The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Tyson on August 24, 2015, 02:51:25 PM
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So I finally have all my debt paid off (sans mortgage), and I'm able to save $2k-$3k every month. Last month I put $2500 into a 90 day time deposit, which was a mistake. I misread the return - I thought it said 5%, but it's actually .05% :O
Anyway, my original thinking was to get several months worth of expenses into a savings account for emergencies, like if I lose my job and have to make mortgage payments, I have something to fall back on. Although the job front looks pretty stable for at least a few more years.
Then I started to wonder if having all that cash sitting around in savings, doing nothing, is actually all that wise. Maybe I should just dump it all into a Vanguard account and at least let it grow while the inevitable layoffs may (or may not) come.
Are there any downsides to just putting the cash into index funds? I know there's a chance the market takes a dive, like the last few days, but on the other hand savings accounts miss out on any growth that might happen over time anyway.
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I keep my e-fund in a taxable index account at Vanguard. Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!
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I keep my e-fund in a taxable index account at Vanguard. Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!
Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.
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I keep my e-fund in a taxable index account at Vanguard. Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!
Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.
Until you need it and something unforeseen, and perhaps, unthinkable happens. At which point you either A. Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity). Think through a scenario where you have some disaster that costs you 6 months of your income. What is your strategy to pay for it? If you don't know, you need to find out!
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Like he said, I would put first on credit card/credit line/Heloc...pay it off the same month. If the emergency expense is more than the leftover money I have at the end of the month, I continue paying it off until it's gone. If the debt is large enough that it would take me 1 year or more to pay it off, then I might think of selling my investments. I would sell the ETF that is at it's peak. In my case, I am invested in bonds (10%), All Canada Stocks (VCN at 30%) and Rest of the world ex. Canada (VXC at 60%). So if I were to sell my investments today, bonds are having a good run lately, while my equities are tanking hard, so I would be selling from my bonds ETF if I really needed the money to pay an emergency.
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Until you need it and something unforeseen, and perhaps, unthinkable happens. At which point you either A. Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity). Think through a scenario where you have some disaster that costs you 6 months of your income. What is your strategy to pay for it? If you don't know, you need to find out!
So yes, I'd have the $$ in stocks, which might go up, and might go down. If it goes up, then selling stocks for cash is definitely better than just having cash in savings. On the other hand, if stocks go down, they'd have to go down more than any gains that occur between now and the need for a withdrawal.
Just kind of thinking out loud here. If I have $30,000 in cash, in one year I still have $30,000 cash, same at 2 years and at 5 years. On the other hand, if I invest that in an index fund, it will be $30,000 at the start, and assuming 7% growth, it'll be $32k after 1 year, $34k after 2 years and $42k after 5 years.
Best case scenario is that I don't have any huge emergencies over the next several years. 2nd best scenario is I have a an emergency and stocks are doing well. Worst case scenario is I have an emergency when stocks are down, relative to when I started investing the money.
Looking at the worst case scenario - if in 1 year it's grown to $32k, the market would have to tank more than 7% to dip me below my original $30k starting point. After 2 years, it'd have to tank more than 14% to drop me below my original $30k, and at 5 years it'd have to tank massively to drop me below my original starting point.
So I guess the issue is risk and time.
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My "emergency fund" is my taxable Vanguard account. It's invested the same as our retirement portfolios. However, I do keep 1 months expenses in my checking account to prevent any issues of accidentally overdrawing the account. That money also covers the larger expenses that come 1 or 2 times a year (car insurance, vehicle registration, etc.).
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I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.
We always keep a few thousand in cash for emergencies.
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I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.
We always keep a few thousand in cash for emergencies.
So I guess that means you disagree with MMM, which is fair, debt springy is not for everyone.
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I think any money potentially needed within now and 3 or 5-years from now, should not be in stocks.
We always keep a few thousand in cash for emergencies.
I'll see the comment above and raise it a few more thousand, lol. I suspect there's a direct correlation between age and amount of cash on hand. The older you are, the more you appreciate the value of readily available money when an opportunity presents itself. And to be fair, you've had longer to amass a nice stache.
