Author Topic: Short Term Stash  (Read 17888 times)

markstache

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Short Term Stash
« on: May 23, 2012, 12:36:35 PM »
In Where should I Invest my Short-Term ‘Stash?, MMM suggests putting emergency fund savings into ETFs, specifically bond funds. I find the argument persuasive, but I wonder if there is a minimum amount of cash savings that one should have first.

1 month? 3 months? 6 months?

I would rate myself as risk-neutral to risk-seeking. Any suggestions?

gestalt162

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Re: Short Term Stash
« Reply #1 on: May 23, 2012, 02:05:55 PM »
ETFs can be cashed out quickly in the case of emergencies. Keep a credit card around (for point-of-sale transactions ie. hospital, mechanic, etc.), then liquidate your bond ETF holdings to pay off your credit card in case of emergencies. No emergency fund needed.

grantmeaname

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Re: Short Term Stash
« Reply #2 on: May 23, 2012, 02:16:14 PM »
Here comes this one again... it's my favorite thread!

If you have a mortgage, and as a result you have home equity, you can do much the same thing as gestalt suggests but at a lower interest rate by getting a HELOC and paying off your credit card out of the HELOC or writing a check directly out of the HELOC. Then you can just pay back the HELOC instead of saving until the balance is back at zero. You can get great interest rates this way too... HELOCs at my credit union run something like 2.5-3%, which is piddly if you only carry the emergency's balance for a month or two.

As another note: you can withdraw principal from a Roth IRA tax-free, so if you don't already and you're going the liquidating-investments route, you should contribute the max to the IRA and then liquidate investments inside the IRA instead of a regular brokerage account.

KittyWrestler

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Re: Short Term Stash
« Reply #3 on: May 23, 2012, 03:05:26 PM »
You should always ALWAYS has some cash stash put in a bank account that will take about 3-5 days to get. Reason being a) short term is for short term, no risk is tolerated b) if you have it in your savings account at your primary bank account, it's too easy to get. So put it in ING Direct or HSBC Direct. It's cash account, but takes a few days to withdraw so you will only touch it when it's necessarily

6 months is ideal. But for all the frugal folks here, aim for 12 months, you can do it.

After that, I like the ETF ideas. You can get a deal with some banks that also offer brokerage account. With say $25K with Wells Fargo, you can trade 100 times per year for free.. Otherwise, get a Scottrade account and pay 7 bucks per trade.. Buy some JNK fund to get some yield on it.. But watch out, you may lose money faster than earning that 6-7% yield. But hey, if you can tolerate the risk, go for it.

AJ

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Re: Short Term Stash
« Reply #4 on: May 23, 2012, 03:19:55 PM »
You should always ALWAYS has some cash stash put in a bank account that will take about 3-5 days to get.

I think you'll find a large group of dissenters here on this one... ;)

KittyWrestler

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Re: Short Term Stash
« Reply #5 on: May 23, 2012, 03:34:49 PM »
You should always ALWAYS has some cash stash put in a bank account that will take about 3-5 days to get.

I think you'll find a large group of dissenters here on this one... ;)

I don't know.. cash is king man.. I always love to have some cash instead of putting all of them in bonds, stock market or real estate. Got burned once.. won't make that mistake again.. Always have cash is my rule to live by. Now try to make that pile of cash substantially big but still a small subset of your overall networth.

AJ

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Re: Short Term Stash
« Reply #6 on: May 23, 2012, 03:39:46 PM »
You should always ALWAYS has some cash stash put in a bank account that will take about 3-5 days to get.

I think you'll find a large group of dissenters here on this one... ;)

I don't know.. cash is king man.. I always love to have some cash instead of putting all of them in bonds, stock market or real estate. Got burned once.. won't make that mistake again.. Always have cash is my rule to live by. Now try to make that pile of cash substantially big but still a small subset of your overall networth.

Oh, I hear you. But there is a fine distinction between "I prefer to always have cash" and "Everyone should always have cash." I think if you read through some older threads you'll see a lot of folks don't subscribe to the latter. It is a recurring theme...

KittyWrestler

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Re: Short Term Stash
« Reply #7 on: May 23, 2012, 03:43:21 PM »
You should always ALWAYS has some cash stash put in a bank account that will take about 3-5 days to get.

