Emergency Fund or Stocks When Inflation Cools? Smart Move

The hidden cost you don’t see: forced selling at the worst time

There’s a line item in personal finance nobody budgets for, but it bites hardest: being forced to sell investments at the worst possible time becuase cash wasn’t ready when life showed up. Job hiccup, big medical bill, the HVAC that dies during a heat wave, these don’t sync politely with markets. They tend to crash your calendar right when stocks are down. And with inflation cooling this year (BLS has headline CPI running in the mid‑2% range over the summer of 2025, after averaging about 3.4% in 2024), the obvious debate is back on the table: should the next dollar go to your emergency fund or into stocks?

Here’s the uncomfortable part I’ve seen over two decades sitting on a trading floor: forced selling is a real, measurable cost. It turns a temporary paper loss into a permanent hit. Not just because prices are lower, but because the mechanics stack against you in stress moments:

• Capital gains timing: If you sell early to raise cash, short‑term gains are taxed at ordinary income rates (top federal bracket is 37% in 2025, plus state). If you sell late, you might be realizing losses right at the trough, no tax magic fixes the missed rebound.
• Spreads and slippage: When volatility spikes, trading costs widen. During acute stress (March 2020 is the textbook case), bid‑ask spreads expanded materially, even in large ETFs. In single stocks, a 5-15 bps spread can balloon, and your “paper” loss quietly grows into a bigger realized one.
• Sequencing risk: You’re withdrawing at low prices. Historically, the S&P 500’s average intra‑year drawdown from 1980-2023 is around 14% (JPMorgan long‑run data). Liquidity gaps love to appear in those exact windows.

Which gets to the core question for September 2025: with inflation cooling and cash still paying something real (online savings and T‑bills are hovering around the mid‑4% APY neighborhood), is it smarter to feed the emergency fund or chase equity returns? The honest answer is it’s not really “cash vs returns.” It’s insurance (cash) vs risk‑adjusted returns (stocks). A dollar in cash is buying you optionality, freedom to not sell at -12% just to cover a deductible. A dollar in stocks is buying you expected return, yes, but with the condition that you can sit through the dips without tapping it. Different jobs.

And the timing wrinkle matters right now. Markets rallied earlier this year, then chopped around on soft‑landing vs. slow‑down worries, and earnings revisions are still, well, mixed. If your liquidity plan is thin, the next drawdown (there’s always a next one) is when the compounding damage shows up: sell low, miss the rebound, re‑buy higher, pay tax on the wrong gains. I’ve watched it happen in real life accounts. Too many times.

Quiet cost, loud impact: An underfunded emergency reserve converts volatility into a tax‑ and spread‑laden expense at exactly the wrong moment.

What you’ll get from this piece: a practical way to size your emergency buffer (not one‑size‑fits‑all), how to weigh today’s cash yields against your equity mix, and where to draw the line between peace of mind and performance. I was going to say something about opportunity cost here and then remembered a client in 2020 who sold right before the snapback… anyway, the point stands.

Inflation cooled, so cash isn’t trash (for now)

Here’s the math that changed. The U.S. CPI year-over-year rate peaked at 9.1% in June 2022 (BLS). By December 2024, CPI YoY was 3.4% (BLS). That shift alone flips the real return equation for cash. Real return is just nominal yield minus inflation (fancy words for: what you actually keep after prices rise). In mid‑2022, a decent money fund earning, say, 2% against 9% inflation was a −7% hit in purchasing power. By late 2024, top online savings accounts around 4-5% APY, with CPI at 3.4%, meant positive real carry, even after some taxes depending on your bracket. Not amazing, but not bleeding out either.

And policy rates matter. Pre‑2022, the policy rate lived near zero for a long stretch, which kept savings yields basically comatose. Post‑2022, policy rates have stayed elevated versus that era, which continues to support money market funds and T‑bill yields this year. Quick reality check from last year: in 2024, many high‑yield online savings printed ~4-5% APY, and 3-6 month T‑bills frequently traded with yields in the 5% zip code. This year, levels wiggle week to week, but they’re still nowhere near the pre‑2022 “0‑point‑nothing” world. That’s the backdrop for the emergency‑fund conversation.

