Your emergency fund money and where to put it

The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!

If you are freelance or run your own business, you know that the shit can hit the fan really fast (an injury, the loss of your main client). If it does, you need to be able to live and pay your rent or mortgage until you get back on your feet. That means having some emergency cash in an account somewhere.

How much cash should you have stashed away?

A common figure is to have 5-6 months of expenses as your emergency fund. It does come down to a personal choice of how risk-averse you are and if you have other assets that can be liquidated (sold) quickly in an emergency. This could be an individual stock portfolio with someone like Schwab. Hopefully, you have a growing i401k (if not, click here for the guide), but you should avoid withdrawing money from the i401k like the plague, as there could be a penalty. You are also taking money away from future you as that money stops growing in the background.

Your emergency fund comes down to this:

Here's the lowdown on the essential costs you may want to cover:

Housing Costs: This is a top priority. Keeping a roof over your head is crucial whether it's rent or a mortgage. You don't want to end up couch-surfing or worse.
Utilities: You have to keep the lights on and the water running. You need electricity, gas, water, and maybe internet (since you'll probably need it for job hunting).
Food: You have to eat, right? But this doesn't mean eating out or fancy stuff. Think basic groceries that can stretch for meals. Ramen can be your best friend.
Healthcare: If you've got meds or ongoing medical needs, they can't be ignored. Health insurance is super important, especially if you've got a family. Don’t stop exercising either, long-term this is so important.
Car Expenses: If you have a car and need it for job interviews or essential travel, then car payments, insurance, and gas should be on the list.
Minimum Debt Payments: If you have loans or credit card debts (credit card debt is the worst to have, so try never to carry a balance over), make at least the minimum payments to avoid penalties and messing up your credit score.
Basic Personal Expenses: We're talking toiletries, household items, and maybe a small budget for clothing if absolutely necessary.

Here’s what you can probably cut back on or drop:

Cable TV subscriptions, gym memberships (workout other ways for a while), streaming services.
Eating out, takeaways, and expensive snacks.
Luxury items, like high-end clothes and gadgets.
Non-essential travel or entertainment

So, how does Maxmyinterest.com help us freelancers?

Max, or Maxmyinterest.com, is a company I first read about in Jason Zweig’s investment column in the Wall Street Journal, so thank you, Jason! Max is an online platform that allows users to instantly open bank accounts with banks around the country offering the highest savings rates. There are no forms, no bank websites to log in to, or anything; Max handles it all.

Max is the platform that links us to the various bank’s savings accounts. Max itself does keep your money, the platform routes money to the banks.

How does it work?

Create an account with Maxmyinterest.com
Link your existing checking account with Max, or create a Max checking account and link multiple accounts in to that.
Open with the click of a button savings accounts that are listed on the Max dashboard. Zero paperwork. Nada.
You can then set a target balance for your checking account and Max will automatically keep that level moving money in and out, or you can transfer manually between the checking account and savings accounts.
Open a new savings account if you see one with a higher rate with the click of the button and then move money in to that. There are no limits.

What’s the point?

Your money is always getting the most interest it can with little attention from you, yet it is always accessible in emergencies.
Your money is being held by FDIC-insured banks. This means you are insured by the Feds up to $250,000 if a bank fails. Max does not hold your money; the banks do.
For high-net-worth individuals, Max keeps each account below the FDIC-insured amount of $250,000 (if a bank goes bust, that’s what the Feds cover you for) by creating accounts with multiple banks, ensuring you are always covered.
You never have to deal with the mess of opening a new bank account, doing all the paperwork, providing ID etc.
Max sends you a single 1099-INT at tax time showing how much interest you have earned for the tax man.

What’s the catch?

There is a fee of 0.04% (so $40 per $100,000) with a minimum of $20 every three months, so $80/year. If you only have a small amount of savings, it may not be worth using Max. For me, it’s totally worth it.

Screen grabs from the Max website

What are the alternatives to Max for saving cash?

