24 - Emergency Fund Sizing for the Enterprising Investor

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Emergency Fund Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode24

Emergency Fund Sizing:

• Recommended Size: 1 year
• Mainstream Alternatives: 
  • 3 months
  • 6 months
  • $1,000
  • $10,000

Why?

• Liquidity is all-important for investors
• Value investing requires managing risk and accepting volatility
• Lack of liquidity can cause you to sell investments when your stocks are undervalued and priced too low
• A strong emergency fund protects you from this possibility

Where should you store it? (Hint: Maximize Safety)

You should maximize the safety of your emergency fund. Don't worry about maximizing the rate of return you receive. 

Store your emergency fund in a government guaranteed account. This can be with either an FDIC-insured savings account. I believe Ally Bank is a good option.

A great alternative is TreasuryDirect.gov where you can lend money directly to the US government. Emergency Fund money would obviously need to be invested only in short-term government bonds. (3 months or less to maturity)