The Unconventional Rainy Day Fund: Investing in ETFs
Let’s be honest, keeping a substantial chunk of money sitting in a low-interest bank account can seem a bit underwhelming. You might even feel like you're missing out on opportunities for that money to be working harder for you. This might lead you to wonder: “Could I put my rainy day fund in an ETF?”
Traditional Wisdom Vs. The Unconventional Approach
Traditionally, your rainy day fund should be kept in an account where the principal is guaranteed, like a savings account or money market account. These are safe places where your cash won't disappear if the stock market has a hiccup.
The unconventional approach, however, says you should invest your emergency fund. Why let inflation eat away at your cash when it could be growing, right? An ETF (Exchange Traded Fund), particularly a low-cost, diversified one, could be an attractive option. It provides diversification, flexibility, and typically, a higher return than a savings account.
The Compromise: A Tiered Approach
We understand that some might find keeping all their emergency money in a bank account overly conservative, while others could see investing the entire amount as reckless. Therefore, we propose a compromise - a tiered emergency fund.
Tier 1 - The 'Oh no!' Money: This is cash you keep on hand for immediate emergencies, like car repairs or an unexpected medical bill. This should be in a traditional, easily accessible savings account.
Tier 2 - The 'Just in case' Money: This is money you could afford to take slightly more risk with. You could invest this portion in a low-risk, easily sellable ETF. It might not be instantly accessible, but it’s there if your emergency expenses exceed your 'Oh no!' money.
Tier 3 - The 'What if?' Money: This portion could be invested in a slightly higher risk, higher return ETF. The idea here is that it's money you can access if you hit a significant financial roadblock, like losing your job.
This approach is not for everyone. If you’re not comfortable with the idea of your emergency fund fluctuating in value, stick to a traditional savings account. Also, you need to remember to keep an eye on your investments, rebalance as necessary, and be aware of any fees.
Investing your rainy day fund in ETFs is an unconventional approach that has its pros and cons. It could be a good fit for those comfortable with taking on some risk, who want their emergency fund to work a bit harder. However, if the idea of your safety net potentially shrinking makes you uneasy, stick with the traditional method. After all, peace of mind is what a rainy day fund is all about.