Author Topic: Options for sinking funds, emergency funds etc?  (Read 3603 times)

Mongoose

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Options for sinking funds, emergency funds etc?
« on: February 17, 2016, 08:58:41 AM »
I apologize if this has been covered extensively before. I haven't figured out the search function. Also, these are probably questions with super-obvious answers... I think I'm missing some basic piece of information (and definitely lack experience).

My questions:

1. I have seen several people (way further along than I am) post that they don't keep emergency funds in a savings account or equivalent. Or keep emergency funds at all. I currently have several months worth of reserves in a savings account. As our circumstances (hopefully) improve, I would like a plan for what to do. Where do you park money that you want ready access to for unexpected expenses? To cover a job loss/FU money? Or, are you super awesome at planning and don't have unexpected expenses?

2. Is it easy to get money in/out of, for example, a Vanguard investment account? Do you lose money/pay fees on withdrawals?

3. I've also seen sinking funds mentioned (which, and I could be wrong, I think is something like putting aside a certain amount of money to replace a roof you know will need to be redone). Or money to cover health insurance deductibles (absent a HSA option)? Do those funds get put in with FI money or kept somewhere else? Do you track those separate (I.e., not count the replace the roof funds as FI funds)?  Or make enough that those types of considerations are irrelevant?

4. Assuming you don't want to do a 529 but want to help kids pay for college, where do those funds go?

5. And this is probably my dumbest question...can the same person contribute to more than one type of retirement account (for instance, put in the maximum into a traditional IRA and a Roth IRA in the same year...assuming that they meet all the requirements). The way I read the stuff I looked at was that, absent employer contributions, you as an individual could max out one type of contribution. I've only done an employer funded 401k and personal contributions in a supplemental 403b before. Employees couldn't add to the 401k so if we wanted to save beyond what the employer put in, we had to start the 403b account. DH has no retirement accounts. We may eventually be eligible for SEP IRAs or 401ks (when business is making enough to support us). Could we, if we desired to, met the requirements and had the money, do one of those plus a traditional or Roth IRA? How do you decide how much to park in those versus taxable (?) Vanguard accounts?

Gin1984

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Re: Options for sinking funds, emergency funds etc?
« Reply #1 on: February 17, 2016, 09:08:54 AM »
1) Once you have had an investment account for a while, often the gains make up for needing to pull it once in a blue moon.  Also many people here are saving large sums, plus have multiple streams of income so if there is an emergency, they use that cash.
2) Yes, but closing an investment account often costs a fee.
3)  I leave those in cash, other may put them in bonds, other still may invest in stocks and as I said above, just not save as much if something comes up.
4) Since I have not finished maxing out my 403b and my Roth (my taxable is below 0), extra cash goes to the Roth (and if I got a raise, the 403b).  I mostly expect to cash flow college though once I finish 403b etc, I will put money in a 529 IF I am still in a state with the tax deduction.  If not, taxable account.
5)I think you are misremembering the numbers for "Employees couldn't add to the 401k so if we wanted to save beyond what the employer put in, we had to start the 403b account."  It may have been a 401a account because that is the account employers put money in but employees can't.  So you can't put more than $5500 in an IRA (traditional or Roth or combined) but you can put money in different accounts like $18000 to a 403b and $5500 to an IRA (the deductibility depends on your income level though).

GrowingTheGreen

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Re: Options for sinking funds, emergency funds etc?
« Reply #2 on: February 17, 2016, 10:15:24 AM »
Re 1) & 2) : maybe I'm one of the few, but I think a dedicated savings account is the way to go. You're highly unlikely to lose it due to FDIC insurance. It doesn't fluctuate with the market and will therefore not put you in the position of having to sell low.

You can get money out of Vanguard, but with a savings account, you can get it right now instead of waiting a few days.

NoStacheOhio

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Re: Options for sinking funds, emergency funds etc?
« Reply #3 on: February 17, 2016, 10:20:07 AM »
It's highly variable from person to person. The people who don't have savings account emergency funds probably use credit and cash flow to cover unexpected expenses (up to a limit).

