What are the downsides to this strategy? (Assuming you want 4-6 months of emergency expenses available).
Put 1-2 months of expenses in savings, checking, MMA, or MMF and then 3-4 more months of expenses in a balanced fund (Vanguard Wellington, Wellsley, STAR, or something similar). Of course, the money in the balanced fund may have down years - but something like Wellington has only lost money in 2 out of the last 15 years (2008: 22.3%; 2002: 6.9%), but on the other hand it's load-adjusted return over the past 10 years is 7.27%. This assumes that you understand that this portion of your emergency fund may fluctuate a bit (and therefore you may want to overfund it a little) and that you just need to pick a specific amount and let it sit.
While it is certainly possible that you will sell at a loss, it is much more likely that you will earn a lot more over the long haul that if you put 4-6 months worth of expenses in an account making <1%. I just hate the idea of a chunk of money making <1% and I'm also assuming that Mustachians need to dip into a 3-6 month emergency fund less often than the average person - because many Mustachians wouldn't consider replacing a 25 year old HVAC system or a 30-year old roof as an "emergency". These are known events to plan (and save) for.
One huge variable is the size of your emergency fund. I don't think this strategy is wise if you're looking at a 1-2 month emergency fund.
Yes this is where my brain is roaming. And thanks to the others on bank suggestions too. I too wonder about money sitting earning so little vs the chance I will need it. I also have little frame of reference bc I grew up poor and then in a marriage with terrible money mgmt for 15 yrs. My single mother raised me on a weeks pay equal to what I make in 4 hrs. Talk about humbling. I have a high fear of being poor again.
More info of this helps:
Single mom of 2.
Well employed at 130k roughly. Base 110 for a minimum figure
Budget is 4000 per month with housing as the majority, then food, etc.
I will have at least 6 months worth to deposit.
Banking: I keep my checking acct balance pretty spare. I keep a 1500 travel fund. I keep about 2500 also for childcare twice per year. Aftercare and summer care for one of the two kids. I can tap into that for an unexpected expense and repay myself in a month or two.
Savings: over 30% SR of post tax income. I actually need to do the math. max 401k with employer partial match. Max IRA. Another 10k invested per year. I also bought a house last year, so I think my SR is low compared to this year. I haven't done the math yet.
Biggest emergency would be job loss, so pulling from a 401k would not work. Mine are penalized if loans are required if you separate employment.
I'm easily employable, unless the economy really tanked again or I couldn't work. The salary I could get is a wide range. 6months expenses allows me to take time and find the right job, basically.