Emergency Fund in Taxable Brokerage Account Withdrawals

My wife and I were just talking about this today (though within Fidelity). We've decided to finally just create a 'cash' account labeled 'emergency fund' to put our dedicated e-fund into ('invested' in SPAXX-essentially a high interest savings fund). We were discussing how much to keep in there as 'cash' versus saying 'enough is enough-any additional goes into the brokerage account'. In our view, our true 'Emergency Fund' has 3 (or technically 4, I guess) parts to it: 1) extra money sitting in our checking account-just enough to smooth over paycheck to bill timing that sometimes gets 'off' a little due to timing 1a) $1000 sitting in the same bank's 'savings' account-as a form of protection in case #1 failed to cover a temporary 'over draft' of sorts 2) the funds I was referring to at the beginning of my post in the Fidelity 'Cash' (SPAXX) account and 3) our brokerage account. All those accounts are shown in our budgeting software as dedicated locations so I can quickly collapse them all under 'savings' and see what the total is at a given moment-even though they're broken up between 2 institutions and 4 different accounts.

To answer your question directly: my opinion is that you should set a certain 'fixed' amount that stays in your cash portion at Vanguard, discuss what that value should be at a max, and then agree to just put anything over that into your brokerage account. The 'cash' portion (VMFXX) will grow a steady, but lower interest rate and basically protect against inflation, and the brokerage account can be free to sit and bounce around with market swings. When you 'need' to access funds, then do so from the VMFXX portion first and replenish that at your leisure. In a true 'emergency' then you can go further and access your funds in your brokerage account if needed.

That's how my wife and I are thinking about things anyway. Hope that helps.

I'm of the opinion, that a dedicated "emergency fund" is something that is needed and useful in the beginning of your FI journey especially folks burdened with debt and new to saving/investing.

But once you've passed a certain threshold, (maybe 200K?) an emergency fund isn't necessary anymore. The way you operate is you handle unplanned expenses with a credit card or by dipping into the bond portion of your portfolio. Some portion of your investments should be in money markets/short term treasuries. These are stable and you can dip into them to pay unplanned expenses then replenish over time. No need to further complicate things with another dedicated account for this.

Possibly overthinking a little, and I did too when I was first doing the same thing. We all go through that as we get settled in with something new like this. I had ages of a mindset that my bank's checking and savings were for my working money, and TBA was just long-term. TBA is still mostly long-term, but shifting to a money market fund inside our TBA has been a really solid move for our family.

We've done a little like you. We keep a nominal working amount in our checking, and a few grand in a savings account at the same bank. That's our day-to-day "working money" for typical bills. Beyond that, we keep additional funds, more along the short-term/rainy day variety, in VUSXX in a TBA at Vanguard. That's essentially their money market fund, and there's not the same loss/gain/lots consideration that you'd have for equities.

In our experience, there's been no friction or issue transferring funds from this to our bank. It takes a couple of business days, then is there when we need it.

Keeping more of this money that you don't want in stocks and want more liquid is a really common use. VMFXX (the settlement fund, and VUSXX are both really solid. Depending on your state and situation, there could be tax advantages to having more of the funds there than in a bank too.

The way you talk about using the funds sounds to me like you're on the right track. Have you had a chance to look over this resource on Vanguard yet? It helped me a lot when I going through a similar change like you. I've personally preferred VUSXX for the lower expense and slightly higher yield, but lots of other folks just use the VMFXX settlement fund too:

Money market funds for short-term investing goals | Vanguard

investor.vanguard.com

So, your question isn't so much about "money located in a taxable brokerage" versus "money located in a HYSA". Rather, it is about money invested in some non-cash instrument (equities like VTI in your case) versus cash (or cash equivalents like VMFXX).

If the VMFXX yield (currently 3.86%) equals or exceeds your HYSA interest, then you could just move the cash over, leave it in VMFXX (which is a cash equivalent) and be done with it.

There are a variety of concerns with "investing" your emergency fund. One big overarching concern is whether selling and incurring a capital gain at an unexpected time will create tax complications for you. This could be something as simple as "I planned to harvest $X capital gains this year and this unexpected gain has potentially altered that plan", to "this unexpected gain has pushed me over some income threshold and I know owe a bunch more tax, lost some deduction, or lost some other big tax benefit I was counting on."

The other big overarching concern is how you will feel dipping into the emergency fund if the market is down 20%, 30%, or even 50%.

If those things concern you, then it might be best to leave the entire emergency fund in VMFXX and avoid the complications.