I think you'll find a large group of dissenters here on this one... ;)

I don't know.. cash is king man.. I always love to have some cash instead of putting all of them in bonds, stock market or real estate. Got burned once.. won't make that mistake again.. Always have cash is my rule to live by. Now try to make that pile of cash substantially big but still a small subset of your overall networth.

Oh, I hear you. But there is a fine distinction between "I prefer to always have cash" and "Everyone should always have cash." I think if you read through some older threads you'll see a lot of folks don't subscribe to the latter. It is a recurring theme...

Interesting.. I thought everybody would always want some cash in hand.. No? Now I am curious.. why not? which tread should I read to find out?

Here is a short story why I always wanna have cash.. I was having two mortgage for a short while, cash flow would be alright if nothing happened. But it did.. My furnace went out in the coldest month, my car was broken in by thefts.. I had two young babies at that time, Not enough cash to get everything fixed, I had to take out money from HELOC. I hate hate hate borrowing.. Even for a day, I felt uncomfortable to borrow money... So I swear by cash now..

AJ

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Re: Short Term Stash
« Reply #8 on: May 23, 2012, 04:01:29 PM »
Interesting.. I thought everybody would always want some cash in hand.. No? Now I am curious.. why not? which tread should I read to find out?

These for starters...I may have missed some...

https://forum.mrmoneymustache.com/welcome-to-the-forum/understanding-springy-debt
https://forum.mrmoneymustache.com/ask-a-mustachian/order-of-operations
https://forum.mrmoneymustache.com/ask-a-mustachian/size-of-emergency-fund

James

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Re: Short Term Stash
« Reply #9 on: May 23, 2012, 04:24:25 PM »
Interesting.. I thought everybody would always want some cash in hand.. No? Now I am curious.. why not? which tread should I read to find out?

Here is a short story why I always wanna have cash.. I was having two mortgage for a short while, cash flow would be alright if nothing happened. But it did.. My furnace went out in the coldest month, my car was broken in by thefts.. I had two young babies at that time, Not enough cash to get everything fixed, I had to take out money from HELOC. I hate hate hate borrowing.. Even for a day, I felt uncomfortable to borrow money... So I swear by cash now..


Obviously everyone has "some" cash in hand, but the mustachian idea is to keep money working for you, each dollar is an employee and needs to be at at work not lounging around in savings.  Each person is different, each situation is different.  I would simply point that that your decision is, at least to a certain degree, an emotional one.


Cash is not king.  Growth is king.  Cash dies a long slow death.  :)  (yes, I realize I'm oversimplifying it for both of us, we both have much more complex reasoning than that, but you get my point)

KittyWrestler

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Re: Short Term Stash
« Reply #10 on: May 23, 2012, 04:25:54 PM »
Interesting.. I thought everybody would always want some cash in hand.. No? Now I am curious.. why not? which tread should I read to find out?

These for starters...I may have missed some...

https://forum.mrmoneymustache.com/welcome-to-the-forum/understanding-springy-debt
https://forum.mrmoneymustache.com/ask-a-mustachian/order-of-operations
https://forum.mrmoneymustache.com/ask-a-mustachian/size-of-emergency-fund

Neat!! Definitely an eye opener... Though I hate paying interest on HELOC even for just one day (it bugged the crap out of me when it happened last time), but mathematically, the interest I pay on HELOC for a few days is significantly smaller than the yield I earn on JNK, especially most of the emergency cases only use a small amount of the cash stash if it ever happens..

Hmm.. I might move my e-fund into a bond ETF that pays dividend. Well worth the risk I guess.. Say your withdraw on a HELOC for $10K that charges you 4%, that's 33 bucks a month. But the $100K e fund earns you 500 bucks before tax on 6% yield..

Guess I learned something today..

If anyone got a good bond ETF, please let me know.. Very much appreciated..

James

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Re: Short Term Stash
« Reply #11 on: May 23, 2012, 04:34:28 PM »
In Where should I Invest my Short-Term ‘Stash?, MMM suggests putting emergency fund savings into ETFs, specifically bond funds. I find the argument persuasive, but I wonder if there is a minimum amount of cash savings that one should have first.

1 month? 3 months? 6 months?

I would rate myself as risk-neutral to risk-seeking. Any suggestions?


