With interest rates hovering around one-half percent, there’s really no longer any incentive to keep your money in a “high-yield” online savings account. You’re losing money against inflation at nearly the same rate as you would if you kept your excess cash in your checking account. Which begs the question, where should you stash your emergency fund now?

Before answering that, we should probably answer another question. How much should you keep in your emergency fund?

And the answer is, of course, it depends.

How much should you keep in your emergency fund?

I touched on this in a very broad step-by-step look into what to do with money. If you’re just starting out and have no dependents or debts, stash a grand away and move on to some investments. I didn’t exactly cover when to sprinkle in more cash, but do so as you progress. If you have a dependent, you’ll want more of a cushion. Just not too much. Emergency funds can be a big waste of potential gains, especially for those in the wealth accumulation stage (most of us).   

To quote… myself:

Common advice regarding the amount of money you should have in an emergency fund follows similar guidelines to buying a wedding ring. Some people say 3-6 months salary (or living expenses), some say 6-9 months, and some say a fairly low amount like I do. Incidentally, this figure frequently corresponds with whether or not you have purchased a wedding ring in your life. If you don’t have a family to support, you can get by with a small emergency fund. The concept is fairly similar to life insurance. Have kids? Better make sure they’re taken care of if something happens to you. Single weirdo? Don’t worry about it so much.

How much you should have in your emergency fund comes down to your own comfort level. I’d argue that it’s a bigger emergency to not shovel more money toward income-generating assets than it is to take on a small amount of debt if disaster strikes, provided that you’ll be able to pay off that debt in a reasonable timeframe.

That said, I don’t practice what I preach.

I’ve kept $20,000 stashed in an Ally Bank account for the last couple years. In addition, I have a fluctuating amount of around $5,000 in my checking account at any given moment. That amounts to about 7% of a net worth in the range of $350,000, which is entirely too much cash to have laying around doing virtually nothing. For me, $25,000 covers 7-8 months of living expenses, which is far more than I need to feel comfortable. The loss of a job may justify this much of a safety net, but if that were to be my emergency, I would prefer not to have such a net. Rather, I would like to keep myself a little uncomfortable. Discomfort is a great motivator. Or at least, that’s what I say now, with the benefit of gainful employment.

A money market settlement fund provides more accessibility

So I decided it was time to pull out of the “high-yield” savings accounts that have only been yielding the pace of my retirement path. Let’s put that lazy cash to work!

Now, what to do with an extra 20 grand? For me, all I’m really going to do is keep a little more cash in my checking account for further accessibility and shift the rest into my Vanguard account via their money market settlement fund. In fact, VMFXX has outperformed most online savings accounts this year anyway, so there are minor returns to be had.

With an emergency fund, you want something safe and accessible. This amount of money is aptly named—funds you’d need in an emergency. I don’t want to get too cute with this stash. But I am at the point where the opportunity cost of keeping that much cash at a 0.60% return is greater than the need for these funds in an emergency.

Opportunity fund is the new emergency fund

Once I shift these funds to Vanguard, I’ll be in a better position to act on the latest hot stock tip I hear at the supermarket without delay. I’m joking, of course. Though I do have an interest in dabbling in a world outside of my normal index fund scope.

I’ve had a little bit of FOMO watching my fellow millennials day-trade their way to high returns on somewhat predictable high-performing stocks during the pandemic. Does that sound like a bubble that’s about to burst to you, too? Fear not. I keep 99% of my investments in index funds (either VTSAX or an S&P 500 index), and for good reason, but I’d like to be able to scratch the itch and throw a couple grand at an individual stock from time to time. At the very least, it’ll give me something to write about, like the always entertaining Freddy Smidlap.

This amount of money isn’t likely to have much of an impact on my overall returns, but a big winner has the potential to help me outpace the market much more than a big loser does to tank my portfolio.

How not to use an emergency fund

Since I essentially own a small part of every U.S. stock already thanks to VTSAX, individual stock investments really just shift the weighted allocation of my investments closer to a few companies I’m particularly interested in owning. The two individual stocks that have been grandfathered into my investment portfolio (before I fully embraced VTSAX) are Microsoft and Apple. Both stocks have helped my overall returns ever so slightly, and any additional purchase of an individual company’s stock would adhere to the same buy-and-hold strategy.

Again, this isn’t about reaching retirement five years earlier thanks to my stock-picking expertise. There’s a reason I’m invested almost entirely in market-tracking index funds. Long term, I’m not likely to do better than the historical returns of the S&P. And I’m not exactly day trading here. I’m interested in individual stocks mainly for entertainment and educational purposes. Which is exactly how not to utilize an emergency fund. Nonetheless, I do want to reduce my cash position and put that money to work instead.

Where should you stash your cash?

So where should you stash you emergency fund? I guess I didn’t really answer that. The fact that you have a small amount of cash on hand to begin with is a win. But personally, I’m devaluing the importance of keeping this extra amount in cash. This could bite me in the ass if, say, a real estate opportunity opened up. I would need to sell off some taxable investments in order to have the sizeable amount necessary to pounce on a down payment. In the Bay Area, I’m not there yet. And might never be.

Even if I end up using my “opportunity fund” toward boring old VTSAX in the event of another downturn, that’s a better use of the cash than the half percent interest it would be gaining. Would I be better served to go ahead and throw it into VTSAX now? Probably, and statistically, yes. But I subscribe to a bit of investor psychology when it comes to market timing. Time in the market beats timing the market every day of the week, but I’m fine with this amount of money maintaining its emergency fund role—with pretty much the same returns—even if a golden opportunity never arises.

This is all a long way of saying that, whatever you do with your emergency fund, you can do better than supposed high-yield savings accounts at the current interest rates. The 0.01% you’ll get in your brick-and-mortar savings account isn’t doing anything for you, but I’d rather keep it there for immediate access instead of creating a separate online savings account and having to wait 2-3 days for that money. For an extra 0.59% percent, “high-yield” savings accounts just aren’t worth it at the moment.