Author Topic: Should Invested money count as "Emergency Fund"  (Read 6528 times)

Yonco

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Should Invested money count as "Emergency Fund"
« on: October 22, 2013, 05:55:23 PM »
    I will keep this short and sweet. Steadily employed at 55 hours a week, 25 years old.  I have $8,000 at a local bank, split 50/50 checking/savings acc.  $1,500 cash on hand incase of quickie emergencys. The cash at home idea came from Dave Ramseys' books and has actually gave me a lot of respect/discipline for not using it.   I already have been saving into 2 IRA type accounts through fidelity(with company match) and vanguard for 7 years.  My only debt is $55,000 on a mortgage.  I want more gains than just paying an extra $500/mo torwards the house(%2.79 apr) or adding to a savings account getting 1%.   

    I have decided to get an index fund through vanguard(VTSMX).   The minimum is $3,000 to start, but my interest gains should be greater than a saving acc. I feel that my emergency fund(Roughly $10,000) isnt enough, and it would be even less if i use $3,000 torwards an investment.  Monthly expenses are right at $2250 without the extra principal payments on the mortgage.  That is a solid 4 months emergency fund.  If i invest with vanguard, i will be cutting my emergency fund by a large amount. I also feel cheated for not investing it and taking the chance at gains.  I do not plan on taking the money out of the fund until i am FI.

Option #1   Keep stacking my savings account till i have 6mo emergency fund then start saving an additional $3000 to invest.  (could take a year to save $2250+$2250+$3000)

Option #2   Use the money out of the saving acc and get the vanguard fund NOW, because it can always be taken back out if need be.   After the fund is started, equally put extra money torwards the 6mo emergency fund, into the (VTSMX), and +mortgage principal.   Probably $250 a month torwards each

 What do you suggest!? Thanks, -Jon

 
« Last Edit: October 22, 2013, 06:04:19 PM by Yonco »

lentilman

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Re: Should Invested money count as "Emergency Fund"
« Reply #1 on: October 22, 2013, 06:23:46 PM »
The emergency fund should be in conservative allocation.  Can you put it in a Roth?  As you build up assets you could always move it over to more aggressive funds in the future.

Lans Holman

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Re: Should Invested money count as "Emergency Fund"
« Reply #2 on: October 22, 2013, 06:29:19 PM »
     I do not plan on taking the money out of the fund until i am FI.
 

      The minimum is $3,000 to start, but my interest gains should be greater than a saving acc. 

First, be clear with your terminology.  It's not interest, it's growth.  It certainly has the potential to grow more, but there's the chance it's going to go down.  What if you lost your job at the same time as a stock market downturn?  These two things are likely to go together.  So maybe think a little more about what this emergency fund is for and the bigger picture of your life.  It's great to say that you're not planning to take anything out of it, but the whole point of an emergency fund is that it's for the things you weren't planning on.  What would your life look like in that worst case scenario, or if you got hurt and couldn't work for a while?  How much you need to keep on hand depends on how well positioned you are to ride out those sorts of events, as well as how secure you feel with your employment. 
One thing I would say for sure is that it doesn't make a ton of sense to be paying down that mortgage, even after you have the emergency fund built up, unless you're already maxing out all your tax advantaged options.  It has a great deal of emotional appeal for many people

Miss Growing Green

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Re: Should Invested money count as "Emergency Fund"
« Reply #3 on: October 22, 2013, 06:35:05 PM »
I personally think emergency funds are over-rated.  I only keep about one month's worth of "emergency" funds set aside because if I were ever to get into an "emergency" that exceeded one months worth of necessities, I could liquidate other investments to cover the emergency.  Or, worst case scenario, put it all on a credit card and pay it off within the next month after liquidating investments.

Your index fund sounds relatively liquid (it isn't an IRA or Roth IRA, is it?) so I vote for putting money into the index fund and avoid stacking your savings up.  After all, anything that sits in a savings account is losing almost 3% value a year to inflation... that a steep price to pay for the small chance of an emergency, especially when you have liquid assets and credit lines available in emergencies.

May I also suggest considering another line of investing- peer-to-peer lending such as Prosper or Lending Club?  These investments yield much higher returns than index funds and are just as easily liquidated, if not more-so.  I have a post on my blog about the basics of P2P lending if you think you might be interested in something like that:

http://www.thegrowinggreen.com/earn-money-while-you-sleep-20-returns-with-p2p-lending/

Good luck and let us know what you decide!

chasesfish

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Re: Should Invested money count as "Emergency Fund"
« Reply #4 on: October 22, 2013, 06:47:32 PM »
I think it's fine to have taxable investments as your emergency fund that you can liquidate if you need it.

I would not recommend lending club, not now.  Returns aren't as good as advertised.

oldtoyota

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Re: Should Invested money count as "Emergency Fund"
« Reply #5 on: October 22, 2013, 07:21:56 PM »
I decided to put a chunk into a taxable investment account.

However, I have a good chunk saved outside of an investment account too. I decided how many months of expenses I wanted saved up and saved it.

Are you single? I ask because I have X months of expenses saved up. I calculated it as though the emergency money would have to cover everything--even though the chance of us both being unemployed is low. So, that means my emergency money would likely last longer than what I project. I also estimated on the high end for expenses. I really do not want to dip into the investment account if it can be avoided.