There is that $20 per quarter fee, so if you only have a small amount of cash and are slowly building it, Max may not make sense in your early saving years. Here are some good alternatives which are single accounts with a bank that pays a high interest rate:

They are all protected by the FDIC. As long as you have below $250,000 Uncle Sam will pay you if a bank goes bust.

I don’t make any commission if you open one of these accounts. Make sure to check about any catches or fees they may charge. Always, always, check everything, known as ‘due diligence’ if you want to sound fancy at a party!

Should all your emergency fund be in cash, what about a Three-Fund Portfolio in the stock market?

If the current interest rate is high, stashing a lot of cash away is not too bad. As I write this, at the start of 2024, the leading Max savings accounts are 5.3%, which is pretty good vs a Three-Fund Portfolio investment. That has a long-term average return of 7-8% but much more volatility (it will go up and down in value a lot vs a bank account.) If the interest rates are low and your money is only earning, say, 1-3%, then having $30,000 or $50,000 in an emergency fund savings account for the next 20 or 30 years means your money is not earning enough; most likely inflation is eating its value. If inflation is 2% and your savings interest rate is 3%, your real-world return is only 1%.

As life progresses and you take on more responsibilities like starting a family or buying a house, your emergency fund will naturally need to grow. This is because you will have more expenses and possibly a larger mortgage.

So how does Cash vs Stocks vs Gold compare in the long term?

**The value of $100 invested in 1928 by 2022 would equal*:**

S&P 500 (stocks) including dividends reinvested - $100 became $624,534
Gold - $100 became $8,866
Cash - $100 became $2,140 (in a bank, earning interest.)
Crypto - It’s a bit of an unknown; one issue is it’s incredibly volatile. It goes up and down like a yo-yo, which may not be helpful in an emergency account. Crypto has an equal amount of fans and critics. Potentially, you could make a lot of money. Or not. My take on crypto is the same as Warren Buffett’s. I’m paraphrasing Buffett here: “I’m not going to buy an asset solely based on what the next guy will pay me for it.”

*Data from NYU’s Aswath Damodaran

So maybe mix it up?

Another option may be to have some money in cash in Max and some in an individual brokerage account invested in a Three-Fund Portfolio.

This is the same portfolio we use inside our i401k for retirement. In this case, it’s in a taxable brokerage account that can be accessed anytime.

That means you can instantly sell some of it in an emergency, which becomes cash; the money can be moved back to your bank account in around three days. If you don’t have an individual brokerage account to buy ETFs, you can open one with Charles Schwab here. A 60/40 mix of stocks vs bonds may be a good way to go with an account like this. Remember that bonds are less volatile than stocks, so they do not go up and down as much. However, they have lower returns (how much they increase in value).

Advantages of having some money emergency money in a Three-Fund Portfolio:

A Three-Fund Stock Portfolio in a taxable brokerage account will earn 7-8% over the long term, much more than a cash account. Your emergency money needs to be somewhere for your whole career; that’s a long time for it to be sitting around in cash, earning a crap interest rate.
The tax benefit. In the event of an emergency, selling a portion of your Three-Fund Portfolio would result in lower taxes on the gains. If the ETF or stock is held for over a year, you pay the Capital Gains Tax rate, not your individual effective tax rate, which is probably around 26%-32%. Example: If your net income is $175,000 you would only pay 15% on any capital gain from selling some of your ETFs or stocks.

If some of the shares in the ETF are held for less than 12 months, you pay your individual income tax rate on just those shares. Read about your personal tax rates and how they work here.

Disadvantages:

If everything goes wrong for you and the stock market drops, you could have to sell the ETFs at a loss, so you need to consider that. Remember, the stock market goes up 2/3 of the time and down 1/3 of the time, with corrections of -10% and crashes of -20 to 30% happening. Read here why long-term crashes are okay.

However, the bond part of the fund most likely won’t drop like the stock ETFs in the portfolio, so you may just be able to sell just some of the bond ETF and leave the stocks.

If you open an account with Maxmyinterest.com or an Individual Schwab account, they pay me a small affiliate fee. I put it in my i401k!

Your emergency fund money and where to put it — Maxmyinterest.com