So what’s the practical takeaway? The opportunity cost of holding cash is smaller than it was in 2021-2022. Back then, you were losing ground fast in real terms while equities were volatile and bonds got hit. Today, cash’s real drag is lighter, and occasionally positive, which changes the emotional and arithmetic calculus. My take (subject to revision, because humility beats bravado in markets): if you’ve been running an ultra‑thin liquidity cushion because “cash is trash,” you don’t get bonus points for bravery, you just carry more tail risk.

• Emergency funds hurt less: A 4-5% APY environment in 2024 against 3.4% CPI (Dec 2024) is a far cry from 2022’s −real yields. The “cash penalty” is reduced.
• Behavior beats basis points: If a sturdier buffer keeps you from selling equities into a drawdown, the saved mistakes often dwarf the extra 50-100 bps you chased elsewhere.
• Short bills still pull their weight: With policy rates still elevated vs. pre‑2022, T‑bills remain a credible parking spot for near‑term needs (3-12 months). Just mind taxes and state exemptions.

Plain english version: In 2022, cash felt like a melting ice cube. By late 2024 and into this year, it’s closer to a fridge, keeps things stable, not a gourmet meal, but you’re not spoiling value by default.

One more nuance. Real returns depend on your inflation basket and taxes. If you live in a high‑cost city and your spending is heavy on services that ran hotter than headline CPI, your personal inflation may be higher. And if you’re in a high bracket, taxable savings at 4-5% minus taxes might be closer to flat after inflation. But compared with 2021-2022, the gap has narrowed. That’s enough to reconsider how much cash you hold without feeling like you’ve sabotaged long‑term performance. I’ve shifted my own mental model the same way, still allergic to idle cash, just less dogmatic when the real math isn’t punishing.

Build the right-sized safety net, not a museum of idle cash

Rules of thumb are fine for napkin math, but your emergency fund should match your actual risk. Start with a baseline and then tweak. The baseline is simple: 3-6 months of essential expenses (rent/mortgage, food, utilities, insurance, transportation, childcare). If your income is lumpy, your job is tied to a cyclical industry (construction, media, ad‑tech, commodities, you get the idea), or you’re a single‑earner household, nudge it up to 6-12 months. I’ve advised plenty of folks who sleep better at 9 months even with stable jobs, totally reasonable. Just don’t drift into hoarding because it “feels safe.” Safety has a cost.

Now, how to hold it so it’s accessible and still earns something. A tiered setup works in practice, not just in spreadsheets:

• Tier 1: Checking buffer (about 1 month). This is the shock absorber for timing hiccups. Keep it where your bills are paid. You’ll earn peanuts here and that’s fine, speed beats yield in this tier.
• Tier 2: High‑yield savings or a conservative money market (2-5 months). FDIC/NCUA‑insured accounts tracked the rate hikes and, for most of last year and this year, have generally paid above 4% APY at reputable online banks. Rates shift, but this tier should be liquid T+0 or T+1 with no loss risk.
• Tier 3: Short T‑bills for the rest (ladder 4-13 weeks). Buy directly at TreasuryDirect or in a brokerage account; interest is federally taxable but state‑tax free. A rolling ladder means something is maturing every week or two. Earlier this year, 4-13 week bills were frequently auctioning near the high‑4% to ~5% area, solid for true cash. If rates move down later this year, you’ll roll into lower coupons, but you’re not taking duration risk.

Quick pause, size isn’t just about months. It’s about known spikes and backup options. Consider:

• Insurance deductibles: Health, home, auto. If your family max out‑of‑pocket on health is $8,000, your fund should be able to swallow that without panic.
• Credit capacity: Untapped credit cards or a HELOC can bridge a short gap. I treat these as contingency, not Plan A, but they count. If your card limits total $25k, you may keep Tier 1 leaner, if you’re disciplined.
• Caregiving responsibilities: Aging parents, kids with special needs, or a partner between jobs, these increase both the probability and severity of cash calls. That usually argues for the higher end of the range.