DH and I just finished flipping a house and have 500k sitting in the bank right now. It's so tempting to throw it in the market on this dip, but we want to do another flip. If you had told me twenty years ago that I'd be facing such a "dilemma", I never would have believed it. FWP indeed.
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I think you need an emergency financial plan. Whether it includes cash savings or not is up to you. Plan for the most likely emergencies and see whether it would work for you. Can you wait for the amount of time to sell and have the funds clear if it is all in stocks/funds? Do you have alternative ways to pay things? How fast would you need the money? Does keeping some amount in cash make things work better? Create some simulations given worst case scenarios.
My personal line of thought is as follows. I would have been really unhappy if an emergency had hit forcing me to sell first thing yesterday morning. Having some cash in reserve allows me to not have to respond so quickly that I might get caught. Yes I may be potentially missing out on some growth but the fast access to liquid reserves and the comfort it gives me is worth the potential cost. I don't keep a years worth of expenses or anything like that. I personally keep about 4 months at the moment. I am considering reducing it down to 3. The rest is working hard in the market.
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I think you need an emergency financial plan. Whether it includes cash savings or not is up to you. Plan for the most likely emergencies and see whether it would work for you. Can you wait for the amount of time to sell and have the funds clear if it is all in stocks/funds? Do you have alternative ways to pay things? How fast would you need the money? Does keeping some amount in cash make things work better? Create some simulations given worst case scenarios.
My personal line of thought is as follows. I would have been really unhappy if an emergency had hit forcing me to sell first thing yesterday morning. Having some cash in reserve allows me to not have to respond so quickly that I might get caught. Yes I may be potentially missing out on some growth but the fast access to liquid reserves and the comfort it gives me is worth the potential cost. I don't keep a years worth of expenses or anything like that. I personally keep about 4 months at the moment. I am considering reducing it down to 3. The rest is working hard in the market.
Having an EF i is a trade off between a 100% chance of earning less on your money by having it sit in a savings account and an x% chance of drawing down on a higher cost source of emergency funds. If you can work out the variables in your high probability, low impact vs low probability, high impact situation you will have your answer.
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I just recently asked myself this question. My conclusion was no..... I do not need to keep cash on hand.
I keep a high limit credit card for a true emergency that will buy me some time to cash out my investments as needed. Like the above poster stated, I would have been mad if my emergency happened Monday morning when the market tanked. But there is a 100% chance it will lose buying power in my comically low interest saving account. Also I invest 150% of my emergency amount. I believe somewhere else on this forum that has been determined to be a fairly safe amount.
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I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.
The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.
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I keep the majority of my taxable account funds in short to mid term bond funds, which I can get to within 4 business days. I keep one week's funds for a week, to cover a cash crunch occuring during those 4 business days. This is about $1500 for me, but YMMV.
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Are there any downsides to just putting the cash into index funds? I know there's a chance the market takes a dive, like the last few days, but on the other hand savings accounts miss out on any growth that might happen over time anyway.
How to deal with shit that happens without a cash EF:
1. credit card - defers cost to next pay period so you can use your planned savings to pay it off
2. line of credit - for expenses to big to clobber over 1 pay period
3. redirect planned savings to LOC/CC
4. find additional savings to pay of LOC for large expenses by deferring non-essential spending [ie. travel plans, non-essential repairs car/house, etc..]
5. additional earning to pay of LOC - over time or a side hustle evenings/weekends
6. cash in investments if absolutely needed
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I absolutely agree with keeping several months of expenses in a cash account. Think about what an emergency is. It's not "Car needs a new engine, I'll put it on my CC and pay it off next month." An emergency can be when you lose your job, and unemployment insurance just covers your COBRA payment, and your investments are down, and the car needs a new engine. If you're not earning anything because you're out of work, you don't want to be forced into borrowing money that you might end up paying interest on for six months (or longer).
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I keep my e-fund in a taxable index account at Vanguard. Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!
Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.
