How to Optimize Your Emergency Fund

DISCLAIMER: I am not a financial advisor and this is not financial advice. Do your own research and consult with a qualified professional before investing.


I split my emergency fund 50:50 between:

This gives me the following benefits:

  • instant liquidity (HYSA)
  • exposure to rate increases (HYSA)
  • inflation protection (I-bonds)
  • deflation protection (both)
  • tax deferred growth (I-bonds)
  • zero market risk (both)

This split allows me to hit all of my goals for an emergency fund, and is less risky than just holding cash – which could be severely devalued by inflation.


The goal I have for my emergency fund is to mitigate the risk that a black-swan-type event will wreck me financially. What I want out of it is a guarantee that I will be able to take care of my family’s basic needs no matter what happens. Even if I get fired from my job without severance and my kid requires an emergency organ transplant at an out-of-network hospital the same week that the stock market crashes – even then, I want to be okay.

Explicit goals I have for an emergency fund:

  • liquidity: I want to be able to spend it ~instantly if needed
  • inflation protection: I want to still be able to pay for my basic needs even if the government quadruples the monetary supply overnight
  • deflation protection: I don’t want my emergency fund to shrink if the cost of goods goes down
  • zero market exposure: I don’t want to have to worry about withdrawing from the fund at the wrong time
  • tax deferred growth: I don’t want taxes to eat away at my emergency fund

It’s non-trivial to construct an account that checks all of these boxes.


HYSAs are just what they say: savings accounts that offer (relatively) high yields. In the current rate environment, that translates to ~0.5% APY. For context, that is 10x higher than what Bank of America pays on it’s savings accounts, and 50x higher than what Wells Fargo pays.

Before you ask: yes, they are FDIC insured. They have no fees or minimum deposits. It is easy to quickly withdraw money from them. They are offered by legitimate banks (e.g. Goldman Sachs). Rates do vary – e.g. about a year ago, they were 1.25% – but that is part of the attraction. In a rising rate environment, HYSAs actually increase their rates.

I use Marcus (owned by Goldman Sachs) as my HYSA. If you’re interested, here is my referral code which will give you an additional 0.2% APY up front. Or, if you’d rather not use that, here is a link to go through the process on your own.


I-Bonds, a.k.a. Series I Savings Bonds, are government-issued debt that earns interest based (in part) on the Consumer Price Index, which is a measure of the rate of inflation. When inflation is high, the bonds earn more money. When inflation is low/negative, the bonds earn less money. But the rate on the bonds cannot go negative, so it’s not possible to lose money.

Benefits of I-Bonds:

  • inflation protection
  • deflation protection
  • they grow tax-deferred for up to 30 years
  • can be redeemed prior to maturity at any point after 12 months

This last benefit makes I-Bonds a considerably better choice than Treasury Inflation-Protected Securities (TIPS), which is another US-issued investment vehicle that offers inflation and deflation protection. Unlike I-Bonds, however, TIPS cannot be redeemed prior to maturity. So if you ever needed to dip into your emergency fund, and you held TIPS, you’d need to sell them on the secondary market – which, depending on the market conditions, means you could be at risk of losing some of your principal. This is not a risk of I-Bonds. As long as you’ve held them for a year, you can redeem (not sell) them and get all of your money back, plus interest.

Drawbacks of I-Bonds:

For these reasons, it makes sense to slowly incorporate I-Bonds into an emergency fund, e.g. by buying $1k in I-bonds each month until you hit your 50% allocation target, removing the same amount from your HYSA once they can be redeemed.


It will never be possible to mitigate every risk. (If the US Government collapses, e.g., government insured savings accounts and government-issued debt won’t do anyone much good.) But by combining an HYSA with I-Bonds, I believe it is possible to substantially improve the utility of a security fund.