On I Bonds: they were headline news in 2022 because the Series I Bond composite rate hit 9.62% from May-October 2022 (Treasury data). Rates reset every six months and fell meaningfully afterward as inflation cooled; by late 2023 and into 2024, new‑issue composite rates were several percentage points lower. They still have merits, state‑tax free interest, inflation linkage, but they’re not first‑line emergency cash. Why? You can’t redeem in the first 12 months, and if you sell before five years, you forfeit three months of interest. So, use I Bonds for longer‑term reserves (think Tier 3.5, beyond your T‑bill rung), not the money you might need next Tuesday.

One thing I should clarify from earlier: when I say “don’t hoard,” I don’t mean run your checking to fumes. I mean don’t let 18 months of expenses rot in a non‑interest account because you’re avoiding a 5‑minute Treasury auction order ticket. If you’re sitting on large sums, at least spread across insured institutions (FDIC/NCUA coverage is $250,000 per depositor, per bank, per ownership category), or use a brokerage sweep program that parcels cash among multiple banks. Money markets that invest in government securities are generally stable, but read the disclosure, there’s a world of difference between government and prime funds.

Last practical tip: automate the ladder and the refills. Set direct deposit rules so Tier 1 stays topped up, sweep the overflow to Tier 2 weekly, and schedule T‑bill purchases to keep maturities staggered. If you lose income, you’ll draw in reverse: maturities and savings first, then checking. It keeps you liquid, keeps you earning, and stops the emergency fund from turning into a museum of idle cash. I learned the hard way in 2008 that liquidity isn’t a nice‑to‑have; it’s oxygen.

Bottom line: Size by risk (3-6 months base, 6-12 if vulnerable), then tier it: 1 month in checking, 2-5 in high‑yield savings or a conservative money market, and the balance in a 4-13 week T‑bill ladder. Add I Bonds only for the longer reserve tier. Simple beats perfect.

When stocks should get the next dollar

Once you’ve hit the minimum cash floor we just sized, your oxygen tank, you earn more expected utility by sending the next dollar to diversified equities rather than hoarding extra cash. Not every dollar; the next dollar. Cash is a tool, not a destination. Historically, the tradeoff is clear: over long spans, U.S. large‑cap stocks have paid you for taking risk. The Ibbotson SBBI data shows that from 1926 through 2023, U.S. large caps returned roughly 10% a year nominal on average, while 3‑month T‑bills did about 3-4% over the same stretch. The gap is the equity risk premium. The toll is volatility.

Two reminders about that toll so nobody emails me later: markets wander. Since 1980, the S&P 500 has had an average intra‑year drawdown of about 14% (J.P. Morgan Guide to the Markets, 1980-2023). You still ended most of those years positive. But not all. If your time horizon is under three years, stocks are a maybe. Under one year? That’s a no, in my book, keep that money in your ladder and sleep well. Five years or more, especially for retirement or college savings that’s still a bit out? That’s stock territory.

So what actually triggers the pivot from cash to risk assets?

• Cash floor met: Tier 1 and Tier 2 are topped off, and the T‑bill ladder for your reserve months is humming. No cheating here. If you’re still rebuilding Tier 1 after a surprise expense, you are not in the “next dollar to stocks” phase yet.
• Job stability: If your income is steady, W‑2 with a durable employer or a contractor with multi‑month backlog, and your industry isn’t in the middle of layoffs, you can shorten the cash window. If your job is wobbly, extend the cushion and slow‑roll equity contributions.
• Time horizon: Money you won’t need for at least 5 years is a candidate for equities. If there’s a 2-3 year objective (down payment, tuition tranche one), keep that funded in safer buckets.
• Tax‑advantaged space first: If you have unused 401(k), IRA, or HSA room this year, that’s the on‑ramp. Once the emergency floor is met, prioritize those accounts. An HSA with index funds is sneaky‑good for long‑term compounding because qualified withdrawals are tax‑free.

