We all need an emergency fund but how do we keep it from losing purchasing power during times of high inflation? Oh what a question! We get into HYSAs, the Ultimate Liquidity Portfolio, interest bearing USD Crypto Stable Coins, Treasury Bills and the hot new kid on the block that’s catching everyone’s eyes… I-Bonds!
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Fundamental Premise: Retirement Accounts VS Emergency Funds
* Retirement Account (sub 40 years old)* Goal is to maximize growth; focus on higher risk, higher longterm return assets* Long enough time horizon to absorb market fluctuations* Emergency Fund or Cash On Sidelines* Goal is to minimize loss and hedge against risk.* Short time horizon, high liquidity need.
Cash Buffers, Emergency Funds and Opportunity Funds
* Cash Buffer – ie. 1 month’s expenses on hand, in cash so it’s ready if you need it today* Emergency Fund* Might be enough to cover things like…* 3 to 6 months of unemployment* Insurance Deductibles for your healthcare, house, car, pets* Typical, hard to predict expenses like replacing the transmission on your car* As much as you need to sleep at night!* Able to be liquidated to cash in your bank account before your Cash Buffer runs out.* Opportunity Fund* Money you are saving for investing but need to keep on the sidelines for now and out of risky or longterm lock up investments. Examples might include a down payment for a house or money you’re saving to start a business or take advantage of an unexpected investment opportunity.* Similar liquidity need as your Emergency Fund
Strategies for hedging against inflation for short-term cash on the sidelines:
* HYSA – High Yield Savings Account* Interest on these is pretty abysmal and may not be worth the effort of setting up the account and moving your money back and forth plus paying taxes on the pittance of interest earned.* ULP – Low Risk ETF Portfolio – * Goal is to preserve purchasing power and this portfolio has achieved that goal more frequently than stocks or cash, before or after inflation and taxes, during a wide variety of economic conditions, and over a wide variety of time periods.* How It Works:* 88% US Intermediate Term Treasuries (ie. VGIT ETF)* 12% Total Stock Market index (ie. VTI ETF)* Rebalance once per year
* USD pegged Stable Coins* Companies offering the stable coins hold other assets equal to or greater than the value of USD stable coins they’ve minted & adjust the assets they’re holding to maintain a 1:1 value with USD.* Providers: Celsius and BlockFi* $50 Signup Bonus for Celsius: sign up, transfer $400 USD into Celsius and keep it there for 30 days. Referral Code: 1434050ef7* Bonds* You are loaning money to a government or corporation; they are paying you interest on the loan.* One Month Treasury Bills “T Bills”* I Bonds* Rates are published as annual percentage but the rates actually change every six months (May 1st & Nov 1st). So, if you buy an I Bond during the current cycle, you will earn 3.56% (half of 7.12%) during the first six months you own the bond. During the second six months, you will earn the new rate that will be published May 1st.* Not covered: CDs, Money Market Accounts, Money Market Funds
More Info On the “ULP”
This is an idea put forward by Christopher Kawaja in his book