Elementary question about emergency fund and US Treasurys

Question

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).

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.