For example, the blower motor on our furnace went out this past fall. I wasn't sure if it was just that, or something more serious. Had the furnace people out, replaced the blower, and it was about $500. If it had been more than that, I would've put it on a card with a 0% interest rate and paid it off over two or three months. Since it was only $500, we put it on one of the normal cards and paid the bill at the end of the month.

Replacing a roof or a car is obviously more costly, but also somewhat predictable. You probably know when the roof was replaced, and roughly how long it should last. If it's 20 years out, you don't necessarily need to have earmarked savings for it. If you know you're going to need a new roof in about five years, that's when you set cash aside either through diverted investment contributions (i.e. money that you would otherwise be putting in an IRA or taxable investment account) or through selling some investments (I'm going to lock in some long term capital gains for this big, predictable expense, and put that money somewhere less volatile).

Rosy

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Re: Options for sinking funds, emergency funds etc?
« Reply #4 on: February 17, 2016, 11:29:28 AM »
All our investment accounts and even one of my bank accounts have fees associated with closing or withdrawal. It can be three to seven days - too slow and stressful in my opinion.
I prefer having immediate access without penalty to at least $10K, beyond that I consider it a crisis and the fees no longer matter.
Of course, I'd probably put it on my cc first to get some extra points and then pay it off immediately to avoid interest payments.

However, to me a line of credit is not a reliable source for a true emergency fund. Banks can and do pull credit lines at any time and if that cc company shuts down your card or even lowers your line of credit - you might be in trouble.
Sure, it is nice to know you have a high credit line, but I would never depend on it being there when I really needed it the most. Cash and immediate access are the only reliable solution.

1. Emergency Fund - cash - immediate access in a separate account.
2. Plus $1K for life's little surprises in various accounts, easily withdrawn at the ATM or paid for with a credit card first.

3. Dedicated funds (sinking funds?) earmarked for a one time anticipated purchase, or home renovation or other expenses.
Our strategy, short term goals-  one to two years - funds stay liquid and accessible.
Medium to long term will be put in a CD or possibly invested until we need it.

NotJen

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Re: Options for sinking funds, emergency funds etc?
« Reply #5 on: February 17, 2016, 12:55:32 PM »
Most of these are personal decisions, and you should do what makes you the most comfortable when it comes to EF/sinking funds/etc.

1. I have seen several people (way further along than I am) post that they don't keep emergency funds in a savings account or equivalent. Or keep emergency funds at all. I currently have several months worth of reserves in a savings account. As our circumstances (hopefully) improve, I would like a plan for what to do. Where do you park money that you want ready access to for unexpected expenses? To cover a job loss/FU money? Or, are you super awesome at planning and don't have unexpected expenses?

I am a big fan of having an emergency fund, and I mostly consider it an "in case of job loss" fund.  I'm single with one income stream, so a job loss would hit me hard.  I am most comfortable having ~ 1 year of expenses in a savings account (best I can find is an online savings account earning about 1%).  Once my taxable investment account reaches a size that I deem "big enough", I'll reduce and keep half of my EF in a savings account, and half in my investment account.  That's just a "trick" to get me to keep less cash on hand.

Quote
2. Is it easy to get money in/out of, for example, a Vanguard investment account? Do you lose money/pay fees on withdrawals?

It is very easy to get money into a Vanguard investment account.  My goal is to not take money out until I need it for retirement (or, an emergency), so I haven't experienced that yet (but I imagine it would be pretty easy).  There shouldn't be a fee associated with selling shares, but you will pay taxes on the capital gains (hence calling it a 'taxable account').  Vanguard does not charge any fees to close an account.

Quote
3. I've also seen sinking funds mentioned (which, and I could be wrong, I think is something like putting aside a certain amount of money to replace a roof you know will need to be redone). Or money to cover health insurance deductibles (absent a HSA option)? Do those funds get put in with FI money or kept somewhere else? Do you track those separate (I.e., not count the replace the roof funds as FI funds)?  Or make enough that those types of considerations are irrelevant?