Until you need it and something unforeseen, and perhaps, unthinkable happens. At which point you either A. Use Credit Card and hope you have a limit large enough or B. Sell stock at a loss (or sell stock at a gain but then lose future opportunity). Think through a scenario where you have some disaster that costs you 6 months of your income. What is your strategy to pay for it? If you don't know, you need to find out!
Here's what historically happens: "I don't need no emergency fund, I'll be smart and put it in investments!" Market tanks. Investor loses his/her job because market tanked. Investor needs to tap funds while market is at historic low, selling at a giant loss. Boo-ya! ...This happy story happened to only millions and millions of Americans 7 years ago.
Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.
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I absolutely agree with keeping several months of expenses in a cash account. Think about what an emergency is. It's not "Car needs a new engine, I'll put it on my CC and pay it off next month." An emergency can be when you lose your job, and unemployment insurance just covers your COBRA payment, and your investments are down, and the car needs a new engine. If you're not earning anything because you're out of work, you don't want to be forced into borrowing money that you might end up paying interest on for six months (or longer).
Yes, but if you have a long running economic crisis, you can still get to your bond funds during such a time. No one needs to keep months of expenses sitting in a cash account.
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The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.
Think of it this way:
If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.
A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.
Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.
You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!
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I have been laid off numerous times. Not once was corrolated with a market crash. Since regular banks really don't make a habit of keeping mortgages anymore, your CD's are invested in bonds anyway.
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Since regular banks really don't make a habit of keeping mortgages anymore, your CD's are invested in bonds anyway.
CD's are FDIC insured; your bonds are not. Furthermore, the price of your bond funds are tied to interest rates. If rates are already at 0 I'm not sure bonds are going to respond a well as they have in the past to a recession. If bond rates go up, then that 2% CD will become a 3-5% CD.
Also, if you read around the investors ally board, it seems most like being 90-100% in equities. Again, not very smart.
I have been laid off numerous times. Not once was corrolated with a market crash.
Your experience differs with millions of those who lost their job during the recession.
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The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.
Think of it this way:
If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.
A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.
Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.
You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!
I could argue with that, but I won't, I think Pete himself proved why an EF is useless, just go read his arguments on EF.
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Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.
Firstly if you can't walk out into the world and get a paying job doing something than you need to make sure you are still breathing!
I was employed as an engineer making well over $100K. The company had a speed wobble between large contracts. I walked down town and got a retail job that week selling outdoors gear. Did that for a few months until the company got their new contract and went back to business as usual. My cost of living wasn't super high and I shut down all but my essential expenses so I only had to dip into my LOC a little and my crappy job was more than enough cash flow to keep everything going. It never once occurred to me to cash in any investments.
If you can't out compete for a retail sales job hang your head in shame.
Secondly you only use credit cards for a short term deferment to the next pay period. If you finance a job lay off on your credit cards and not your low interest rate LOC you are a moron and deserve the 19% interest.
The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.
I lived through the tech bubble bursting and 2008. I've had a temporary lay off in that period and then later had to re-start my career in a small job market. None of that has made me want to hold month's of cash just in case something maybe might possibly happen someday.
Think of it this way:
If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.
A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.
Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.
You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!
Losing 5% of $20K compounded over 10yrs = $12.6K
Losing 5% of $20K compounded over 15yrs = $20.6K
Losing 5% of $20K compounded over 20yrs = $33.7K
Cost of borrowing $20K from LOC for 6 months at 2% = $200
Cost of borrowing $20K from LOC for 6 months at 7% = $500
Cost of borrowing $20K from LOC for 6 months at 15% = $1.6K
Cost of cashing out $20K from investment at 20% market drop = $5K
Cost of cashing out $20K from investments at 40% market drop = $13.3K
Holding cash is expensive insurance against a job loss.
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I currently have 5k in emergency funds in a savings account; now I'm taking a long, hard look at putting that to work, too. Ahh, decisions.
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Dunno about you but if the market takes a dump and I lose my job I don't want to be living off of credit cards.
