My Emergency Fund Dilemma
Over a month ago I decided to make a change with my emergency fund. Before I get into how I came to have a crypto emergency fund let’s clear up what an emergency fund is. The emergency fund is the allocation of money saved for those unfortunate times when an unexpected expense rears its ugly head, or you unexpectedly lose your primary source of income.
An emergency fund is money you set aside for, as it clearly states in the name, emergencies. It should typically be enough to cover your expenses for 3-6 months, depending on your financial situation.
This emergency fund should be in a liquid form, meaning it can be accessed quickly and without any penalties. This is important because if you need to access this money in an emergency, you want to make sure that you can get to it right away.
Your emergency fund should also be stable in its value with minimal to no risk of the value going below its required amount. The last thing you want is to need the $2,000 you saved for an emergency for example to only be $500 when you go to withdraw it. This is why you don’t want your emergency fund to be invested in the stock market or something like Bitcoin. Your emergency fund could be the one thing that helps you survive an unexpected job loss, medical emergency, or natural disaster. This is why most recommendations are to have your emergency fund in a savings account that’s “safe” from volatility and the risk of loss.
On the other hand, it’s understandable to want to make the most of these savings which are upwards of $15,000 in my case. I struggled to see that money sit in savings that only returned a .05 percent APR, so I sought out ways to make higher returns without volatility and with little to no risk.
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Crypto Emergency Fund with Stable Coins
So, as I mentioned above this new emergency fund safe haven had to meet two main criteria:
- Must not be volatile to price movements. Meaning if I deposited $100 today, I’d be guaranteed to withdraw $100 tomorrow.
- There must be little to no risk of losing the money in the emergency fund. Meaning that the potential or probability of me losing 100% of my funds was low.
- Must earn 3x greater returns on the money in the emergency fund than my bank.
My search for a solution led me to settle on cryptocurrency, specifically stable coins.
A stable coin is a cryptocurrency that is pegged to the price of another asset, such as gold or the US Dollar. This means that its value doesn’t fluctuate with market volatility. Stable coins are a good way to ensure that people have a way to protect their money from the volatility of cryptocurrencies as you may know could be moderate to extreme and is in no way good for something like an emergency fund.
In my opinion, the stable coin you choose is important. The best stable coin is back 100% by the asset it’s pegged to and/or is insured. To be transparent I went with GUSD which is a Gemini Exchange stable coin when I started but I intend to switch to USDC in the future.
Earn More with Crypto Yields
The final piece to using a stable coin is earning a higher yield or APY that translates to a higher APR on the value of the stable coin. You can find a good explanation and definition of APY and APR here.
There are many exchanges that offer an earn product. As mentioned, I initially went with Gemini’s stable coin so, in turn, I leveraged Gemini’s Earn product on GUSD which offers the highest yield on the platform. Other companies like BlockFi, Celsius, Crypto.com, and so on offer similar products that have different returns for different coins and that have different payout schedules all of which impact the compounding returns that you can get on your money.
I went with Gemini because I feel the company, exchange, and products are secure and that the company is a “safe” bet. Not to mention the user experience on their portal and mobile app are simple and intuitive.
So, at the time of my leveraging Earn with GUSD, the APY was 8.05% well exceeding the .05% APR in the saving account I used for my emergency fund.
There is a risk to using Earn because they’re essentially using your funds to loan out to others. But in contrast, the banks are doing the same thing. The main difference and these are big differences, is that banks are FDIC insured and regulated. So, it’s important to read how the earn product works in order to understand the safeguards the company has in their lending practices to help understand the risk and probability of losing all your hard-earned cash.
To reduce some of the risks that come with crypto I keep $2,000 at the bank as part of a hybrid emergency fund approach. In summary, I was able to find a solution to my emergency fund dilemma that helped me sleep at night and earn more money. This is not for everyone so don’t blindly follow what I did. This is not financial advice so do your own research and consult a financial expert before making these types of decisions.