An “emergency fund” is pretty boomer-tier advice, yet I keep running into people making serious money yet saving absolutely none of it(!).
It’s a good idea for any person, from those living paycheck-to-paycheck to billion-dollar companies. It should have enough to cover at least a few months’ expenses. Therefore the amount you need to save will differ per person.
The best investor out there (besides Nancy Pelosi) stays cash-heavy for a reason.
Liquidity = reactivity.
So besides a bank account, where might you put an emergency fund? My criteria for these are:
- Liquidity of less than 24 hours
- Very low risk
This is not optimizing for a return, or else it would just be called an investment. This stuff is obvious, but it’s worth mentioning.
If you don’t have short-term liquidity, you have short-term risk.
You may think stock X is going to the moon, but if that takes 2 years and you have stuff to pay for now, you may end up selling your stock at a loss to pay your bills.
“Bills” aren’t just the boring stuff like mortgages, but mission-critical, actionable needs, e.g. your Fortune 500 client delays paying their invoice a month. Not a big deal for them, but a potentially huge deal for you and your revenue.
Here are the routes I’ll go over:
- Cash-Covered Puts
- Foreign Currency
- BlockFi (high-interest account)
- Keeping it in bank, like a normie
This is the riskiest option, and a little less passive since you have to rewrite them when they expire. But it’s fun so I’ll list it first.
The nice thing about options is you can literally calculate the likelihood of profit. Very, very rarely do I ever get exercised at something that said I had a 90% chance of profit. Anecdotally, it’s been certainly less than 10% of the time.
Anyhow, I did some rough napkin math on a relatively stable stock: AT&T. By only writing puts on 90%+ contracts, you get an annualized return of around 8.4%.
- AT&T stock ($T) trades at $26.46 at time of writing
- A covered-call for end of next week (9 days) has a 93.18% chance of profit
- The call has a premium of $0.04, which means for a lot of 100 shares you’d get $4
- You’re putting up $2,446 to make $4 in about a week
Annualized, that’s about 8.4% return on that cash for the year.
The negative here is the cash doesn’t compound because you can’t write partial calls. Also a sudden drop in the stock of course.
If you’re in the US, this is less for you unless you travel frequently.
If you’re in a country with a less stable currency (all my love to you, Argentina) you should consider keeping as much of your cash in dollars as you can.
Many corrupt nations don’t allow their citizens to hold cash in anything other than the local currency (or they’ll tax it heavily, or put other restrictions on it).
If you’re in this situation, you might be interested in stablecoins.
It’s crypto, but not an investment. The goal of stablecoins is to have an asset pegged to fiat currency.
The three big stablecoins for USD are Tether, USD Coin, and Gemini.
Do your own research on these because I am absolutely not recommending them. Just letting you know they exist.
Tether is the biggest and stays the biggest because institutional investors tend to flood into it before trading for other crypto. It was in legal trouble last year because the US government claimed they were potentially defrauding investors or something. I don’t know the details, don’t quote me (I say as I type into the permanent archive of the internet). As of now, Tether coins are only partially backed by cash reserves—the actual percentage being sketchy.
Update: I previously misunderstood Tether to be fully backed by cash reserves. This isn’t the case (though their website language is tricky). They’re still the biggest but Gemini still has my bet.
USD Coin is pretty close behind Tether in terms of reach (Tether is #4 coin market cap, USDC is #6). Functionally, they act the same. I don’t know much about it other than it’s also supposed to be fully backed by cash reserves.
Gemini is a creation of the Winklevoss twins and acts as an intermediary token on their exchange of the same name. but Gemini popped up to meet that need. Gemini is an actual corporation that has actual dollars backing its coins. Their books are audited to confirm the tokens issued match dollars in reserve.
There’s at least one platform that will pay you interest if you hold your cash in the form of stablecoins with them…
This is the highest interest rate savings account I’ve found. It’s also the weirdest, because it’s entirely crypto-based.
The steps are simple:
- Open an account with BlockFi
- Transfer cash to them from your bank
- They automatically convert it into a stablecoin (Gemini)
Stablecoins on BlockFi earn up to 9% interest at time of writing.
It sounds a little bit too good to be true. I have some cash with them, but not much. Just a portion of my emergency funds (but I’m quite lightweight in terms of my needs, so I can afford to live on little).
Cash in a Bank or Broker, and under FDIC Limits
Banks suck, mostly because they try to find ways to charge you for the privilege of lending them cash.
A few don’t suck.
Novo is great, especially for a business checking account.
Some credit unions will pay you more than a bank since you’re considered a member of the union. They tend to have much better customer service, too.
Some people also keep cash in their investing accounts at major brokerages (e.g. Fidelity). Some of these brokers also offer debit cards so you can withdraw straight from your account.
The advantage to this is if you’re holding cash waiting to invest in a dip or IPO, it’s instantly available and you don’t have to do the dance of transferring between broker to bank to crypto exchange, or whatever you’re doing.
If you have short-term cash needs of over $250k, just make sure you are keeping it in multiple banks. The federal government (through the FDIC program) protects your cash in case of bank default up to $250,000, but that limit resets at every bank. The simple solution is to spread your emergency cash between different banks.
This also applies to broker-dealers (like Schwab, Vanguard, etc.) up to $250,000 as well. It’s not called FDIC, but SIPC, but functionally does the same kind of protection.
As an aside: always keep actual cash in your wallet, too. Not tons, but at least for the little things like tipping. The right tip to the right serviceperson can open up doors you wouldn’t otherwise be able to buy (AKA priority, information, and a good reputation).