I don't really do sinking funds - most of my larger planned or unplanned expenses can be cash-flowed from my paycheck (I just put less in savings that month).  I also put most expenses on my credit card, so that would give me a little extra float to spread an expense over a couple paychecks.  Back when I was saving for a car, I put it in the same savings account as my EF, and used a spreadsheet to track how much was allocated to "car" and "EF".

Quote
5. And this is probably my dumbest question...can the same person contribute to more than one type of retirement account (for instance, put in the maximum into a traditional IRA and a Roth IRA in the same year...assuming that they meet all the requirements). The way I read the stuff I looked at was that, absent employer contributions, you as an individual could max out one type of contribution. I've only done an employer funded 401k and personal contributions in a supplemental 403b before. Employees couldn't add to the 401k so if we wanted to save beyond what the employer put in, we had to start the 403b account. DH has no retirement accounts. We may eventually be eligible for SEP IRAs or 401ks (when business is making enough to support us). Could we, if we desired to, met the requirements and had the money, do one of those plus a traditional or Roth IRA? How do you decide how much to park in those versus taxable (?) Vanguard accounts?

You can definitely do 401k + IRA (Roth or traditional) or SEP IRA + IRA (Roth or traditional).  I max out all tax-advantaged retirement accounts (for me that's 401k and Roth IRA) before adding to my taxable investments.


Gin1984

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Re: Options for sinking funds, emergency funds etc?
« Reply #6 on: February 17, 2016, 02:11:49 PM »
Most of these are personal decisions, and you should do what makes you the most comfortable when it comes to EF/sinking funds/etc.

1. I have seen several people (way further along than I am) post that they don't keep emergency funds in a savings account or equivalent. Or keep emergency funds at all. I currently have several months worth of reserves in a savings account. As our circumstances (hopefully) improve, I would like a plan for what to do. Where do you park money that you want ready access to for unexpected expenses? To cover a job loss/FU money? Or, are you super awesome at planning and don't have unexpected expenses?

I am a big fan of having an emergency fund, and I mostly consider it an "in case of job loss" fund.  I'm single with one income stream, so a job loss would hit me hard.  I am most comfortable having ~ 1 year of expenses in a savings account (best I can find is an online savings account earning about 1%).  Once my taxable investment account reaches a size that I deem "big enough", I'll reduce and keep half of my EF in a savings account, and half in my investment account.  That's just a "trick" to get me to keep less cash on hand.

Quote
2. Is it easy to get money in/out of, for example, a Vanguard investment account? Do you lose money/pay fees on withdrawals?

It is very easy to get money into a Vanguard investment account.  My goal is to not take money out until I need it for retirement (or, an emergency), so I haven't experienced that yet (but I imagine it would be pretty easy).  There shouldn't be a fee associated with selling shares, but you will pay taxes on the capital gains (hence calling it a 'taxable account').  Vanguard does not charge any fees to close an account.

Quote
3. I've also seen sinking funds mentioned (which, and I could be wrong, I think is something like putting aside a certain amount of money to replace a roof you know will need to be redone). Or money to cover health insurance deductibles (absent a HSA option)? Do those funds get put in with FI money or kept somewhere else? Do you track those separate (I.e., not count the replace the roof funds as FI funds)?  Or make enough that those types of considerations are irrelevant?

I don't really do sinking funds - most of my larger planned or unplanned expenses can be cash-flowed from my paycheck (I just put less in savings that month).  I also put most expenses on my credit card, so that would give me a little extra float to spread an expense over a couple paychecks.  Back when I was saving for a car, I put it in the same savings account as my EF, and used a spreadsheet to track how much was allocated to "car" and "EF".

Quote
5. And this is probably my dumbest question...can the same person contribute to more than one type of retirement account (for instance, put in the maximum into a traditional IRA and a Roth IRA in the same year...assuming that they meet all the requirements). The way I read the stuff I looked at was that, absent employer contributions, you as an individual could max out one type of contribution. I've only done an employer funded 401k and personal contributions in a supplemental 403b before. Employees couldn't add to the 401k so if we wanted to save beyond what the employer put in, we had to start the 403b account. DH has no retirement accounts. We may eventually be eligible for SEP IRAs or 401ks (when business is making enough to support us). Could we, if we desired to, met the requirements and had the money, do one of those plus a traditional or Roth IRA? How do you decide how much to park in those versus taxable (?) Vanguard accounts?

