Consider the following strategy for maintaining an emergency fund:
- continually reinvest ~$40k in 1-month US bonds at ~2.5% APY
- pay up to ~$10k using credit cards in case of emergency
- pay off credit card each month using ~$5k checking account
- 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).