Need more info to give an actual opinion for your situation.  Job stability, family situation, saving rate, housing situation, etc.  I would start by reading those threads, it's been hotly debated, though we are always willing to help with specifics for your situation.

arebelspy

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Re: Short Term Stash
« Reply #12 on: May 23, 2012, 07:40:30 PM »
Neat!! Definitely an eye opener... Though I hate paying interest on HELOC even for just one day (it bugged the crap out of me when it happened last time), but mathematically, the interest I pay on HELOC for a few days is significantly smaller than the yield I earn on JNK, especially most of the emergency cases only use a small amount of the cash stash if it ever happens..

Hmm.. I might move my e-fund into a bond ETF that pays dividend. Well worth the risk I guess.. Say your withdraw on a HELOC for $10K that charges you 4%, that's 33 bucks a month. But the $100K e fund earns you 500 bucks before tax on 6% yield..

I'm  impressed you read the threads and changed your mind!  Most of us are so stubborn/stuck in our ways (plus the fact of hearing a counter viewpoint often tends to reinforce one's own original viewpoint) that we don't do that.  Good for you.

And yeah, even if you use a credit card, you have a month to pay it off, interest free.  During that month you can tap the invested eFund.  You're absolutely right though that even if you have to pay a bit of interest, you'l have made much more interest in the meantime having those funds invested, that it's worth not having idle cash (for anyone not living close to the edge - i.e. with sufficient lack of debts, good savings/investments, etc.)

Course that's my opinion, and I suppose that's what the OP was asking for. 

Thanks for corralling those links AJ.
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markstache

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Re: Short Term Stash
« Reply #13 on: May 23, 2012, 09:26:49 PM »
If you have a mortgage, and as a result you have home equity, you can do much the same thing as gestalt suggests but at a lower interest rate by getting a HELOC

While we don't have much equity (10% downpayment on a relatively inexpensive house), this is probably the correct thing to do. I had been treating it as a hassel, but its time to work on my Hasselhoff.

As another note: you can withdraw principal from a Roth IRA tax-free, so if you don't already and you're going the liquidating-investments route, you should contribute the max to the IRA and then liquidate investments inside the IRA instead of a regular brokerage account.

Great point. I had forgotten about this. I suppose the downside it is it requires keeping a larger portion of my IRA in bonds/low volatility ETFs. But perhaps allocating a larger sharer to the Roth, but keeping some independent bond ETFs would be the best compromise. Good to think about...

markstache

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Re: Short Term Stash
« Reply #14 on: May 23, 2012, 09:59:04 PM »
Need more info to give an actual opinion for your situation.  Job stability, family situation, saving rate, housing situation, etc.  I would start by reading those threads, it's been hotly debated, though we are always willing to help with specifics for your situation.

Thanks to the poster of the threads. I can confidently say there is active debate on the subject.

If anyone wants to play armchair financial advisor, here's the situation:

- Family: Married, one child (1.5 years), baby due in October.
- Income: Wife's income would barely cover childcare for 2 kids (and one an infant), so she'll be staying home and (hopefully) picking up about 10hrs/wk with a former employer on nights and evenings (potentially about $400/mo). I am a graduate student, starting a new part time job while I work on my dissertation. It should bring in about $3500/mo.
- Spending/saving: Currently, we are saving about $200/mo. I expect this to increase in the coming months as we are cutting costs and our net income will be increasing. We should be able to save at least $1000/mo, more if my wife picks up hours.
- Debt: We have a 6.75% mortgage of $72k remaining on $78k house (4 years into a 30yr mortgage). We have not made principal payments a priority, and I admit I was disappointed to see how much remained when I recently started to get more familiar with my financial situation. I would like to think that our efforts on home improvement will payoff when we have to sell in a few years (after I get my degree we expect to move), but these improvements are hard to quantify. 22k in combined student loan debt. All at 2-3% interest.
- Cash on hand: $4000
- Assets: Roth IRA @ $9500, piddly amount in wife's pension fund

Opinions welcome. My current thinking is that we have sufficient cash for the short term EF. Future savings will be split to max out the Roth IRA, slowly build a bond ETF based e-fund to support 1 year of expenses, and the remainder to pay down the mortgage. We have recently made several cost saving cuts to spending, so with luck, I am being conservative with my estimated savings.

arebelspy

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Re: Short Term Stash
« Reply #15 on: May 24, 2012, 06:43:43 AM »
Though I'm not a fan of the eFund in a lot of cases, in your circumstance I would have one due to:
1) baby
2) low cash flow (200/mo) makes it hard to pay emergencies out of incoming cash
3) unstable job (temp job)
4) only 1 income

now naturally if 3 is actually stable, and 4 changes (wife is able to pick up extra job), then 2 will change (and could become that 1k you mention), and then I'd be more comfortable with you having a smaller efund.