Firstly if you can't walk out into the world and get a paying job doing something than you need to make sure you are still breathing!
I was employed as an engineer making well over $100K. The company had a speed wobble between large contracts. I walked down town and got a retail job that week selling outdoors gear. Did that for a few months until the company got their new contract and went back to business as usual. My cost of living wasn't super high and I shut down all but my essential expenses so I only had to dip into my LOC a little and my crappy job was more than enough cash flow to keep everything going. It never once occurred to me to cash in any investments.
If you can't out compete for a retail sales job hang your head in shame.
Secondly you only use credit cards for a short term deferment to the next pay period. If you finance a job lay off on your credit cards and not your low interest rate LOC you are a moron and deserve the 19% interest.
The responses to this thread are pretty indicative of people who started saving during the 6 year bull market. Kaspian nailed the scenario.
I lived through the tech bubble bursting and 2008. I've had a temporary lay off in that period and then later had to re-start my career in a small job market. None of that has made me want to hold month's of cash just in case something maybe might possibly happen someday.
Think of it this way:
If you have a 20k emergency fund earning 2% in CD's and the market on average return 7% you are missing out on the spread of 5%. This amounts to about 12.5k over 10 years.
A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily. If you run the numbers you need 10 years of 7% growth to make up for one loss of 40% to be even with the just keeping your money safe in CD's.
Investing your EF might seem like a no brainer to those with short memories or who have a only bull market as a reference point. Let those wiser than you help you out.
You will not miss the 12k in the slightest when you are retired living of a stache 50x that size!
Losing 5% of $20K compounded over 10yrs = $12.6K
Losing 5% of $20K compounded over 15yrs = $20.6K
Losing 5% of $20K compounded over 20yrs = $33.7K
Cost of borrowing $20K from LOC for 6 months at 2% = $200
Cost of borrowing $20K from LOC for 6 months at 7% = $500
Cost of borrowing $20K from LOC for 6 months at 15% = $1.6K
Cost of cashing out $20K from investment at 20% market drop = $5K
Cost of cashing out $20K from investments at 40% market drop = $13.3K
Holding cash is expensive insurance against a job loss.
A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009.
What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.
If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.
Who cares?
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A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009.
What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.
If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.
Who cares?
I like you. You're good people.
Maybe people don't realize how difficult it is to get a low interest loan if your country's in recession, you owe more on your mortgage than the house is worth, your portfolio's worth half what is was a few months earlier, and you have to report that you're unemployed? ...Ah, well--fuck it.
I don't think we'll see another recession like '08 for 30+ years, but there's bound to be lots more crazy times ahead.
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A HELOC is great until your home loses value and you are shopping for a LOC during a recession. I can see the HELOC being a great option if you have your home substantially paid off, but those in many cities with 40% equity in 2007 had 0 equity in 2009.
What you are not considering by projecting 5% growth for 20 years is what happens when you need that money year 4 when you lose your job. That EF is now worth 14.5k which is only 4 mos. of expenses instead of the 6. You then have to withdrawl 5.5k of stached money. That 5.5k of stached money is worth 37k 20 years later if you had never touched it at the bottom of the market.
If you need 600k to retire, and maxing out your tax advantaged accounts, missing out on that 34k gained by investing in a make believe world is delaying your retirement by 4 months.
Who cares?
I like you. You're good people.
Maybe people don't realize how difficult it is to get a low interest loan if your country's in recession, you owe more on your mortgage than the house is worth, your portfolio's worth half what is was a few months earlier, and you have to report that you're unemployed? ...
... or you're employed, but making $300/week as a part-time barista instead of the 1000/week you made before in your field.
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I agree that if you have a small networth and you are able to save less than 50% of your income, then you should have an EF. But once you have good sizeable networth and you are able to save more than 50% every month, having an EF is useless. Normally the 50%+ that you save every month should cover most emergencies (especially if you are in a relationship where both partners save 50+%) and if you lose your job, put everything on LOC or HELOC (if you have that option) until you find work...if you are worried with the amount of LOC used for the duration you have no work, then you can use your sizeable investments to live on for awhile. Not sure how it works in the US with the Roth IRA and all those other investment options, but in Canada, we are able to use the TFSA in which we are not penalized when we withdraw our funds from our investments.
