Having a solid emergency fund, or rainy day savings, is crucial for financial health. Some experts, like Dave Ramsey, suggest starting with as little as $1,000. However, it’s more common to hear advice recommending saving enough to cover three, six, or even twelve months of living expenses.
My wife and I have managed to build our rainy day fund to around $20,000, which would cover about four to five months of our living expenses if needed. When our fund was smaller, around $5,000 or $10,000, I didn’t mind keeping it in a standard savings account despite the low 1% interest rate. But with a larger amount saved, I’m beginning to wonder if there’s a better way to grow this money without sacrificing its accessibility.
The primary goal of an emergency fund is to have money available quickly during an unexpected situation. In 2013, we had to use over $5,000 for car repairs, so having quick access to this money is essential. This means avoiding risky investments like stocks or peer-to-peer lending.
My aim now is to find a way to improve our returns without taking on too much risk. Earlier this year, we analyzed what to do with an extra $200 in our budget and found that different investment choices could potentially yield $17,000 over several years. So, if I’m currently getting 1% interest, can I increase that to 2%, 3%, or even 4% with minimal risk? Doing so could significantly boost our earnings from $200 to as much as $800.
Years ago, it was easier to earn a decent return on savings. My old ING Direct savings account used to pay 5% interest, and CDs in my high school days offered 5-6%. But with current low interest rates, we need to explore more creative options.
One potential solution could be found in old-fashioned mutual funds. For safety and steady returns, bond and balanced funds, which are less aggressive than stock funds, are worth considering. Bond funds, while safer than stocks, can still fluctuate, so adding diversification might help.
The Vanguard LifeStrategy Income Fund (VASIX) caught my eye. It invests 80% in bonds and 20% in stocks, both domestic and international. Though rated as a lower-risk fund, it has historically provided nearly 5% returns, which is quite appealing. Compared to a typical bond fund, it shows similar or less fluctuation with better returns over time, thanks to its balanced mix.
So, I’ve decided to invest half of our emergency savings into this Vanguard fund while keeping the other half in our savings account. This strategy allows one portion to grow more rapidly while maintaining some safe, easily accessible funds. If we manage not to dip into the rainy day fund too often, we might even move more money into this account, but I’ll monitor it for a year before making any further decisions.
