Your emergency fund money and where to put it.
The AI generated freelancer, all banged up!
The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
Updated: April 2025 to include using U.S. treasury ETF/fund as an option.
As a freelancer or single-person business, your emergency fund is the first thing you should establish.
You know that the shit can hit the fan fast (a recession, an injury, or the loss of your main client). If it does, you need to be able to live and pay your living expenses until you get back on your feet. That means having some emergency funds in an account somewhere.
TL;DR
Have at least 3-6 months of living costs saved, perhaps more if you’re in a volatile industry.
Having a fund will reduce stress on you, your business, and your relationships.
Keep the money in a High-Yield Savings Account (HYSA), or
Use a U.S. Treasuries ETF like Vanguard’s VBIL to avoid state tax on the interest, or
If you are more unlikely to need to draw on the fund, consider using a Three-Fund Portfolio. It’s a higher risk but a higher return on the emergency fund money. This is unsuitable for most people.
How much cash should you have stashed away?
A common figure is to have 3-6 months of expenses as your emergency fund.
It comes down to a personal choice of how risk-averse you are and whether you have other assets that can be liquidated (sold) quickly in an emergency, like shares in a taxable brokerage account, like a Schwab account.
As life progresses and you take on more responsibilities like starting a family or buying a house, your emergency fund will naturally need to grow. This is because you will have more expenses.
Hopefully, you have a growing i401k; if not, get that going ASAP. Click here for the guide, or open a Roth IRA if your income is mostly W-2. Investing will make you rich, slowly.
Side note:
You should avoid withdrawing money from retirement accounts like the plague, as there could be a penalty. You are also taking money away from future you. The money you pull from your i401k or Roth will cost you tens to hundreds of thousands of dollars in the future. $20,000 invested now growing at 7% will become $108,000 in 25 years. Yes, pull $20k now, and you will lose $108k in the future.
Your emergency fund comes down to this:
Here's the lowdown on the essential costs you may want to cover:
Housing Costs: Your rent or mortgage, it’s a no-brainer.
Utilities: You have to keep the lights on and the water running.
Food: Think basic groceries that can stretch for meals. Ramen can be your best friend.
Healthcare: If you've got meds or ongoing medical needs, they can't be ignored. Health insurance is super important, especially if you've got a family. Don’t stop exercising either, long-term this is so important.
Car Expenses: If you have a car and need it for job interviews or essential travel.
Minimum Debt Payments: Make at least the minimum payments to avoid penalties and to improve your credit score.
Basic Personal Expenses: We're talking toiletries, household items, and maybe a small budget for clothing if necessary.
Here’s what you can probably cut back on or drop:
Cable TV subscriptions, expensive gym memberships (workout other ways for a while), streaming services.
Eating out, takeaways, and expensive snacks.
Luxury items, like high-end clothes and gadgets.
Non-essential travel or entertainment
Where to stash the cash?
Eh…no.
Here are three main options:
High Yield Savings Accounts (HYSA).
U.S. Treasuries-based ETF or money market fund to avoid state tax.
Stock market Three-Fund Portfolio (60% stocks, 40% bonds).
1 - The High-Yield Savings Account (HYSA) Option
Chances are your bank’s savings account offers a lame interest rate (we’re talking 0.1 - 0.5%), so we need to use a specialty HYSA bank. Honestly, the term ‘savings account’ is a joke at most main street banks.
Is a HYSA at a bank safe?
Banks are insured by the FDIC. If your account balance is below $250,000, Uncle Sam will guarantee your money if the bank goes bust.
Look for specialty banks offering a High Yields Savings account like:
I put part of my emergency fund in Maxmyinterst.com.
Max, or Maxmyinterest.com, is a company I first read about in Jason Zweig’s investment column in the Wall Street Journal, so thank you, Jason!
Max is an online platform that allows users to instantly open bank accounts with banks around the country, offering the highest savings rates. There are no forms, no bank websites to log in to, or anything; Max handles it all.
There is an $80/year fee, so if your emergency account is small, it may not be worth using Max.
Points to consider:
If the Federal Reserve base rate is low, the interest rate on the HYSA may pay a very low interest rate.
The interest payments generated by the account is taxable at your personal interest rate and must be declared on your tax-return yearly.
Keep each account under $250,000 to be covered by the FDIC insurance. (Yeah, I know. Most don’t have $250k in a bank account!)
2. A U.S. Treasuries-based ETF or Money Market Fund
If you invest in a U.S. Treasuries-based ETF or money market fund inside a taxable brokerage account, the dividends are usually exempt from state and local income tax. I live in D.C., so that is an 8.5% tax saving. However, this account has no advantage if you live in a tax-free state like Florida or Texas.