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Congrats on paying off the mortgage!
I think that point in particular is important in you decision process for two reasons.
First, you no longer have a mtg payment.
Second, you have substantial equity in your home and can set up a HELOC now before you need it.
Brief answer, no I do not think I need months of extra cash in a separate Emergency account.
But everyone does need something.
You can read why I feel that way and then see for yourself.
I have about 1 month extra cash in a savings account. I usually need to use it to pay my bills before my paycheque comes in.
(I'm kind of living paycheque to paycheque :) because I like to save every month)
In addition to that, I have about 3 checking accounts (don’t ask). But all of them have 1.5 to 3K balance so I pay no fees. OK that’s 2-3 more months. And all of those accounts have overdraft for a few more thousand. So I probably have more "cash" on hand than some MMM here.
However, I would use my CreditCard (pay in full 1 month later) then HELOC before letting my checking accounts drop below the minimum and certainly before using the overdraft. The HELOC interest is lower than the fees per account.
Only once I dug a hole of about 20K into my HELOC, or 10 months expenses, would I cash out some of my investments. But before that, I would turn off the DRIP (dividend re-invest) for a measly $200/month.
I do currently have a house “emergency” (that I kind of saw coming) of about $7-10K this month. It will be put on the HELOC and paid off within 2-6 months. I can throw a few 1-2 K on it ASAP then depending on if I continue to invest my savings and pay this “emergency” slowly (6 months) or halt my savings and pay it all ASAP (2 months).
I think there are some factors that have not been mentioned.
A real emergency may be a car crash. Or as some have pointed out, 3 shitty things at once. My job is stable. It could end in 1y or in 2y but I will have at least 4 months warning/severance. Are you single or the only income earner in the house? Could you get any family support? If you are single, I would add 1 month cash to your emergency fund. If you have kids, or others relying on you, I would add 1 more month. If you have no chance of family support in an emergency I would add another month.
MMM has a large stash, secure income (dividends from stash & website), a paid off house, a supportive wife, probably a supportive extended family (I can’t picture any Canadian/Indian family not helping) and an emergency HELOC so he doesn’t need an emergency fund.
Not very many of us can check off all of those boxes. I can’t! But that is why you get so many varied answers.
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"A job loss where you really need 6 months of expenses is likely to coincide with a recession which could trim 40% off your emergency fund easily."
Correct.
Having a small emergency fund is a no-brainer. The only people who don't need it are a) those folks who have significant cash flow over their expenses and are financially free and b) folks who have absolutely no liabilities, dependents or any risk of losing income.
Pete (MMM) is definitely a).
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Having a small emergency fund is a no-brainer.
Sure, but how does one define "small" in this context. In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote. A job loss would not, itself, require immediate access to next month's emergency funds. If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week. Therefore, one pay period of take home pay in a cash account in a local bank is your "small emergency fund", and whatever more weeks & months of emergency funds you feel you need should be in a bond heavy, diversified, taxable investment account.
But then, being late on the cell phone bill doesn't qualify as an emergency, IMHO. For that matter, it's been my experience that a layoff isn't that much of a crisis anyway, there are just too many ways to reduce the downside impact of an unexpected loss of employment in this country; from frugal 'belt tightening' to seasonal 'gap' work to federal, state & private unemployment insurance and/or benefits.
I'd say that totaling your commuter car (without insurance), or your furnace dies dies during winter, or your only toilet refuses to flush, or your kid wakes up puking bile; these things are emergencies. Yet most similar examples can be managed with a liquid cash fund of less than a month's take home pay, even if the entire crisis can't be paid for immediately.
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I like this thread, and it partly highlights why I was attracted to MMM.
One of the biggest lessons I've taken from MMM is the 'Frugality Muscle' concept.
Knuckling down on ridiculous expenses/overheads, and obtaining as much, or more, joy from life is a double edged sword of power.
