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Let me start off by saying: You should only follow my advice if you’re comfortable with it.

That said, it would greatly behoove you to become comfortable with investing, and the only way to become comfortable doing something is to learn the facts, determine your calculated risk tolerance, and actually do it. 

If you’re going to panic, sell your positions, and close your account because your Emergency Fund investing goal dips $10, you’re not going to be able to stick around long enough to enjoy the $30 rally—and it’ll be of no use to you. 

This post is intended to walk you through some of the realistic risks and benefits of choosing an investing account like Betterment’s Emergency Fund to grow (or maintain the value of) your emergency savings. Let’s begin!

I’ve talked before on this site about my first nerve-racking experience investing: I bought $1,000 worth of VOO (an S&P 500 ETF) on Robinhood and the moment I pressed the “Buy” button, I sat at my desk and stared at the balance as it moved. It was fascinating and terrifying, and at that time, it represented about 5% of my total net worth outside of my 401(k). Is this safe? A whole 5% of all my money invested? Maybe I should’ve done less.

Fast-forward only two years, and the ratio has—ironically—flipped. I have 5% of my net worth in cash at any given time (about $8,000) and around $160,000 in the market.

It’s hilarious how much my mindset has changed: Now, rather than being nervous about the money that’s IN the market, I’m nervous about the money that’s OUT of it.

Betterment Emergency Fund vs. a savings account

How can that be possible? One word: Inflation. The buying power of every dollar decreases in value (on average) 2-3% every year—so although your cash may be gaining 0.5% in a High-Yield Savings Account, it can still net a loss year over year thanks to inflation.

Does that mean you should have no cash in your portfolio? Obviously not—things happen, and there are those obnoxious things called bills that need to be paid. You certainly want enough cash on hand to cover the next 60 days of your life at any given time, and probably more than that—but beyond your realistic “cash on hand” amount, you (typically) don’t want 5+ figures of wealth sitting dormant in a traditional savings account.*

*If you’ve got a similar situation to me: Unmarried but engaged, no children, a stable source of income (plus a few more), etc. If you’re a single mom of 5 and paying a mortgage, I’d adopt a more risk-averse attitude.

Most personal finance hobbyists, at one point or another, espouse having 3-6 months of expenses in some type of emergency fund, whether it is invested or in cash.

And I have, too. In fact, my Wealth Planner suggests an emergency fund balance that’s calculated by multiplying your average take-home pay by 3, because in my experience, most people don’t really have a solid handle on what their monthly expenses actually are—so rather than asking you to guesstimate how much you’re going to spend for the next three months, you can also multiply your actual income—the amount you’d expect to be taking in—by the lower end of the sliding scale.

Betterment’s Emergency Fund account for emergency savings

I don’t make the decision to recommend Betterment’s Emergency Fund account lightly, as I had always religiously followed the “6 months of cash” dogma of Personal Finance Dot Com.

In doing a little research, I discovered there were other options like the Emergency Fund investing goal at Betterment, a taxable investing account that was invested in 85% bonds and 15% stocks (although their default allocation is subject to change, you can also change the allocation yourself if you want to be heavier in stocks or bonds).

I was intrigued.

In the investing world, bonds are generally considered the lower risk bet in comparison to stocks. They’re called “fixed income assets” because your interest is more or less guaranteed by the government and corporations who issue them.

Here’s why I was intrigued: Betterment marketed this investing goal as a good place to grow your emergency fund. Up until that point, I had never heard of a company (or anyone) using an investment account for an emergency fund (beyond the idea that your Roth IRA principal actually serves as a back-up emergency fund because you can withdraw it anytime penalty-free).

But to strategically use an investment account to grow a large sum of cash that could help combat inflation? Sounds like a winner to me.

…except let me do a lot of research first, because I’m greedy, not stupid.

How Betterment Emergency Fund works

The Emergency Fund invests 85% of your total balance in corporate and government bonds, and these bonds produce interest. For example, a percentage of the total goal can be invested in U.S. Short-Term Treasury Bonds, which produce a range of annual dividend yields (read: interest for you!). (Betterment makes these decisions for you; you don’t have to decide which bonds to pick.)

Dividend yield is cool because it’s typically paid out regardless of whether or not an asset goes up or down.

The 15% of your Emergency Fund that’s invested in stocks is the aggressive portion that’s intended to drive growth; the 85% in bonds are intended to provide stability. Think about it like dating a mechanical engineer with a Master’s Degree from MIT who also has a chest tattoo–mostly wholesome and predictable, but… then there’s that chest tattoo, providing a little intrigue.

What’s the catch?

Well, there really isn’t one, minus the fact that now there are tax implications for your gains.

To be clear, there are tax implications on your High-Yield Savings Account, too—Uncle Sam isn’t going to let you collect your fat check for 0.5% without taxing it first.

During tax season, you’d receive a 1099-INT form from your HYSA provider and you’d be charged accordingly. Interest is taxed as earned income, which means it basically gets added to your total income for the year and will likely be taxed in your marginal tax bracket.

