Some advisers tell us it can start off with as little as $1,000 (I believe that one is a). More commonly I see suggestions to have as much as 3 months, 6 months, even 12 months worth of living expenses set aside in easily accessible bank account.
Fortunately for my wife and I we have done a pretty good job of building up our rainy day fund over the years to as much as $20,000! That’s a pretty admirable amount and it would easily cover around 4-5 months of our living expenses should anything awful ever happen to us.
Back when we only had $5,000 or even $10,000 in that fund, I would have never given a second thought to keeping that money parked in our boring-ole savings account. The money was good and safe, and I didn’t really care if it was only earning a meager 1% interest rate.
However … now that this pot of money is starting to get pretty healthy, this leaves me wondering: Should I be doing something more with it?
Don’t Get Greedy!
Now obviously I understand that the goal of a rainy day savings fund is to have money when you need money fast!
If you remember back in 2013 we had to drain over $5,000 in unexpected car repairs – that was awful! So just in case history decides to repeat itself, I’ll want that money where I get it fast – like within less than a week. That means that’s a no-go for investing in anything risky or speculative: No stocks, no peer-to-peer investing, etc.
So with greed removed, I’m simply asking the question: Is there a better way to optimize my returns without compromising liquidity or loss?
I feel with such a larger volume of cash on hand that it would almost be irresponsible for me NOT to at least investigate the issue a little deeper. Earlier this year when we did a similar analysis of what to do with $200 extra dollars in our budget, we found out that over time the difference in choices could have resulted in over $17,000 over the years!
So if I’m only earning 1% interest right now, is there a way I can bump that up to 2, 3, or even 4% without a lot of risk? Doing so would take the $200 I’m on track to earn and bump it up to as high as $800!
Interest Rates Were Better Back Then:
Having an emergency fund in your savings account was so much easier 10 years ago than it was today. Back then I had an ING Direct online savings account paying 5% interest. What a dream come true that would feel like right now!
Back when I was in high school I had CD’s paying as high as 5 or 6%. If I could get a return like that this whole thing wouldn’t even be an issue.
But unfortunately as long as the Fed keeps rates artificially low, we’re going to have to be a little more creative than that.
So where should we look?
My Great Compromise for Your Rainy Day Savings:
One place I’ve been looking for a possible solution is with old-fashioned mutual funds. If you ever look through the product line-up on Vanguard, you’ve probably skipped over the bond and balanced funds in hopes of finding bigger, sexier returns with the more aggressive stock and exotic-style funds.
But we’re not after big and aggressive. We want safe and steady! So let’s take a step back and look at the less-aggressive, more “boring” type of funds … starting with bonds.
Bond funds are okay. But in case you’ve never really looked very deeply into this category you’d find that bond values can fluctuate just as much as stocks (just not quite as high or low as stocks would). Can we do a little better with volatility by adding some diversification to the mix?
Yes we can! And one fund that has caught my attention is the LifeStrategy Income Fund (VASIX) from Vanguard. It invests 80% of its assets in bonds (both domestic and international) as well as 20% in stocks (also domestic and international).
Even though it’s categorized as one of the lower risk funds (2 out of 5), it still produces (in my opinion) some very acceptable returns. Almost 5% historically!
But here’s what else is drawing me to this fund. Notice what happens when you compare it to a popular bond fund index:
Did you notice how both seem to have relatively the same (perhaps less) amount of fluctuation? However the LifeStrategy Income fund produces better returns over time. That’s what’s nice about finding a hybrid fund with just the right mixture of stocks and bonds – you get the best of both worlds!
Ultimately I feel like this fund is very good compromise of the things I’m looking for. So what I’ve decided to do is take half of our emergency savings and put it into this Vanguard while the other half remains safe and sound in our online savings account. My thought there is that if we can resist touching at least one half of the entire “pie”, then that would allow this money to grow at a much more rapid rate with returns closer to what I’m after.
And who knows – if we can do a really good job of not touching any of the rainy day fund, then perhaps we can divert more of it to this account. But let’s not get ahead of ourselves too far. I’d like to monitor things and see how they go for a year.
Readers – How do you feel about taking on a little more risk for a little more return with your rainy day savings fund? Where do you keep your emergency fund and why?