More money to invest, and less need for money.
The EF question speaks to the 'less need for money' side.
If your annual expenses are $25k for you and family, then your 3 month EF in cash is $6,250.
Sure, we can argue the maths and hypotheticals, but in the end it is a minuscule amount that is unlikely to alter many planned retirement dates.
Even at 6 months EF we are talking small amounts.
Even if that multi pronged disaster strikes all on the same day, the prior work you've done becoming a frugal, happy, confident, healthy individual who hopefully has the gumption and fortitude to go out and find some other job the next day, will put you in good stead to survive a prolonged assault of misfortune. The ability to be flexible, roll with the punches, and keep on keeping on, is vital in any emergency or disaster.
For these reasons I think valid arguments can be made to either hold, or not hold an EF depending on your own situation.
Murdoch
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Brief answer, no I do not think I need months of extra cash in a separate Emergency account.
But everyone does need something.
You can read why I feel that way and then see for yourself.
I have about 1 month extra cash in a savings account. I usually need to use it to pay my bills before my paycheque comes in.
(I'm kind of living paycheque to paycheque :) because I like to save every month)
In addition to that, I have about 3 checking accounts (don’t ask). But all of them have 1.5 to 3K balance so I pay no fees. OK that’s 2-3 more months.
In other words, you DO have several months of cash in accounts--just not in an account labeled "Emergency." It's still an e-fund.
Having a small emergency fund is a no-brainer.
Sure, but how does one define "small" in this context. In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote. A job loss would not, itself, require immediate access to next month's emergency funds. If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week.
If the market is down 40%, selling even a little will suck a lot. Plus transaction costs if you do this repeatedly.
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Having a small emergency fund is a no-brainer.
Sure, but how does one define "small" in this context. In my view, the odds that anyone will have a fiscal crisis that requires immediate access to a 3 to 6 month liquid cash account is remote. A job loss would not, itself, require immediate access to next month's emergency funds. If there is a correction (like we are seeing now) occurring during the same week you happen to be laid off, then just sell as many stocks & bonds as may be necessary to make it another week.
If the market is down 40%, selling even a little will suck a lot. Plus transaction costs if you do this repeatedly.
The odds of anyone needing funds during a 40%, or even a 20%, correction are truly remote. The number of times crashes of that magnitude have occurred in the history of the US stock market can be counted on one hand. Furthermore, the odds that a middle class American will actually need emergency funds in excess of one month's take home pay during their entire working career is about an even 50/50. High enough that it's a good idea, but still not dramatic over an entire lifetime. Like I already said, I've been laid off more than a dozen times, twice for longer than two months time, and have never actually needed more than one month's e-funds. If you look at the article from Betterment that another poster provided above, putting 130% of your target e-fund amount into a 40% Bond 60% Stock portfolio (pretty conservative) gives you a 95+% chance of having at least your target e-fund amount available for any month since 1956. Do it however you like, it concerns me not, but try not to be a zealot about your own plan. There is more than one way to do it.
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In other words, you DO have several months of cash in accounts--just not in an account labeled "Emergency." It's still an e-fund.
Touché!
But I would use my HELOC first and also before I saved even more in a specific e-fund.
I guess the point is to take stock of all your accounts before deciding your e-fund requirements.
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Plus transaction costs if you do this repeatedly.
Transaction costs are negligible for the securities we talk about on this forum. Commissions are zero or near-zero at various retail brokers. The average spread for VTI (https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/bidaskspread) is 0.01% of the market value. In a sale of $10,000 of VTI, you would lose roughly $1 (one dollar) to transaction costs.
I'm calling for a moratorium on "transaction cost" arguments in the context of the stocks and ETFs that we talk about here. There is no reason to pay any nontrivial transaction costs on these transactions in the year 2015. In the old days, securities markets were less liquid and so transaction costs were significant. That is not the case anymore for the securities that we talk about on this forum.
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I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.
The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.
Where are you getting the sweet rates?
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?
Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.