For now, the 4k you have is probably okay.  I'd probably bump that up a bit until you have the baby and see your new expenses (and the income settles out), then reduce as appropriate from there.
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James

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Re: Short Term Stash
« Reply #16 on: May 24, 2012, 07:30:07 AM »
I think you have a good amount now and have a solid plan for going forward.

It's too bad you have that 6.75% rate on the mortgage, have you looked into any possible refinance options?  I know you plan on moving, but locking in a lower rate gives you more options and would probably pay for itself pretty quick.  Are the improvements enough to raise the house value in an appraisal?  How long are you expecting to be in the house?

skyrefuge

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Re: Short Term Stash
« Reply #17 on: May 24, 2012, 09:11:02 AM »
I'm  impressed you read the threads and changed your mind

haha, yeah, I read that and was like "WTF?  What just happened here?  I think you're doing this wrong!  Please go back and re-read the monster threads of endless back-and-forth and try again!"

markstache

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Re: Short Term Stash
« Reply #18 on: May 24, 2012, 10:02:31 AM »
It's too bad you have that 6.75% rate on the mortgage, have you looked into any possible refinance options?  I know you plan on moving, but locking in a lower rate gives you more options and would probably pay for itself pretty quick.  Are the improvements enough to raise the house value in an appraisal?  How long are you expecting to be in the house?

Agreed. A lower rate would be advantageous. Back of the envelope calculations on the refi (http://zwicke.nber.org/refinance/index.py) suggest it would be worthwhile for a mortgage at 3.25% or lower (that'd be nice and I'm sure it would come with a pony).

I doubt the improvements will push up the appraised value much (new windows and doors, a brick patio, insulation in the attic, new lighting in all rooms). It is probably better to look at them as making the house more sellable, even if at the same ultimate price. Plus, they have helped with heating and cooling costs or provided immediate increased utility to our lives.

Dicey

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Re: Short Term Stash
« Reply #19 on: May 25, 2012, 09:18:31 PM »
Speaking of re-fi options, have you tried calling your lender and asking for a streamline re-fi? They usually are low-cost, involve little or no paperwork and fairly quick. At one point in my housing career, one phone call and $500 lowered my rate by two whole points. Why would a lender do this? To keep your money flowing into their bank, not someone else's. An especially good option if you do not plan to stay in the house long term.

darkelenchus

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Re: Short Term Stash
« Reply #20 on: May 27, 2012, 01:43:15 AM »
The mustachian idea is to keep money working for you, each dollar is an employee and needs to be at at work not lounging around in savings.

Even if you use a credit card, you have a month to pay it off, interest free ... Even if you have to pay a bit of interest, you'l have made much more interest in the meantime having those funds invested, that it's worth not having idle cash (for anyone not living close to the edge - i.e. with sufficient lack of debts, good savings/investments, etc.)

My wife and I took out a HELOC while paying down our mortgage just in case we faced an emergency expense that we couldn't cover with monthly income & cash on hand. Now that the mortgage is paid in full (got the payoff notification in the mail this morning!), we were thinking of building a 6 month emergency fund and putting it in a high yield savings or money market account. This is what a number of sources strongly encouraged, including YMOYL.

But combine the information from the thread (that, hopefully, I'm understanding correctly) with some details about our own situation: a) our post-mortgage monthly income is able to cover approx half of our planned emergency fund, b) we have a lot of credit available between our credit cards and the HELOC to cover just about any foreseeable emergency expense, c) any emergency expenses that we can't cover with monthly income & immediate cash on hand will very likely be infrequent and rare, and d) the money will very likely earn more in an investment with a higher potential yield. Even if the investment vehicle isn't as liquid as a savings account, it's just got to be liquid enough to cash in either before the end of the month or at least before the debt interest eats too far into the returns earned from the bond fund (which would take awhile). There is risk involved here, but it's minor, especially compared to the opportunity cost of not investing the money in a potentially higher earning investment.