If you’re like, Wait, what? I’m getting taxed on that interest? It probably means you haven’t earned enough interest income for you to notice during tax time.

With an investing goal like Betterment Emergency Fund, you’ll likely receive a 1099-DIV to report your bond interest and dividends earned.

Unfortunately, most bond interest is taxed as earned income every single year, regardless of whether or not you withdraw it, which means you pay your marginal tax rate on interest (capital gains work differently; i.e., if your stock ETFs go up in value from $111 to $199, you don’t get taxed on those earnings until you sell them). Dividends are taxed every year, too, but qualified dividends that meet certain requirements are taxed at the “capital gains” tax rate—which is often going to be lower than your marginal tax rate.

Other tax implications to consider

The question that I get the most from savvy readers who are considering this type of account? “What happens if I have to withdraw the money after a few months to pay for something?”

Remember those capital gains taxes we talked about? If you hold your earnings for greater than a year and then sell them, you’ll pay 15% on those gains. That’s known as a long-term capital gains tax, and unless you’re earning more than $518,900, you’ll probably be in the 15% group.

But if you sell in less than a year, you’ll be charged as if it’s earned income—just like how your interest is taxed.

So let’s pretend something catastrophic happens and you need all $15,000 of your Emergency Fund’s balance, all at once. It’s difficult to think of a single scenario wherein that would be the case (think about it: Even if you lose your job, you’re likely not going to withdraw the entire account all at once—you’d probably withdraw it little by little as you needed it as you looked for a job), but let’s pretend.

If you sold the entire balance, including the gains, you’d be charged short-term capital gains taxes on the portion that came from the market gains.

Short-term capital gains taxes = your marginal tax rate.

So that would mean your net gain would drop by the amount eaten up by short-term capital gains taxes.

This means that the worst case scenario is that your net gain is slightly lower due to taxes.

In the hypothetical example above, your net gain would’ve dropped from $870 to a mere $694 (please read “mere” drenched in sarcasm).

Still, if someone can show me the HYSA that can return a net gain anywhere close to the potential overall return on the Emergency Fund (even if you’re paying short-term capital gains taxes), I’d be impressed.

And it’s worth noting here that there are no transaction fees for accessing your money in your Betterment Emergency Fund account.

What’s next?

Again, I urge you to remember: Investing can be simple (especially with Betterment), but it’s not easy and comes with risk. It’s not easy to see your portfolio drop and log off without selling anything, sometimes no indication that it will bottom out and begin climbing again soon.

3 easy steps to set up an Emergency Fund account

If you don’t have an account with Betterment at all, you can go to www.betterment.com/moneywithkatie to get started.

And if you don’t want to use my link, that’s cool. Just make sure you consider opening a Emergency Fund account and break up with that high-yield savings account.

Step #1: You’ll see a screen that says “How would you like to get started?”

While you’re probably tempted to click, “Save cash and earn interest,” that’s like the second-most right answer on the multiple choice quiz. You want to click:

“Invest for a long-term goal. Build wealth or plan for your next big purchase.”

Then, you’ll be asked to set up your account with your personal information, which is standard and—I trust—you don’t need screen grabs to walk through that part. Once you’re done, you’ll land in the Home section of your new account. Woohoo!

Step #2: Add the actual Emergency Fund goal.

From here, you can go any number of ways, but I would click “Add new” on the left-hand side column (it’s gray) or “Finish setup” on the Investing account.

Once you reach the screen where it asks, “What are you saving for?”, you’ll click “Emergency Fund. Helps build an emergency fund so you’re prepared for the unexpected.” It has the purple life preserver next to it.

Then, you’ll click “Individual Taxable” on the next screen (or Joint, if you’re married and intend to share it).

You’ll then be asked for a Goal name, a Target amount, and a Target date.

If you’re just starting to build your emergency fund, enter a real target amount (like $15,000, for example).

This will help set your account up in an appropriately aggressive manner, along with your target date. I wouldn’t stress too much about the accuracy of the target date; it’s used to tell you whether you’re on track or off track to meet the goal based on projections.

If your emergency fund is fully funded and you’re just trying to grow or maintain the balance, enter its current amount as the target amount.

This will tell you you’ve “reached your goal,” and the money will continue to grow.

Step #3: Click “Create this goal” and begin your trek to world domination.

Notice how “15% stocks” is the recommended allocation; you can change it if you want based on your risk tolerance and #YearnToEarn.

What about getting your money back?

Another common question I get a lot is how long it takes to get your money out.

If you do need to withdraw from the account, it’ll generally take around 4-5 business days for the money be sent to your checking account.

So if you anticipate needing the money in the account the same day something happens (read: you don’t have a credit card or source of cash to pay for the expense before the money lands in your account), maybe this isn’t the best thing for you—but remember, there are other scary consequences of living that close to the edge, so I’d take that as a sign that there may be some more fundamental changes you want to consider.

In conclusion

Because I inevitably always forget to answer some common question literally every time I’m convinced I’ve written the perfect post, I know there’s probably something you’re still wondering—and I’m always happy to chat. But if you’re ready… The Money with Katie-specific link to Betterment is below.