Khan

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Re: Should Invested money count as "Emergency Fund"
« Reply #6 on: October 22, 2013, 07:48:45 PM »
It depends on who you ask, we've had many discussions on "Emergency Funds", here are several discussions on the topic:

http://www.mrmoneymustache.com/forum/welcome-to-the-forum/am-i-stupid-for-not-having-an-emergency-fund/
http://www.mrmoneymustache.com/forum/welcome-to-the-forum/emergency-funds-what-do-you-do/
http://www.mrmoneymustache.com/forum/ask-a-mustachian/need-advice-on-where-to-store-my-emergency-fund/

Anyways, I like to float between 2-4k in my bank account(~1800$ is enough for one months bills and groceries to all hit at once, I have roommates), the rest moves to my investment accounts/etc. My basic theory is this: I can either eat the opportunity cost of possibly -not- investing, with a super shitty/worthless interest rate and a lot of cash on the sidelines, or I can power through knowing that in a worst case scenario, I may get 50 on the dollar liquidating some positions in order to pay for whatever it is that has to be paid for. I have a 5k credit card and a month before I would start paying interest on it(which at 10% interest rate would only cost me ~40$/month). Dividend alone on 5000$ invested at a 3.3%(what several of mine average out to, what a lot of blue chips average out to) is 165$/year, so I would have to eat up 4 months of CC interest to balance that out if I didn't just pay it off.

Also, I myself have a cadillac health plan, I understand the arguments for high deductibles, but I sleep more soundly with my plan then otherwise, so that's one of the major "emergencies" already covered for me.

My suggestion is this: Whatever makes you sleep better at night(to a point). I have no problems whatsoever sleeping, so this is what I do. If holding 10k in cash makes you sleep better then the alternative, do it. If on the other hand 50k in cash makes you sleep better... then you might want to evaluate your choices a little.

Edit 4 years later: I no longer have roommates, am much happier with 3k-6k in cash, and now have a HDHP because saving money on taxes is great. I continue to sleep very soundly without a conventional emergency fund buffer, and instead can use cashflow, margin, taxable+roth+HSA if a world ending emergency ever comes up. In the mean time, 4 years later and the market is up quite a bit, and still no emergency has occurred.
« Last Edit: April 26, 2017, 02:35:26 AM by Khanjar »

RootofGood

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Re: Should Invested money count as "Emergency Fund"
« Reply #7 on: October 22, 2013, 08:07:14 PM »
If you can cut your expenses if you find yourself unemployed, you might not need a huge e-fund.  Don't forget you'll get unemployment benefits (as long as you don't get fired). 

As for investments, one thing I did was enable "margin" borrowing on my brokerage account.  During my working career, I sometimes had a HELOC as a source of living expenses that I could draw on in an emergency.  Never needed it, but good to have.  Now I just have a large-ish brokerage account where I could pull out enough cash to get me through a few months or years if necessary.  Or I could just sell my investments. 

Just don't borrow too much on margin, since when the underlying securities you are borrowing against go down in value (ie stock market crash), your brokerage firm will want you to repay some of the margin loan (if you borrowed, say, 50% the value of your investments).  Borrowing 10-20% of your investments is not very risky in my book.  If you had $10k in a brokerage account, borrowing $2k against it in the case of an emergency (if you didn't want to sell the underlying securities to fund living expenses) would be ok and low risk. 

I never kept more than about $3k in checking/savings, since that was around 1 months expenses.  Just enough to handle the cash flow each month.  Between investments (and the income from investments) and unemployment, we would be just fine month to month.  Of course there were two of us with paychecks, so losing just 1 income is also less severe than you losing all your income. 

Yonco

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Re: Should Invested money count as "Emergency Fund"
« Reply #8 on: October 22, 2013, 08:21:16 PM »
    Thanks for all of the suggestions! I admit being young and naive, i totally missed that i am not maxing both of my non-taxed IRA accounts.  I never thought of the IRA accounts as being able to remove the roth contributions as a backup, but that is an option. 

    My Simple IRA through work gets maxed each year(it uses a different contribution limit than the roth IRA) and is going on 7+ years.  I started my Roth IRA at vanguard a 2 years ago and setup $100/mo automatic contribution. I set it and forgot about it, untill i checked it now. It is in a 2040 target retirement.   I can up my contribution to 450$ a month and exchange this 2040 fund for the (VTSMX) through the vanguard website. The 3000 minimum is already reached in this IRA.  Then i get a higher risk account without opening anything new, and max Roth IRA at $5500 a year.   This also allow me to keep a steady, less risk account(through fidelity).

    At this point adding that extra contribution to max the Roth IRA wont leave me with enough to invest in a taxable account.   I am not single and my monthly totals include expenses for me and my other half. This does not include her part time income.  I understand i am losing "3%" a year due to inflation on a savings acc, but that piece of mind makes sense to only keep 3-4 months worth in there.  I will still be adding extra principal because i want that feeling of being *debt free* and after mortgage payments end my monthly expenses will drop from $2250, to $1300.  After the house is paid off, my 4 month emergency fund will be a 7 month.

Conclusion: Max non-taxable roth ira contributions(now i see it, duh), Transfer funds to VTSMX for higher risk/growth instead of starting another fund, keep current emergency fund at local bank for piece of mind, If Sh*t hits the fan beyond my 4 months emergency fund, i can always remove my contributions to the roth IRA.

Thanks for the help.  -Jon