Most financial advice around cash management boils down to “save 3-6 months of expenses in an emergency fund.” To be clear, that is good advice!
But it’s not fully exhaustive as there’s an additional step I think people should take, especially for people with steady income to replenish funds if needed. If you’re retired or approaching retirement, your cash strategy should be different – we’ll cover that in a future post.
The Foundation: Your Emergency Fund
Start with 3-6 months of expenses in a high-yield savings account. I lean toward 6 months because I’m conservative with cash. Make sure you’re actually earning something meaningful, not the 0% or 0.1% that many big banks offer. This money is purely for emergencies and should never be touched for anything else.
What Most People Miss: Your Opportunity Fund
Here’s what I think a lot of people are missing out on when it comes to an emergency fund. For myself (and my clients), any cash above that 6-month emergency fund should go into a low-cost, diversified investment portfolio; call it your “opportunity fund.” This gives you flexibility that a traditional emergency fund can’t provide.
When life happens and you have to access that emergency fund, you’ll have options. If the stock market is doing well and you need money, you can decide: Should I sell some investments (and pay taxes on your gain) and leave my savings alone, or should I use my cash savings and rebuild that later? The answer depends on your income, tax situation, and the nature of your emergency – but having choices when it comes to your finances is always helpful.
Beyond Emergencies: Medium-Term Goals
This opportunity fund also works well for medium-term goals. Planning to buy a house in 3-10 years but don’t want the low returns of a savings account? This invested cash could help you reach that down payment faster while still being accessible when you need it.
Lastly, this type of account is also great for long term goals. After you’ve taken full advantage of the tax benefits with your retirement accounts, if you have extra cash, you can put it in this type of account and have it available to you as source of income in your 50s as you wait until age 59.5 to access your retirement funds penalty free.
Account Structure
If you’re single, you can use an individual brokerage account. If you’re married, consider a joint account with your spouse. Make sure to add a TOD (transfer on death) to the account and name who you would like to receive that money in case of your untimely passing.
By combining a traditional emergency fund with an invested opportunity fund, you create financial flexibility that pure cash savings can’t match, giving you both security and growth potential during your working years.