How to Invest your Excess Emergency Fund


Worrying about how to invest your excess emergency fund might seem like a champagne problem, but it is something I discuss with my clients on a weekly basis. If you are fortunate enough to have excess money in your emergency fund, keep listening as we discuss the best strategies for investing that money so it can grow.

As a financial planner, I want all my listeners to be good stewards of their hard-earned money. That means putting your money into investments instead of “under the mattress.” We know that money needs time to grow in investment accounts, but with emergency funds, we don’t have 40 years for that money to grow as we do with a retirement account. It’s better to keep your money somewhere more accessible, like in bonds.

In this podcast, we discuss:

  • Best practices for building an emergency fund.
  • The importance of having an adequate emergency fund.
  • What to do with an excess emergency fund.
  • Different ways to invest your excess emergency fund, including bonds and bond funds.

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Hey, this is Daryl Lyon, CEO and co-founder of PAX Financial Group, and you’re listening to Retire in Texas. Thanks for tuning in. I wanna remind you that this information is general in nature only. It’s not intended to provide specific tax, legal or investment advice. Visit paxfinancialgroup.com for more information. And again, as I’ve reminded you guys that we have a few eBooks on our website the one that’s getting a lot of traction that a lot of people seem to like is our Biblical Responsible Investing one. We also have one on Pivot Retirement Planning. Both of those are free. They’re just resources to help guide you. Those that are clients of PAX, you’re probably acclimated to a lot of those resources and the terminology and language. But for those that aren’t, it’s a good way to, to get to know us better.


So there you go. Hope you get to check ’em out. They’re free. Okay, so we’re gonna talk a little bit about cash. You know, when cash is interesting because when I, you know, growing up and frankly most of my life, you know, when you start out in the financial advisory business, it’s really tough, at least the way I started out because you know, I didn’t have a salary and so I was just kind of knocking on doors and trying to find people who might wanna do business with me. And it’s just hard. I mean, it’s really hard to be a financial advisor who’s broke too. It’s kinda like a shop teacher with no fingers and you just kind of scrap and get lucky and people give you a break and give you a shot. And I’m very thankful to those people.


I know exactly those people who gave me a shot when I didn’t deserve it. But I remember during those times reading, I was always studying finance and I remember reading about excess emergency funds. So this is a problem when somebody has too much of an emergency fund. And I couldn’t help scratch my head as I was completely broke thinking I am just worrying about paying my energy bill. And people are worried, worried about excess emergency funds. Really? I thought, how is that possible? Like, I think that’ll be, I was thinking my past self was thinking, I think that’ll be an interesting problem, but let me just get to the point where I’m surviving and then maybe once I survive, I can squirrel enough money away to actually have something called an emergency fund. And then maybe one day, way down the road with a lot of gray hair, I’ll have something called an excess emergency fund.


And I’ll have to deal with that problem then, which really isn’t a real problem, is it? It’s a champagne problem. Here we are today and I’m talking to somebody nearly every day about their excess emergency fund air quote problem. And I don’t discount it. I know it’s something to think about and you know, you wanna be good stewards of your money and you don’t want it to be under a mattress. And it kind of is, even if it’s in a bank account, it’s still kind of under a mattress if it’s not earning anything. So that’s what I wanna talk to you today about. I wanna talk today about excess emergency fund. If you were like me years ago that didn’t have emergency fund nor an excess emergency fund, still listen to this show because I think if you’re listening into this show and you’re interested in finance, I’d suggest to you, you’re putting yourself in a good position to one day have an excess emergency fund.


So here we are. So let’s talk about it for just a second and let’s set the stage because at the end of the show I wanna make sure you know where to put your excess emergency fund money. I’m gonna tell you that, but I have to define emergency fund to know what excess is, right? Logically speaking. So emergency fund for many people that are working is gonna be six times your monthly expenses. Now some people get that confused with income, don’t get that confused cause those numbers are different and they could be meaningfully different. So it’s six times your monthly expenses. If you are married and both spouses are working, you could probably be fine with three months. If you have an income and maybe a pension you probably could be fine with three months as well. But for the majority of people who are working we call that the accumulation stage.


