Vanguard Emergency Fund

Just tossing around the idea of different flavors of emergency funds…

Everyone is in agreement that you should have one.  Possibly with the exception of extreme investor types like Mr. Money Mustache, who believes that a single dollar not put to investing work is wasted money.  He recommends, if you own your home, to use your home equity line of credit as your potential emergency fund if anything should go wrong.

That actually got me thinking: can an emergency fund also do investment work for you?  The only requirement of emergency funds is that they are liquid and available any time.  There must be something better than dumping it in dusty savings.  I heard Suze Orman recommend using the Roth IRA as a sort of emergency fund – because you can take out what you put in at any time.  But come Loan Payoff Day, I will be able to save more than $5500 per year (the current annual limit for Roth IRA contributions).  So I would rather shovel the money into another vehicle and be done with it once it hits $20k or so, fulfilling EF needs.

Why Vanguard?  I don’t know.  It’s an index fund I have heard many different PF realm folks talk about.  It indexes the entire S&P and generally keeps up with overall market by virtue of its averaging nature.  I have also heard that 401k funds (and possibly Roth IRA?) often do not keep up with the market.  So for a retrievable place to put my money for lightweight investment, I would aim for a hands-off “tracking to market” investment.  Beyond that I would try to make my money do better than the market average, but more on that another time 🙂

6 thoughts on “Vanguard Emergency Fund

  1. There was a famous military thinker named Clausewitz, who’s probably most famous for saying that “War is politics by other means.” Anyway, one of the things he argued for is that there’s no such thing as a strategic reserve. If some portion of your forces isn’t actively engaged in pursuing your goals, then they’re wasted forces.

    That’s not to say that you should commit your entire force every time you enter a battle. It just suggests that how you position yourself and how you deploy your forces always matters. Your reserve could be used in various creative ways, such as holding a key position or worrying the enemy’s flank, or securing lines of retreat for you main force.

    I think the lesson carries over. If you have a monetary reserve, there’s got to be ways to utilize it while still keeping it close at hand. Stocks are easy to liquidate should you run into trouble. You could set up a separate, safer portfolio, with the idea of selling it off should you find you need the money.

  2. funny you bring this up! after talking about emergency funds the other week, my bf asked why i didn’t just keep my emergency fund in vanguard. i honestly didn’t have an answer for him… and now you’re reminding me that i wanted to possibly do that!

    i think I liked the savings account because i figured it would be easier to access the money if i needed it quickly- but it takes 3-5 business days to get the money from there, which i bet is about the same amount of time it would take to get from vanguard! and for the most part, i’d get a much better return from vanguard than my 0.95% savings account… hmmmm

    • Yup! I think you can only transfer like $500/day out of savings at my bank. And who knows if I even have checks for that account…

      Only thing I noticed was that you have to open a Vanguard account with $3k. So if you had to take it out for an emergency cost, I’m not sure if that would be a problem. Or you could always just have EF + $3k in there.

  3. You have me thinking about this “emergency fund” thing in a whole new way. We can consider liquidity independent of stability of principal when assessing savings vehicles. A Vanguard ETF or mutual fund is very liquid, but you can’t rely on it keeping its value. But that’s okay, because we Mustachians don’t spend much money anyway, and we’re a crafty resourceful folk.

    I like it.

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