I've turned a taxable investment account into my emergency fund.
There are a couple of things that I “know” as someone who writes about personal finance for my “job.” I'm not supposed to be using a taxable investment account until my tax-advantaged retirement accounts are maxed out. And my emergency fund is supposed to be in a highly liquid savings account with a high yield.
I do have money in a high yield, online savings account. However, I also use a taxable investment account as part of my emergency fund.
Automatic Investment Each Month
I have to admit that my finances aren't as automated as I'd like them to be. My contributions to that high yield savings account are a prime example. I don't have those contributions automated. But the investment account contributions are automated. It isn't a huge amount (automatic contributions to my Roth IRA are larger), but it's there. The taxable account was opened years ago, before I really started thinking about the proper “order” to my investing. And I never got around to changing.
What I have found, though, is that even with all the market volatility, the returns (I am invested in ETF that follows the S&P 500) over time have still been better than what I see from the high yield savings account. Indeed, I find myself using that?account as a rather convenient emergency fund.
Why It Works for Me
Last year, I withdrew some money from the taxable investment account to help pay for some unexpected expenses. I withdrew during a “down” period. Instead of seeing capital gains, I saw losses. They weren't huge losses, but they were losses. So I had the benefit of using almost $2,000 from that account, and not having to pay taxes on it — in fact, I was able to offset some of my income with the loss.
Even if I had withdrawn at a time when gains would have been realized, the small amounts withdrawn for emergency purposes wouldn't likely have resulted in taxes that were too much higher. I was just barely into a new, higher tax bracket last year anyway, so it wouldn't have been a huge difference. Plus, I've had the account long enough that any gains would be taxed at the favorable long-term rate.
Of course, one of the issues with withdrawing from an investment account as an emergency fund is due to the fact that you can't get the money immediately. You have to sell the shares, and it takes a couple of days for the order to clear. Then, once the money is made available to you as cash in your account, you have to transfer it to your bank account, which takes another three or four days. The result is that you don't get the money instantly.
I don't usually need the money instantly, even in an emergency, though. There is usually enough of a buffer involved in my monthly cash flow to allow for a week during which shares can be sold, and for the resulting cash to make it into my account. And, if there isn't enough of a buffer…Well, that's what the high yield savings account is for. It's connected to a checking account (instant transfer) with a debit card.
It's not a perfect system, of course, but it works for me; I haven't had a problem with it. Money gets set aside each month to help deal with problems, and the money grows at a reasonable rate. And, even if I need to withdraw some of the money during a time of loss, at least I avoid taxes and even get to offset some of my income.
What do you think? Would you use a taxable investment account as an emergency fund?