One thing that trips people up this year: cash actually pays something again. Yields are still solid as we sit here in September 2025, and inflation has cooled from the 2022 peak, which makes cash feel cozy. But cozy isn’t compounding. If expected stock returns are ~9-10% nominal over full cycles and your cash or T‑bills are in the mid‑single digits, the math still favors equities for the long dollars, assuming your liquidity needs are already solved.

About entry strategy. If valuations feel stretched, reasonable folks can disagree, use dollar‑cost averaging for the next 6-12 months and keep it automatic. The behavior win beats any spreadsheet win I could show you. Automate contributions on payday, funnel them to a low‑cost diversified equity fund (Total U.S., Total International, or both), and only rebalance if your target mix drifts beyond bands you set now. I have a simple 5/25 band I’ve used since 2010; it saved me from myself more than once.

And yes, you can hold two thoughts at once: DCA new money while also reinvesting dividends and keeping your strategic allocation intact. If the market sells off 10-15%, which it does with annoying regularity, your schedule keeps buying. If it rips higher, you still participated. Either way you avoided the “I’ll wait for a better entry” trap that quietly turns into sitting in cash for a year. I’ve done that. Regret tastes stale.

Quick checklist before you redirect the next dollar to stocks (we’ll come back to bonds in a minute):

1. Emergency floor funded per your risk tier, including the T‑bill ladder.
2. High‑interest debt (anything above, say, 7-8%) knocked out or at least contained.
3. Job/income visibility for the next 6-12 months is decent; severance or backup plan identified if not.
4. Tax‑advantaged accounts open and set to automatic contributions.
5. Time horizon ≥ 5 years for equity dollars.

Bottom line: After the cash floor, the next dollar usually belongs in diversified equities, especially inside tax‑advantaged accounts. Expect ~9-10% long‑run nominal returns with bumpy years, volatility is the toll. If markets feel pricey, DCA over 6-12 months and make it automatic so your plan survives your mood.

Make cash work smarter: taxes, accounts, and liquidity traps

Emergency cash isn’t just “a pile in checking.” It’s a mini-portfolio with one job: be there. Second job: don’t leak yield to taxes or friction. You want boring, but not lazy-boring. Subtle difference.

Start with the obvious tax edge. Treasury bills are exempt from state and local income tax. For higher earners in places like California (top state rate 13.3%) or New York (10.9% state, plus NYC 3.876%), that exemption matters. If your bank’s high-yield account shows 4.50% APY, the after-tax yield for someone in a 37% federal and 10% state bracket is roughly 4.50% × (1 − 0.47) ≈ 2.39%. A comparable T‑bill at, say, 4.30% would be hit by federal only: 4.30% × (1 − 0.37) ≈ 2.71%. Different inputs, same punchline: for high state taxes, T‑bills can beat bank APYs after tax. I’ve seen this math surprise people in April more times than I can count.

Okay, but what about daily access? Government money market funds (MMFs) that hold Treasuries and agency securities tend to have very low credit risk and same‑day liquidity. The SEC’s Rule 2a‑7 requires money funds to maintain at least 10% daily and 30% weekly liquid assets, with weighted average maturity typically under 60 days, so they’re built for stability. Many brokers let you redeem MMFs same day if you hit the cutoff (often ~3 p.m. ET), though settlement can post T+1. Key detail: check your broker’s sweep rules. Some sweep idle cash into bank deposits (FDIC‑insured but lower yield), not into a higher‑yield government MMF. That gap adds up over a year.

Do you need both T‑bills and an MMF? Probably. I use a small instant bucket (broker sweep or checking), then a core bucket in a government MMF, then a ladder of 4-13 week T‑bills rolling every week or two. In a real emergency, you tap the liquid bucket day 1, then unwind the rest as needed. Not perfect, but it keeps the lights on without panic‑selling stocks on a red day.

