I think of my checking account as a buffer - direct deposit goes in, bill pay goes out, any amount beyond this month’s bills goes to/from brokerage. My particular account has a minimum balance and the actual balance hovers right around there. Any interest lost/earned on that balance over a year isn’t enough to worry about, and no payee/payer ever sees the magic numbers to access my real savings.
The key is not to have cash just sitting around, regardless where. If you don’t have immediate need, get it into investments. Modern mutual funds or ETFs are liquid enough to serve as emergency fund - unless your ‘emergency fund’ is something you dip into every other month. While interest rates are so high, it may not feel pointless to keep cash, but even those high rates are only 1-2% above inflation (and have only risen above inflation recently). Get your money back into the economy; don’t pay a banker to do it for you.
Yeah, the extra interest isn’t a ton. I was already keeping my checking balance pretty low, so the extra interest is something like $4-5/month (average balance is like $1k). That’s not life changing money by any stretch, but it still adds up, and I didn’t need to do anything for it other than move where my autopay goes.
The more important thing to me is being able to consolidate accounts. I’m going to have a brokerage account anyway, so I was able to move my checking and savings to it, plus my efund (was at Treasury Direct in ibonds), and I get an extra $50-60/year as well.
Modern mutual funds or ETFs are liquid enough to serve as an emergency fund
But are they dependable enough? Let’s say the market crashes 30-50% and you lose your job at the same time, how would you feel if your 6-month efund became 3 months overnight?
Also, how big of a difference would that be overall financially? As in, what percentage of your net worth is that efund? When it’s a big part of your net worth, it’s a bigger hit if you lose your job in a market downturn, and if it’s a small part of your net worth, the difference in returns won’t be huge.
So that’s why I keep my efund in stable investments. I don’t hold bonds in my portfolio, so I just treat my efund as my bond portion, and it’s currently a fair bit less than the 10% experts recommend for bonds, so I don’t really see a point to go even more aggressive.
So, definitely coming from a position of privilege, but I think of a 6 month efund sitting at 2% (historical) MMA or having a couple of 10-20% years. If you’re looking at an efund that’s 105% of what you put in vs 150%, then that crash is a much smaller concern. Especially because the actual nadir of values (at least in the last 30 years) has been quite short lived. Why I distinguish between emergencies and events that happen once or twice a year: personal emergencies are kind of likely to coincide with stock market dips/crashes, but there’s a lot of growth potential in the meantime. I have taxable and tax-sheltered investments, and don’t distinguish a specific efund.
Risk tolerance is definitely a thing, though. I was 98% equities, 2% cash for 20 years, and only started getting some junk bonds when the yields got above 7%.
And that’s why percentage of invested assets matters.
If your efund is 50% of your invested assets, you’re probably near the beginning of your working career and a layoff is somewhat likely in a downturn. So if that happens, you could burn through all of your assets in the time it takes to find a new job, and that sucks. If your efund is 10% of your invested assets, losing half of your efund won’t really matter all much because you have other assets to back you up. But also having 10% of your invested assets in secure investments also won’t drag your growth all that much since a 90/10 stock/bond split has almost identical performance vs 100/0. If it’s significantly <10% of your invested assets, you’re nearly or already capable of retiring and don’t need an efund anymore (2% is that magic number assuming a 6 month efund).
I personally am in a single income family with kids, so having cash to pay for necessities is really important to me. In fact, I had 12 months when I was working as a consultant, which I’m glad for because COVID killed all of my contracts and nobody was hiring, so I lived on that cash for the better part of a year. When I was single, my efund was much smaller because I had the option of moving back home, sleeping on a friend’s couch, etc if things went sideways.
So the more screwed you’d be if you lost your job, the more of your efund you should have in cash.
I personally keep about 3-6 months of expenses in tbills, and I have a taxable brokerage account with more assets if necessary. I also keep about a month of expenses in cash in my money market funds as slush between paychecks. Other than that, the rest of my assets are in stocks, as in, pretty much 100% stocks in a 70/30 domestic/international split. I happen to need <10% of my assets for my efund, but I’m still unwilling to part with it because it saved me when I lost my job (and the phenomenal returns right now certainly help). So I just count it as the bond portion of my portfolio and call it a day.