That’s six months of reserves set aside in a savings account, easily accessible six times your monthly expenses. Why six times? Like who came up with this six times monthly expenses thing? Well, the idea is, is that most expenses aren’t going to cost that much money like a car breakdown or a refrigerator breaking or an AC in the heat of the summer. An emergency fund, as we know, turns a crisis into an inconvenience. But there is one circumstance that the crisis remains a crisis. Do you know what that is? That’s a disability. And I’m not talking about falling off a ladder. That certainly does happen, don’t get me wrong. But most disability companies will tell you that their claims are neurological or anxiety or blood related issues, disease, cancer, they’re not necessarily accidents. And so if something happens to any of us, I just had a situation the other day.


Somebody told me a 40 year old had an aneurysm. They unfortunately died. But in many cases I had one client, I’ve had several clients that have become disabled in their early forties. And what do you do then? Well, having a six month emergency fund really doesn’t do you much good, but it does buy you time. It buys you time because you should have a long-term disability policy. That long-term disability policy is your lifeline to income for an extended period of time, often age 65. So having a six months emergency fund gives you enough runway to get through the deductibility on those policies. A lot of the long-term disability policies have a 90 day deductible period. And then you wanna kind of ex you wanna have more money beyond that 90 day because sometimes underwriting can, the claims on the claims side, not necessarily the underwriting, but sometimes the claims process can take longer than 90 days as they do their due diligence, check medical records, confirm that it’s legitimate.


And so it could extend beyond the 90 days. And so having six months gives you that plenty of runway before that long-term disability policy kicks in. That’s why it is recommended that you have six months, generally speaking, for an emergency fund. Now, if you’re, like I said before, there’s situations, two income households, you have a pension, three months is fine. Now there’s actually other in organizations that, we call them entities in the textbooks I guess, that have an issue too. And I’m seeing this a lot. Churches are right now, believe it or not, many churches have excess emergency funds. It’s kind of interesting, maybe even a building fund. Businesses, seeing a ton of businesses that have excess emergency funds, especially those in construction just doing really, really well. Nonprofits, for-profit social organizations. We’re seeing a lot of these institutions coming to us and saying, we’ve got more cash than we need.


We don’t know where to invest it right now because we’re not finding the deals that we used to, but we wanna make sure that this money’s growing. Can you help us? And so you, you might ask the question, if you’re a business of any sorts nonprofit or for profit, well, what constitutes an emergency fund in for business? Are there any rules of thumb? There’s really not. Honestly, it’s really circumstantial and a lot of it depends on the reoccurring revenue of the business and government contracts and when those renewals happen. So for me, when I get the question from a business, a nonprofit, how much do I need an emergency fund? I always say, I just need to, I need to understand your business just a little bit better to give you a direct answer. With that being said, a lot of businesses know they’ve got too much. So if you got too much, you fall in the category of having excess emergency funds.


So that if, if any of this resonates with you and you’re like, oh man, I’m in that situation again, champagne problems, I’m sorry, we’ve got a problem we’ve gotta solve. And then you look at that money above and beyond that excess emergency fund and you ask yourself, okay, reasonably speaking, can this money be invested for five years or more? And if it can, I’m gonna share with you a few solutions in just a second. If it cannot be invested for five years or more, then you may want to consider a CD at your local bank. They’re paying pretty well right now, 4%, 5%. So it’s excess emergency funds. You get the dollar amount. And then you ask yourself, can this excess emergency fund be set aside for five years or more? And if it can, that’s what I wanna talk to you about in the next five minutes.