Two more levers that aren’t front-of-mind but matter:

• Roth IRA contributions (not earnings) can be withdrawn tax‑ and penalty‑free anytime. Use this only as a backstop, not your primary emergency fund. Why? Opportunity cost. Roth space is scarce and compounds tax‑free; once you pull cash, getting that space back isn’t trivial. I’ve seen too many people raid Roths for avoidable cash hiccups and regret it.
• HSAs can be a stealth reserve for qualified medical expenses. If you save receipts, you can reimburse yourself years later for past expenses, no tax. For 2025, the IRS HSA contribution limits are $4,300 self‑only and $8,550 family (plus a $1,000 catch‑up at 55+). Invest prudently here; I tilt to short‑duration or a government MMF inside the HSA for the cash portion, then own risk assets only for the long horizon medical bucket. And yes, that’s a real thing, I’ll come back to how I size that split later.

Credit and insurance guardrails: keep an eye on FDIC/NCUA limits, $250,000 per depositor, per institution, per ownership category. Title accounts correctly (individual, joint, trust) and spread across institutions if you’re well over the cap. People forget that broker “bank sweep” programs often spread across multiple partner banks; read the list and the per‑bank allocation. It’s not exciting, but it’s how you avoid Cinderella at midnight problems.

Now, the annoying part. Liquidity looks simple until settlement rules, cutoff times, and employer payroll hits collide with a Friday bank holiday. Ask me how I know. Build a buffer where at least one week of expenses sits in instantly spendable cash, then graduate the rest up the yield stack. If you’re improve down to the last basis point, you’re probably doing it wrong. The goal is resilience, not a beauty contest.

Where are rates right now? This year, short T‑bill yields have hovered in the ballpark where the state‑tax exemption still matters for many coastal high earners, even as headline inflation cooled from last year’s prints. I won’t pretend to forecast the next Fed move, intellectual humility beats false precision, but the structure holds: taxable bank APY vs. state‑exempt T‑bills vs. liquid MMFs, layered to match actual emergencies.

Bottom line: Keep emergency cash simple, layered, and tax‑aware. Use a small instant bucket, a government MMF core, and a short T‑bill ladder. Know your broker’s sweep, mind FDIC/NCUA caps, and treat Roth/HSAs as backstops, not piggybanks. If it only works on a spreadsheet, it won’t work on a Sunday night.

Put it to work now: a 2025 decision checklist you can actually use

Quick framing for this year: inflation isn’t the fire drill it was. After peaking at 9.1% year-over-year in June 2022 (BLS), headline readings cooled through last year and into 2025, while short T‑bill yields stayed respectable in the mid‑single digits for much of the period. That mix argues for keeping a real cash buffer, but not letting every new dollar sit idle. Here’s the simple routing guide I give family, and frankly, follow myself.

1. If you’re below 3 months of essential expenses in true cash (instant savings + government MMF + T‑bill ladder): every new dollar goes to the emergency fund until you hit 3 months. No exceptions. Why? Markets can fall faster than you can update a spreadsheet, the S&P 500 dropped about 34% in February-March 2020, peak to trough, in barely over a month.
2. From 3 to 6 months: split new savings 50/50 between cash tiering and a broad stock index fund (think total market or S&P 500). Cash still earns okay, short T‑bills in 2025 have lived around the 4-5% zone, and the state‑tax exemption can matter. A 5% T‑bill that’s exempt from, say, around 7% state income tax can edge a 5% taxable bank APY for coastal filers. Not perfect math, but you get the idea.
3. Above 6 months: direct most new dollars to stocks and tax‑advantaged accounts first (401(k), Roth IRA, HSA). Maintain a small ongoing T‑bill ladder (say 3-6 months of extra cushion) so you’re not forced to sell equities in a bad tape. Remember 2022: the S&P 500 finished the year down 19.4% and the Bloomberg U.S. Aggregate Bond Index fell 13.0%. Both were red at the same time. That’s the scenario you’re insulating against.

• Stress test: Could you still cover 3 months of expenses if stocks dropped 25% tomorrow? If the honest answer is “maybe,” you’re light on cash. 2020 and 2022 weren’t outliers so much as reminders that drawdowns arrive fast.
• Rebalance rules: once a year or after big life changes, new job, home, baby, marriage, a startup equity event. Don’t micromanage monthly; it invites mistakes. I’ve tried. Didn’t help.
• Hands off the emergency fund: no raiding for vacations, gadgets, or spec bets. If it wouldn’t be prudent to use a credit card for it, it probably doesn’t deserve emergency cash either. Harsh, but it works.
• Automation beats willpower: set direct deposits to route by default, some to a high‑yield savings/MMF, some to a brokerage index fund, some to the T‑bill ladder. Fix the pipes once; stop tinkering.