You can definitely do 401k + IRA (Roth or traditional) or SEP IRA + IRA (Roth or traditional).  I max out all tax-advantaged retirement accounts (for me that's 401k and Roth IRA) before adding to my taxable investments.
Not accurate:
According to the IRS: If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan.  You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.  Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account.  However, any dollars you contribute to the SEP-IRA will reduce the amount you can contribute to other IRAs, including Roth IRAs, for the year

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

NotJen

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Re: Options for sinking funds, emergency funds etc?
« Reply #7 on: February 17, 2016, 02:37:05 PM »
What's not accurate about what I said?  This is all I was saying:
You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.  Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Thanks for the link to more complete details.  When I had a SEP, I wasn't allowed to make contributions to it, so I contributed to a Roth.  Luckily, we switched over to a 401k once I was making more and wanted to contribute more.

Gin1984

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Re: Options for sinking funds, emergency funds etc?
« Reply #8 on: February 17, 2016, 04:50:04 PM »
What's not accurate about what I said?  This is all I was saying:
You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.  Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Thanks for the link to more complete details.  When I had a SEP, I wasn't allowed to make contributions to it, so I contributed to a Roth.  Luckily, we switched over to a 401k once I was making more and wanted to contribute more.
You, the employee, cannot contribute to both a sep and a regular IRA. 

Mongoose

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Re: Options for sinking funds, emergency funds etc?
« Reply #9 on: February 17, 2016, 10:36:16 PM »
Thanks for the info.
  Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Thanks for the link to more complete details.  When I had a SEP, I wasn't allowed to make contributions to it, so I contributed to a Roth.  Luckily, we switched over to a 401k once I was making more and wanted to contribute more.
You, the employee, cannot contribute to both a sep and a regular IRA. 
[/quote]

Um, this is really confusing to me. I thought SEP was for self-employed. So, as owner of the company, I am the employer and the employee. I had only looked a bit at SEP401ks but clearly need to study this more before we get to this point.

Gin1984

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Re: Options for sinking funds, emergency funds etc?
« Reply #10 on: February 18, 2016, 05:02:35 AM »
Thanks for the info.
  Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Thanks for the link to more complete details.  When I had a SEP, I wasn't allowed to make contributions to it, so I contributed to a Roth.  Luckily, we switched over to a 401k once I was making more and wanted to contribute more.
You, the employee, cannot contribute to both a sep and a regular IRA. 

Um, this is really confusing to me. I thought SEP was for self-employed. So, as owner of the company, I am the employer and the employee. I had only looked a bit at SEP401ks but clearly need to study this more before we get to this point.
[/quote]
I think you are confusing a solo/individual 401 with a SEP-IRA.  A small business owner (including a business owner of one) can have a SEP-IRA as long as he or she gives the same percentage to all employees.  Some employers then allow you to make contributions which lowers the amount you can put in your own IRA.    But, the rules are different for you as the employer vs you as the employee on how much that can be contributed.

NotJen

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Re: Options for sinking funds, emergency funds etc?
« Reply #11 on: February 18, 2016, 08:11:03 AM »
https://www.irs.gov/pub/irs-pdf/p560.pdf

Apparently, the option for employees to contribute to the SEP (the SARSEP option) is only for specific plans set up before 1997.  So, if you are setting up a new SEP, ONLY the employer can contribute, and you don't have to worry about contributions you make as an employer reducing the amount you as an employee can contribute to an IRA (Roth or traditional).

gliderpilot567

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Re: Options for sinking funds, emergency funds etc?
« Reply #12 on: February 18, 2016, 10:54:07 AM »
There's been a few threads about the NetSpend cards you can get which have an associated 5% savings account attached to them. There are lots of little caveats to using them which are well explained in the other threads, but it seems like a decent place to stash emergency money while keeping it both liquid and working for you.