As an example, assume a $10,000 "emergency fund" that earns 4% in a bond ETF and 1.5% in a savings account. After three years, a $2,500 emergency arises. During that time, the investment would have grown to $11,248.64 in the bond fund and $10,456.78 in the savings account. Suppose that it takes one month to receive the money from the bond fund. You'd pay off the debt in full after that month, but with interest of $10.94 and a total expense of $2510.94. That takes the "emergency fund" down to $8,737.70. Meanwhile, since you'd have gotten immediate access to the funds in the savings account, you'd be able to pay off the debt without incurring any interest, taking the "emergency fund" down to $7,956.78. So even though the total cost is lower, you'd have $780.92 less than if you'd have invested the money in a bond fund.

In this situation, then, and in situations like this, it makes better financial sense to forego setting aside money in a savings/money market account as an emergency fund and instead take on a higher yield investment, even if it's a bit more illiquid.

Of course, you've totally screwed yourself over if, say, you're given 24 hours to pay a $10,000 ransom. :-P

Anyway, this thread helped a lot to see we can and very likely will earn more by foregoing the emergency fund. Thanks for the insight, guys!

MsGuided

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Re: Short Term Stash
« Reply #21 on: September 12, 2012, 12:37:44 PM »
Speaking of re-fi options, have you tried calling your lender and asking for a streamline re-fi? They usually are low-cost, involve little or no paperwork and fairly quick. At one point in my housing career, one phone call and $500 lowered my rate by two whole points. Why would a lender do this? To keep your money flowing into their bank, not someone else's. An especially good option if you do not plan to stay in the house long term.

Hi Diane C, I would love to get a streamline re-fi.  Do you have any suggestions about how to get in touch with someone who has the power to do that?  I've called my mortgage company about this & have been given canned information about the costs of re-financing with them.  The person I spoke with said it didn't matter that I had a mortgage with them, have paid on time, etc. 

Thanks!  I've enjoyed reading your posts.  Did you ever give your recipe for quinoa/sour milk pancakes?  I have been reading your posts & didn't see it.

markstache

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Re: Short Term Stash
« Reply #22 on: November 02, 2012, 01:41:53 PM »
I wanted to thank everyone who encouraged me to look into the refi. We dropped from 6.75 to 3.75, with out of pocket costs that will be recouped in less than a year.

arebelspy

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Re: Short Term Stash
« Reply #23 on: November 02, 2012, 05:56:38 PM »
I wanted to thank everyone who encouraged me to look into the refi. We dropped from 6.75 to 3.75, with out of pocket costs that will be recouped in less than a year.

Awesome!  How much per month is it savin ya?
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markstache

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Re: Short Term Stash
« Reply #24 on: November 10, 2012, 04:12:20 PM »
$150. Straight into the stash.

fb132

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Re: Short Term Stash
« Reply #25 on: October 18, 2014, 11:33:16 AM »
Sorry to bring this subject back to life (I am new to money mustache). If In understand MMM philosophy on EF, I have currently 2,5K$ in a high savings account and I should be putting it in an index fund instead, am I correct so far??? And if I were to have an emergency, I would charge it on my bank's line of credit (I have a personal line of credit with my bank),right???

If for example, my roof needs to be repaired and it cost me 4000$, what does MMM suggest???

A) I charge it on my Line of Credit and pay it off in 4 months without investing (I am able to save at most 1000$ per month, unless i have a 3 paycheck month)
B) I charge it on my line of credit, pay off 1000$ on that month and the other 3000$ from my Index funds so that I do not get hit with interests???
or
C) I charge it on my Line of Credit and then pay it off using my savings in my Index funds (regardless if the stock market is in a bear market or not). 

I have to admit, it is confusing to me, I would like to adopt this method instead of saving cash in a 1-2% money market account, but on the other hand, before making a move, I want to know exactly how it works.

matchewed

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Re: Short Term Stash
« Reply #26 on: October 19, 2014, 08:53:45 AM »
It all depends on the interest rate on any line of credit, the interest rate in your savings account, and the anticipated return over using an index fund (assuming you have the cash flow to fund any sort of debt you choose to take on). If the line of credit's interest rate is higher than any of the other two you probably shouldn't use it. It'll cost you more money in the long run. If the interest rate on your savings account sucks but you get a low interest rate on your line of credit then you can probably put the money into an index fund as long as the return over time is anticipated to be higher than the interest rate on the line of credit. And finally if you're getting a great return on your savings account (unlikely in this environment) you can safely keep the money in the savings account.

