is fixed at ~$10k. Also assume that the paid-off house is correctly valued at ~$200k for the purposes of taking out loans against it. I can see reasons why it might be good not to invest 100% of all assets in the market and rely on a HELOC for day to day expenses, but I'm having a harder time seeing why having most of invested in short-term government paper doesn't beat checking accounts (let alone CDs offering less APY for longer terms).
  • Your numbering confuses me, Are you saying you have $45k? $40k you're trying to figure out what to do with, and $5k in checking, and $10k available on a credit card? – Hart CO Apr 19 at 20:34
  • @HartCO $45k cash in a checking account and a credit card with a $10k limit. My question is whether there is any downside to putting $40k in the 1-month bill over and over again. I understand the US government could hypothetically default but if I irrationally assume the likelihood of that is actually zero, is there really any liquidity risk given my other parameters (home value, monthly expenses, credit availability, etc.)? – Patrick87 Apr 19 at 20:39
  • That's what I was thinking but wasn't sure how #4 factored in, seems like it could be removed. – Hart CO Apr 19 at 20:40
  • @HartCO All I meant to convey there is that if I need to buy a new car for $20k I can take $20k out of the bond circulation next month to make that one large expenditure... assuming I don't want to just take a loan for that. – Patrick87 Apr 19 at 20:41
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Treasury Direct allows an individual to buy directly from the US government Tbills, and other similar securities. There are no fees.

The best part is that you can set it up to automatically reinvest when the 4 week tbill matures. You can do this for 24 months. Then start again. If you have an emergency you can cancel the reinvestment and the next time it matures the money goes back into your bank account.

You can fund the purchases from your bank account. The interest is credited to your account every time a tbill matures. The minimum investment is only $100. They action 4 week Tbills every week, so laddering is easy.

I see no flaws to be concerned about. You can liquidate in less than 4 weeks. You can cover short term amounts via credit card. This is a secure as FDIC coverage. There can even be some tax savings.

  • To my question though, is this a good strategy, or does it have a non-obvious flaw I have not contemplated? – Patrick87 Apr 19 at 20:53
  • added an evaluation of your plan. – mhoran_psprep Apr 19 at 21:28
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There are several high-yield online-only savings accounts that approach a Treasury Bill rate. And there is a Treasury Direct account. A short-term bond ETF is often commission-free unless selling back out of it.

Even a three-month Treasury Bill could be used by putting 1/12 of the funds in each week. This approach requires a commission-free Treasury Direct account.

The short-term bond endeavor is close to personal banking and therefor a value of professional time is not a factor.

  • Thanks for the answer! I imagine the benefit of using the high-yield online-only savings accounts is that I would save some of time I'd spend manually investing and reinvesting. However, are these going to play funny games like lowering my interest over time relative to the 1-month bonds? Account fees? What is the Treasury Direct account? As for three-month bills, this is a possibility, but wouldn't it decrease my liquidity by a factor of three? that is, wouldn't there only be ~$40k/3 ~ $13k per month to use to pay off emergency expenses? That gives me less money to pay a big expense with. – Patrick87 Apr 19 at 20:37
  • "Even a three-month Treasury Bill could be used by putting 1/12 of the funds in each week." The 8- and 13-week bills are actually lower than 4 at the moment, and the difference has been pretty much negligible for a while now. I'd say just ladder 4-week bills. – Kevin Apr 19 at 20:37
  • @Patrick87 Treasury Direct lets you buy treasury bills and bonds directly from the government. You'd want to keep an eye on the savings account interest and make sure you get one without a fee (or waived). Also see my comment above about laddering 4-week bonds so 1/4 is accessible every week. – Kevin Apr 19 at 20:42
  • @Kevin I see the value in laddering, but wouldn't that increase the amount of time I have to spend reinvesting each year by a factor of four? Alternatively, can you set up automatic reinvestment on TreasuryDirect? – Patrick87 Apr 19 at 20:45
  • @Patrick87 You will need to set up four purchases instead of one (you can schedule a ways out), but you can set up automatic reinvestment for up to two years. Up to you whether the extra 5 minutes is worth the liquidity. – Kevin Apr 19 at 20:47
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I'd suggest looking into a CD ladder and maybe extending your terms. I'm using 5-year CD's purchased every 6-months, but even a 12-month CD can currently get you ~2.7%. The money can be transferred to my checking account almost immediately, so no real liquidity concerns. The penalty for early withdrawal is usually pretty modest, at my bank it's 6-months of interest on a >1-year CD's, 3-months of interest for <1-year CD's.

T-Bills are just about the same, the main reason I like the CD's for my emergency fund is ease of access. If you can find a high-yield savings account that rivals CD's/T-Bills then that would be even less work on your end.

Some other considerations:
I wouldn't recommend viewing a Roth IRA as an emergency fund, but if you aren't currently maxing out your IRA contributions and are instead buying CD's/T-Bills then I'd suggest a Roth IRA since you can retrieve contributions if necessary without penalty.

Periodic review of your emergency fund is worthwhile as well, if you start budgeting for major house/car expenses then perhaps the emergency fund can be pared back a bit, and 6-8 months of expenses can change considerably over time. Similarly your liquidity needs will change over time, so maybe right now the 1-month T-Bill is worth the hassle, but down the road you'll be comfortable with longer terms.

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Just use a deposit account. It is FDIC insured, so at least as safe as the government bonds, and you can find completely reputable banks paying just under that 2.5% APY bond yield in set-and-forget savings accounts, as well as legitimate (but less known) credit unions paying over 3% APY in premium checking if you meet minimum activity requirements. Some of those institutions also provide banking perks when you have that amount on deposit, for example free wire transfers, free certified checks, or commission-free trades at their brokerage.

The major advantage is liquidity. Some expenses can't be put on a credit card (unless you pay a cash advance fee of 3% - 5%, assessed immediately not APY), or will incur processing fees of about 2% (again, immediate not APY). But they can be paid from a deposit account.

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