One small nuance I almost skipped: taxes. If you’re in a high‑tax state, state‑exempt T‑bills can improve your after‑tax yield without any heroics. If you’re in a no‑tax state, a top online savings account or a solid government money market fund is fine. I was going to get into duration tilts here, but, no, keep the reserve short. “Emergency” and “duration risk” don’t mix.

Bottom line for Q3 2025: build to 3 months of essentials first, grow to 6 with a 50/50 split, then let stocks and tax‑advantaged accounts do the heavy lifting while you maintain a modest T‑bill ladder. Rebalance annually, ignore noise, and stress test against a quick 25% market drop. If that plan survives your Sunday‑night gut check, it’s the right plan.

Bring it full circle: protect the downside so the upside counts

We started with the enemy: forced selling. It’s the classic “sell low because life happened” problem. Job wobble, roof leak, kid needs braces, whatever, markets don’t stop to ask if it’s a good time for you to raise cash. Which is why the first dollars belong to resilience. An emergency reserve isn’t a bet against stocks; it’s the insurance that keeps you from liquidating stocks when they’re 20% off and your stomach is already in your throat.

And here’s the good news, at least relative to 2022. Inflation is cooler, which means cash drag isn’t the same tax on your plan it used to be. The Bureau of Labor Statistics reported headline CPI peaked at 9.1% year-over-year in June 2022. Back then, the FDIC’s national savings rate was roughly 0.1% for much of 2022, so holding cash felt like lighting money on fire. Last year, and continuing this year, the tradeoff changed. In 2024, 3‑month T‑bills hovered around ~5% for much of the year (Treasury data), and in 2025 many top online savings/MMFs are still paying roughly 4-5% APY, with 3‑ to 6‑month T‑bills sitting in the mid‑4s to low‑5s. Exact quotes move week to week, but you get the point: the carry on cash is decent while inflation is way off the 2022 highs.

So, is a bigger cash buffer “leaving money on the table”? Sometimes. But the more honest framing: it’s buying flexibility at a time when that flexibility is not wildly expensive. If CPI has decelerated into the low‑3% range this year and your reserve earns near 5% pre‑tax in a money fund or T‑bills, the real drag is small to slightly positive, depending on your tax rate. In 2022 that math was ugly; in 2025 it’s not. I’m simplifying, yes, state taxes, brackets, and liquidity rules matter, but the direction is right.

What does that mean for allocation? It means keep the floor firm, then press the gas where compounding pays: equities and tax‑advantaged accounts. The reserve’s job is to absorb the shock so your stock allocation can ride through it. No heroics, just mechanics. I’ve seen too many portfolios break because a layoff led to selling a broad index fund after a 25% drawdown. Could that be avoided with three to six months in a T‑bill ladder? Often, yes.

Two quick guardrails I keep taped to my monitor (okay, metaphorically):

• Emergency cash is insurance, not a market call. You’re reducing sequence‑of‑returns risk, especially during the bad stretch at the start of a bear market, so your long‑term equity returns actually show up in your account, not just in a backtest.
• Cooling inflation makes the tradeoff tolerable. 2022 was 9% CPI and sub‑1% savings, painful. 2025 is cooler inflation and 4-5% cash yields, manageable. Different world, different math.

Once the floor is set, let equities do what they do: compound. Will there be 10-20% pullbacks? Yes. Will your emergency fund feel “idle” during bull runs? Also yes. That’s okay. The rainy‑day fund can’t be a fair‑weather friend. If you raid it because markets are calm and you’re bored, been there, regretted that, you’re re‑inviting forced selling when the next shock hits.