Also is the $2.5k your emergency fund? What is the purpose of the money? What the money is meant for helps in determining where it should be kept for optimizing your finances.

fb132

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Re: Short Term Stash
« Reply #27 on: October 19, 2014, 08:59:39 AM »
It all depends on the interest rate on any line of credit, the interest rate in your savings account, and the anticipated return over using an index fund (assuming you have the cash flow to fund any sort of debt you choose to take on). If the line of credit's interest rate is higher than any of the other two you probably shouldn't use it. It'll cost you more money in the long run. If the interest rate on your savings account sucks but you get a low interest rate on your line of credit then you can probably put the money into an index fund as long as the return over time is anticipated to be higher than the interest rate on the line of credit. And finally if you're getting a great return on your savings account (unlikely in this environment) you can safely keep the money in the savings account.

Also is the $2.5k your emergency fund? What is the purpose of the money? What the money is meant for helps in determining where it should be kept for optimizing your finances.
My High Interest account pays only 1,5%. My Emergency fund is mainly money that may be needed mainly to help my parents out when something in the house is in major need of repair like the roof. That is why i was saving my EF to reach 4K$, because that was the highest amount I had ever paid in so little time. I usually never get an unexpected bill caused by me, most unexpected bills I get are from my parents who struggle financially and who live life like the rest of society. Luckily it doesn't happen too often that they ask for help, but it does happen (usually once a year).

The stock market is in a bear mode at this moment as you know, so if I had listened to MMM advice (if I understood correctly), I would of had to withdraw 4K in my index fund which has lost some value in the past 2 months to pay off the credit line. By the way, my credit Line is at 6,84% interest FYI.

So please suggest me what I should do in my situation should a similar situation arise.
« Last Edit: October 19, 2014, 09:02:56 AM by fb132 »

matchewed

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Re: Short Term Stash
« Reply #28 on: October 19, 2014, 10:30:53 AM »
It all depends on the interest rate on any line of credit, the interest rate in your savings account, and the anticipated return over using an index fund (assuming you have the cash flow to fund any sort of debt you choose to take on). If the line of credit's interest rate is higher than any of the other two you probably shouldn't use it. It'll cost you more money in the long run. If the interest rate on your savings account sucks but you get a low interest rate on your line of credit then you can probably put the money into an index fund as long as the return over time is anticipated to be higher than the interest rate on the line of credit. And finally if you're getting a great return on your savings account (unlikely in this environment) you can safely keep the money in the savings account.

Also is the $2.5k your emergency fund? What is the purpose of the money? What the money is meant for helps in determining where it should be kept for optimizing your finances.
My High Interest account pays only 1,5%. My Emergency fund is mainly money that may be needed mainly to help my parents out when something in the house is in major need of repair like the roof. That is why i was saving my EF to reach 4K$, because that was the highest amount I had ever paid in so little time. I usually never get an unexpected bill caused by me, most unexpected bills I get are from my parents who struggle financially and who live life like the rest of society. Luckily it doesn't happen too often that they ask for help, but it does happen (usually once a year).

The stock market is in a bear mode at this moment as you know, so if I had listened to MMM advice (if I understood correctly), I would of had to withdraw 4K in my index fund which has lost some value in the past 2 months to pay off the credit line. By the way, my credit Line is at 6,84% interest FYI.

So please suggest me what I should do in my situation should a similar situation arise.

With a 6.84% interest on a credit line I would not use it for funding large purchases unless you could pay it off quickly. That is near historic long term US stock return. Keep using your savings account is my best recommendation. That changes over time given several variables some of which I already mentioned above. MMM's advice is coming from his particular circumstances; high cash flow, low emergency risk, and high anticipated long term return. Your particular circumstances may be different.

fb132

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Re: Short Term Stash
« Reply #29 on: October 19, 2014, 12:09:13 PM »
Thanks :)

pdxvandal

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Re: Short Term Stash
« Reply #30 on: November 22, 2014, 03:27:50 PM »
I can find a high-yield checking account at 3% interest for up to 10k. Not a bad deal and liquid.