Author Topic: Reduce our emergency fund?  (Read 2407 times)

0cean23

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Reduce our emergency fund?
« on: July 13, 2013, 02:06:27 PM »
We currently have about 100k in our emergency fund sitting in our online savings earning .85%. This is approximately 2 years that will cover our all our expenses.  Currently my wife and I max out on our 401k and IRA's. Our only debt is our mortgage which is $165k @3.25%

1. Should we reduce our emergency fund to $20k and use $80k to pay for the principle on our mortgage?

2. Reduce our emergency fund to $20k and invest $80k into VTSAX?

3. Keep the emergency fund as is, just incase something goes wrong.

worms

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Re: Reduce our emergency fund?
« Reply #1 on: July 13, 2013, 02:27:42 PM »
Only you can gauge the stability of your employment and weigh up your attitude to risks, but if it was me, I'd go for option 1 with the proviso that you then use the reduction in monthly mortgage costs to invest in something like option 2.  That way you end up with the best of both a few years down the line.

fiveoclockshadow

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Re: Reduce our emergency fund?
« Reply #2 on: July 13, 2013, 02:37:19 PM »
I think by many standards that is a very large emergency fund - but each has their own tolerance for risk.

Option 1 gives you a guaranteed return but the money becomes illiquid.  What kind of mortgage is it?  30 yr fixed rate?  If so a lot of people here wouldn't pay that down and would prefer to invest the money elsewhere.

Option 2 keeps the money liquid, so it can act as a extreme-emergency fund, but of course the value is more volatile.

What kind of IRAs are you doing?  Roth?  If so, remember that Roth contributions can be distributed at any time tax and penalty free (only earnings must stay in for the long haul).  So a Roth IRA actually can act as a super-extreme-emergency fund.  Certainly you wouldn't normally want to remove that money, but putting money in there gives you more return and tax free return as well.

So maybe that will help you think it through.  It sounds like you have some peace of mind from a large emergency fund.  Maybe you should view it instead as a number of stages of emergency.  Some amount liquid in savings for more likely emergencies (short term unemployment, big unexpected expenses).  Some amount liquid but in a better if riskier investment (your extreme-emergency fund, if forced to draw on it when the assets are down will hurt but you still have access to a fair bit of money which you don't anticipate needing in any typical emergency).  Finally your Roth IRAs as the super emergency backstop.

I think when you look at this way you will feel more comfortable getting more of your current emergency fund out working for you earning better returns.

Michelle119

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Re: Reduce our emergency fund?
« Reply #3 on: July 13, 2013, 04:35:43 PM »
I would probably reduce down to 4-6 months of expenses and split the rest of it. I'd pay down principal on my mortgage with half and invest in stocks with the other half. If it is a 30-year mortgage, where are you in repayment? Can you refinance into a 15 or 10year mortgage if you put a substantial amount of your efund towards it?

fiveoclockshadow

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Re: Reduce our emergency fund?
« Reply #4 on: July 13, 2013, 04:49:08 PM »
Can you refinance into a 15 or 10year mortgage if you put a substantial amount of your efund towards it?

No, he really shouldn't do that. 15 yr are at 3.3% right now and 10 yr about the same. His current mortgage (if a 30 yr) is better. If he wants a 10 or 15 yr he should just pay his 30 yr as if it was one of those. Lower cost, no refi fees and the flexibility to lower his payment if times get tough.

0cean23

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Re: Reduce our emergency fund?
« Reply #5 on: July 13, 2013, 05:15:40 PM »
Thank you all for the replies!

Our mortgage is a 15 year. We refinance recently to 3.25% and have about 8 year left. Paying some of th principle will save us on interest and knock off a few years.