Am I oversimplifying a messy reality with tidy buckets? A bit. There’s always gray, two incomes vs. one, industry risk, RSUs, variable bonuses, kids. But the hierarchy holds: protect the downside first, so the upside actually counts. With inflation cooler and cash still earning, the cost of resilience has dropped. Use that window. Then, with your Sunday‑night gut check passed, let the equity sleeve do the heavy lifting and stop tinkering with the pipes.

Final word: Build the floor (3 to 6 months, short and liquid), keep it paid (automatic), and let compounding work. Insurance first; growth next. That’s how you avoid selling low, and how you give your future self a break.

Frequently Asked Questions

Q: How do I decide whether my next dollar goes to my emergency fund or stocks right now?

A: Quick rule: if you’ve got less than 3 months of essential expenses in cash, feed the emergency fund first. Between 3-6 months, split new savings 50/50 with stocks. Over 6 months and stable job? Tilt more to stocks. And if you’ve got high‑interest debt (≈10%+), knock that down first.

Q: What’s the difference between keeping 6 months of expenses in cash earning ~4-5% versus investing it while inflation’s in the mid‑2% range this year?

A: Cash at ~4-5% APY (online savings or T‑bills) is delivering a small positive real return with CPI in the mid‑2% this summer of 2025. After taxes, call it 3-4% for many folks, still “real-ish.” The tradeoff is opportunity cost if markets rally. But the purpose of this cash isn’t return; it’s insurance against forced selling. Selling stocks during a typical drawdown (the S&P’s average intra‑year drop was ~14% from 1980-2023 per JPM data) can lock in losses and trigger taxes. Stocks have higher expected returns over multi‑year horizons, but sequence risk kills you if withdrawals happen at lows. My take: park 3-6 months in cash as runway, invest the rest according to plan. If your income is volatile or you’ve got kids/house HVAC roulette, push toward 6-9 months.

Q: Is it better to tap a HELOC or credit card than sell stocks when markets are down?

A: In a pinch, a HELOC can be the lesser evil versus panic‑selling. HELOC rates this year are often in the 8-10% range (prime-based), which isn’t cheap, but it can be cheaper than realizing a 12-15% portfolio drawdown plus short‑term capital gains taxes if you’re selling winners. Credit cards at 20%+ APR? Usually a no, only for a days-long bridge you can pay off immediately. Practical guardrails: 1) Borrow only what you can repay in 6-12 months from cash flow or expected bonus. 2) Keep HELOC utilization under ~30% of the line to preserve flexibility. 3) If you must sell securities, harvest losses first, use ETFs with tight spreads, and sell in liquid hours to limit slippage. Best fix is preventative: keep that emergency fund earning ~4-5% so you’re not choosing between ugly and uglier.

Q: Should I worry about taxes and trading costs if I have to raise cash from investments?

A: Yes, because they’re real money, not theoretical. Two bites hit you when you sell under stress: taxes and execution. Taxes: sell inside a year and short‑term gains are taxed at ordinary income rates (top federal bracket is 37% in 2025, plus state). If you’re in, say, a 32% federal bracket and 5% state, a $2,000 short‑term gain on a $10,000 sale could cost ~$740 in tax. Execution: when volatility spikes, spreads widen. In calm markets a large ETF might trade at 1-2 bps wide; in stress it can gap multiples wider. Single-stock spreads that sit at 5-15 bps can balloon, and a rushed market order can eat another 10-30 bps in slippage. Example: Need $10k during a 15% drawdown. You sell $11.8k of stock, realize $2k gain, pay ~$740 tax, and lose ~0.25% (~$30) to wider spreads, then miss part of a rebound if it snaps back. Better play: keep 3-6 months in high‑yield savings/T‑bills, maybe 9-12 months if income is project-based; automate contributions 60% to emergency cash, 40% to your portfolio until the cash cushion is full; use a T‑bill ladder (4-13 weeks) for liquidity. That setup costs little this year with CPI in the mid‑2% and cash yields around the mid‑4s, and it keeps you off the forced‑seller treadmill.

@article{emergency-fund-or-stocks-when-inflation-cools-smart-move,
    title   = {Emergency Fund or Stocks When Inflation Cools? Smart Move},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/emergency-fund-or-stocks/}
}