Jimbo dropped a great question in the Clubhouse last week that I wanted to respond to. It’s a query that I hear occasionally and have developed some perspective on. Today I’m going to share how I think about investing your emergency fund.

But first, the question:

Let’s say you have $10,000 that you want to park for at least 1 year, where would you park it? Does that decision change if it’s $100K or $200k?

This money would be earmarked for an emergency fund or investment capital in real estate. So liquidity is a factor but having it sit in cash at the bank is not desirable.

Would putting the money into the market like buying DIS (or some other stock) be a bad idea? Why or why not?

Unproductive Capital = Boo

First off, I share the sentiment that letting a modest amount of money sit unproductively in a bank account is undesirable. At a minimum, you should be getting close to the risk-free rate which currently stands at 2.44%. If you’re not, then you are living beneath your privileges. You can capture close to this rate by using a high yield online savings account or a no penalty CD, or you can buy T-bills directly through the Treasury Direct website.

I think we can all agree that the safest route for investing an emergency fund is not to take risk. Park it in T-bills or some equivalent and bask in the liquidity and safety afforded by them. The paltry return is the price you pay for these twin benefits.

I know that’s an unsatisfactory answer. But that doesn’t mean it’s not right.

Now, suppose you want to take some risk in an attempt to make a better return. Do you put the $10k in gold, silver, or stocks? Do you invest passively and let it sit, or get tactical and try to amp up the returns?

The tricky part with investing money earmarked for an emergency is that you don’t know when you will need it. What if the asset you buy drops 15% right at the moment you need to pull the capital out? You don’t have time to let it recover because you need the money now. This is why a traditional investment advisor would steer you away from buying anything outside of the risk-free investments I mentioned earlier.

But if you insist on taking some risk, then I think it comes down what you’re the most confident in. If you believe that gold or silver will rise more than 2.45% during the coming year, and, if you think they won’t experience too much volatility along the way, then sure, buy GLD or SLV.

Bear in mind; both precious metals have been dead money for some six years now. It’s anyone’s guess as to when they’ll finally wake up and start rewarding investors. But if you think it’s going to be this year, then fire away. Personally, I have no clue.

The Stock Picker

As for picking an individual stock to buy with your money, just make sure you don’t pick one that ends up going down:) Do you have a track record of consistently identifying stocks that don’t suck? If not, how will you have confidence that the one you pick won’t get torpedoed by bears?

Disney certainly sounds compelling, but I suspect you could craft intriguing stories for many big companies right now. With the S&P 500 at record highs, strong stocks are a dime a dozen. Will they stay strong? I think so, but I’m sure we’ll get a correction somewhere along the way. Are you okay seeing your emergency fund dwindle if the market throws a temper tantrum?

I definitel prefer buying a large cap stock with sound fundamentals over some Cannabis stock that carries wicked volatility. You might also consider buying an ETF, such as SPY or IWM for more diversification.

And then, of course, there is the dizzying array of options strategies you might tap into. Not that you have to enter full-on day trading mode. You could still be mostly passive. Maybe you do covered calls. Or, embrace the high probability of selling far OTM naked puts. The possibilities are endless, but in the end, it’s probably wise to stick with whatever you know best. Venturing into uncharted territory is inappropriate with an emergency fund.

What if I’m a Baller?

The final piece of Jimbo’s question asks whether the answer would change if we were talking about $100k or $200k. My first thought is that this amount of money wouldn’t qualify as an emergency fund. What kind of an emergency requires six-figures, pronto?

None that I can think of. Unless you’re a multi-millionaire with some serious monthly expenses. If that’s you then all of my previous feedback still applies.

For everyone else, I think it comes down to time frame. If you have $100k, but you need it in a few months, then I wouldn’t obsess about trying to generate eye-popping returns by taking risk. Alternatively, if you don’t need it for a year or two, and if you have a strategy that you’re confident in and possess the skill set to score profits with, then sure, swing away.