I just want to be smart with my money. I want to be well informed and make wise decisions that will ultimately help me reach my goal of financial independence where I have the freedom to determine how I want to spend my time and energy. One of the things that has been challenging to figure out is the best way to put my money to work. I want to invest wisely because I’m not rich and I can’t afford to lose the money I’m putting away towards this goal. But I also don’t want to be a chump either and miss out on the return I would get if I took a few calculated risks.
I read an article yesterday in which a financial advisor was making a case for not saving your emergency fund in a savings account. His logic was pretty compelling. The gist of it was that saving your emergency funds in a savings account is actually not the best thing because savings accounts can’t even beat inflation. So you’re essentially losing money. Inflation, which is the rate at which the price of goods and services go up, increases at 3% annually. So something you buy today for one price would be 3% more expensive next year. When inflation goes up, prices go up and your buying power goes down. Suddenly the same amount of money no longer goes as far as it used to. The best savings rate I’ve seen thus far is 1%. So if you put your money in a savings account that’s earning you 1% annually, but inflation is going up 3% in the same amount of time, your money is not growing fast enough to even be able to go as far as it used to. It’s falling behind by 2%.
I’ve decided to factor this information into my emergency fund savings plan. I’m not going to put all of my emergency money into an index fund because I still want the things I talked about in the other post. I want to have quick access and not expose all of my money to the changes in the market. But I think I’ll keep my emergency savings in two places, a high yield savings account and an index fund. I’ve decided that I’ll keep 2 months of emergency savings in a saving account and 4 months of emergency savings in an index account. That way, I’ll be able to have access to the amount of money that will cover my expenses for at least two months and will not worry about having quick access to my money. But I’ll also be able to get returns on the amount that I have in index funds. For me, a six month emergency fund would be around $12,000. So I’d have $4,000 in savings and $8000 in an index fund but still dedicated for emergencies. I think that’s a good compromise on the two methods.