Example:
$50,000 at 4% will earn $2,307
An 8.5% tax saving on $2,307 = $196
No big deal? Over 30 years, that’s $5,880
How does it work?
The ETF or mutual fund buys treasuries from the U.S. government, which are held in the ETF/fund. The dividends are paid into your brokerage account monthly. I set my account to ‘re-invest dividends’ so the money paid out automatically buys more of the ETF or fund’s shares. This starts the compound interest snowball effect.
The dividend rate is usually the same as, or higher than, a HYSA interest rate.
Whoa! I need the cash now!
Need cash? Sell part of the ETF/fund, wait three days for the money to clear, and then transfer the money to your checking account.
Use one of these Vanguard products as they have the lowest fees at 0.07%
If you have an account with Vanguard, you can invest in the money market fund VUSXX.
Or, buy the ETF VBIL in a taxable brokerage account like a Schwab or Fidelity account — In this case, I suggest opening a separate account with whoever you use (it takes a few minutes) to put VBIL in. You need to tell TurboTax or your accountant that the income is from a treasury-based account, so they know it’s state tax-exempt. This way, you don’t have to break out the payments from VBIL versus your other investments.
Points to consider:
Treasuries are not FDIC-covered investments but issued and backed by the U.S. government.
The brokerage account you hold them in is protected by the SIPC (Securities Investor Protection Corporation). It covers cash and securities in a brokerage account up to a limit of $500,000, including a maximum of $250,000 in cash.
I only recently discovered the treasury-based account hack myself. Why my accountant never suggested it, I do not know!
3. Using a 60/40 Three-Fund Portfolio for part of an emergency account?
This higher-risk option is not suitable for most people — You could keep some of your emergency funds in a TFP, or all of the funds if you think you are unlikely to ever dip into them.
What’s the risk here?
If the market crashes and you need to sell the ETFs to use the emergency funds, you may lose money. The three-fund option is unsuitable for most people, but it is worth discussing.
Read about the Three-Fund Portfolio here. It’s the backbone of the Freelancer Finance i401k and Roth IRA. Inside those accounts, which are very long-term, it is rock solid.
Why are we talking about it?
The money in your emergency account will sit there for much of your lifetime, and hopefully, you’ll never use it.
$50,000 emergency fund for 30 years if you never touch it:
HYSA: at an average of 3%, it will grow to $121,000
Three-Fund 60/40 portfolio: earning 7% will grow to $380,000
If the current interest rate or Treasuries rate is high, stashing a lot of cash in a HYSA isn’t too bad. As I write this, at the start of 2025, the rates of HYSA accounts and U.S. Treasuries are around 4%. The return on Three-Fund Portfolio (60% stocks, 40% bonds) long-term is around 7%.
But if the HYSA rate is 1%, that’s not so great.
Points to consider:
There will be a lot more volatility in a Three-Fund portfolio.
If the market is crashing and you need to sell the ETFs to use the emergency funds, you may make a loss. However, that loss is a tax deduction of up to $3,000 that year, with the rest deferred and claimable in subsequent years.
The portfolio's 40% bonds portion is safe and not very volatile.
Selling part of the portfolio to use the funds will most likely result in only a 15% capital gains tax on any profits, not your personal tax rate, which is likely to be 25-30%.
Again, the TFP as an emergency account is not for most people, but now you know it’s an option!
Me: where is my emergency fund?
Me: 80% of my emergency fund is in VBIL to avoid D.C. state tax. It’s in a separate account inside my Schwab account (I have a Traditional i401k, a Roth i401, a Roth IRA, and a taxable brokerage account, all under the same login.)
The remaining 20% is in Maxmyinterest.com. I already have a decent taxable brokerage account with TFP that I can sell and get access to the cash, so I don’t need to add any more into that for an emergency fund.
Wrapping this up.
As a freelancer, your emergency account is the first thing you should establish. Next, start banging money into your i401k, or Roth IRA if you are primarily W-2. This is how we get rich, not by working but by investing.
The above are some of the options for your emergency account. There may be others. Buying fine wine and storing it in your cellar is not one of them.
Increase the size of your fund as your cost of living increases due to mortgages, having kids, etc.
Financial stress is the worst. It affects your relationships and your health. Be prepared so you are chill if the shit hits the fan.
Comment below if you have other options to suggest or if you have questions!
If you open an account with Maxmyinterest.com or an Individual Schwab account, they pay me a small affiliate fee. I put it in my i401k!