Excess emergency fund has a time horizon longer than five years, but just in case you need liquidity still, in case I still wanna get it. So I don’t wanna tied up in anything where I can’t access it, but I also want to earn a little bit more on it. And then you ask yourself, well, do I wanna be in the stock market? Many people in this decision making mode don’t, they don’t want this money to be stock market money. They’ve got other stuff in stocks, but that they’re fine with. But this excess emergency fund, I’m not sure I want this to be stock market money. Maybe a little bit Darryl, but not a lot. Okay, so what’s our choices? Well, what lands between stocks and CDs? There’s one type of investment that lands between the two. Any guesses? It’s bonds. Now bond is a loan, a bond is a loan that you make to att or whoever in, you know, corporation, government entity, whatever.


And you lend it to ’em and they promise to pay you back that money in a given time period with interest rate, with interest along the way every six months. So bonds have less risk than stocks and I am really, really, I’m like keeping this really simple. Maybe we’ll do a different podcast on the nuances here, but generally speaking, bonds have less risk than stocks, generally speaking. But rather than buying individual bonds, which you know, we can do that, we will do individual bonds at PAX and other institutions will, generally speaking, most of the time it’s not done in just buying a bond. Most of the time it’s looking at funds. Now, fund when you think about a fund, you think about not just one bond, but maybe hundreds of bonds. That way you don’t just buy Enron and or whatever, you know, whatever company you, you’ve spread that risk out so you’re not subject to one risk.


So you buy a fund of bonds and, and that kind of is the in between of CDs and stocks is bond mutual funds. Now you can also do bond exchange traded funds. There’s just nuanced differences between the two. I think I’ve done some previous podcasts on those, but you can do either one. In my research, I’ve, I actually, I gotta stop there, I want to go there a little bit. Maybe you can ping me darryl@paxfg.com. I wasn’t prepared to necessarily talk about my research on which one’s better stocks, the ETFs, or the mutual funds, but maybe I’ll do that in another show. But there is some research that mutual funds can be better than exchange traded funds. I’m gonna leave that kind of dangling and come back to that at another show because that’s just a really nerdy technical but fun analysis.


But generally speaking, if you own a fund that has bonds in it, you’re gonna diversify any Enron risk, right? Then you ask yourself a question, there’s like thousands of options to choose from. Which ones do I choose from? Well, it starts with asking yourself, do you want long-term bonds, short-term bonds or something in, in between called intermediate bonds? And the longer the term the bond, sometimes not always, but the longer the term the bond, the higher yield you’ll get. And so working with an advisor, you can do this research on your own, trust me, you can do it on your own. It just takes a little bit of time. But working with an advisor, a good advisor should be able to say, okay, here’s a long-term bond fund. Here’s an intermediate term bond fund. Here’s a short-term bond fund and here’s the yields on each one of them.


Which one do you think most makes the most sense? And let’s put a combination of them together. So that’s, that’s very rational. And then you’ve got another set of decisions to make. Do I want high yield bonds, which are higher credit risks used to be called junk bonds. They changed the name to high yield because nobody would buy junk. Or you can buy high quality bonds. You would expect if you’re gonna buy junk bonds or high yield bonds, you’re gonna get a better rate of return. Sometimes those returns are very attractive. So you just kind of mix and match. And I say, how do I wanna mix this recipe together in my bond strategy between intermediate, short, long, junk, and high quality? And you just kind of put the recipe together that works for you, let it cook for five years and see what happens.


Now what’s interesting is we can’t forget that a 0.5% here or 1% there compounded over time is a significant dollar amount if there’s significant excess emergency funds involved. So it’s incumbent upon all of us to say if we’ve got a five year time horizon that we make good use of this money. It’s not impossible to find solutions in today’s marketplace for excess emergency funds. It’s a fun conversation we’re having probably once a week. The bond market is the one that’s giving us an opportunity to really get that little bit of excess return that we need without taking that stock market risk. So I hope that was educational. Ping me darryl@paxfg.com if you want me to dive deeper on any of this because I kept it high level today. But I would be happy to land that helicopter and really nerd out on this stuff. You’ve listened to this episode of Retire in Texas. Thanks again for tuning in and I wanna remind you, as always, you think different when you think long term. Have a great day.

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