It's really not a big deal to have 3 months of living expenses in a checking/savings account.
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?
Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.
It's really not a big deal to have 3 months of living expenses in a checking/savings account.
If you are already saving more than 50% of your income, it should easily pay for AC breaking especially if both you and your wife have a big savings rate. I have a credit line, I can easily transfer to my account at no time if they need cash now. There are many ways. People put too much emphasis on "What happens if that 1% chance hits me". Like I said previously, if you have a small net worth and are not able to save more than 50% of your income, then you need an EF. But once you have more money and a high savings rate, having an EF is useless.
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From Random Walk Down Wall Street (Malkiel)
Range of annual return rates on common stocks for various time periods 1950 - 2013:
1 year: -37% to +52.6%
5 years: -2.58% to +28.76%
10 years: -1.47% to +19.61%
15 years: 4.21% to 19.1%
20 years: 6.46% to 17.99%
25 years: 7.96% to 17.57%
Of course even this is not guaranteed, but you still need a 15 year horizon to start having expectations that the stock market is a safe bet. It has already been said better, but I repeat - don't put your e-funds into stocks. And read Random Walk - hugely helpful to understand the game you want to join. -aperture
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
A lot of really good points have already been outlined so I won't repeat them here, but consider also that your emergency provider (broken AC, car engine malfunction, etc.) may not even take credit cards. If your AC breaks and you do your research and find a small business/contractor who's highly rated and recommended but doesn't take credit cards, what are you going to do?
Regardless of stock market movement and job loss, even selling stocks when they're up incur capital gains taxes that you'll be on the hook for come next April. And if you're so "optimized" that you don't have any cash e-fund, then you probably didn't account for paying an extra $800-1,200 in taxes that come from liquidating stock assets.
It's really not a big deal to have 3 months of living expenses in a checking/savings account.
If you are already saving more than 50% of your income, it should easily pay for AC breaking especially if both you and your wife have a big savings rate. I have a credit line, I can easily transfer to my account at no time if they need cash now. There are many ways. People put too much emphasis on "What happens if that 1% chance hits me". Like I said previously, if you have a small net worth and are not able to save more than 50% of your income, then you need an EF. But once you have more money and a high savings rate, having an EF is useless.
I can agree if you already have your financial situation figured out, i.e. saving 50% of your income and have a couple hundred thousand in a taxable/roth account, then you can reduce the need for liquid cash. If you are well on your way to early retirement, congratulations! You are definitely not here looking for advice!
There are many people who come to this forum like the OP who are just starting out. I believe the OP stated they had saved $2500 and was wondering if they even needed the cash for an EF. The answer to this question is you absolutely need the liquid cash!
If the OP said: "I have 200k in a vanguard taxable account, 400k in my 401k, and saving 50% of my income; do I need this 20k in my bank account? Then I can see the arguments for springy debt etc...
Those posters who have it figured out need to be careful what they are recommending to new members (those with a nw <300k). Being FI and having a fortress like balance sheet lets you do things like: no need life insurance, liability only insurance on the car, HDHP, no cash EF, and 100% equities (though this is still stupid!). This advice can be disastrous for new ER converts who don't have it dialed in yet.
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Just because it seems like nobody has linked the MMM article yet, I'll do it: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/
I think it's important to keep in mind that it's possible to:
1. Get another job
2. Lower expenses
3. Use credit cards for the usual 1 month no interest loan
4. Use the line of credit
5. Use dividends/interest from index funds
...all before having to sell any investments. Emergency funds are often never used by prudent people anyway. Have enough cash to manage your usual monthly expenses, but invest the rest and open a credit line if you feel you need it.
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I keep cash because I find it more convenient.
I don't count cash in my networth/investments so when I hit FI, I will be FI without the cash so me investing it for a "boost" would be the same as working "1 more year". IE, not needed.
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However it hardly matters much. The opportunity cost of keeping a small emergency fund in cash is fairly low. So this discussion is pretty academic.
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It's really not a big deal to have 3 months of living expenses in a checking/savings account.
That's me. 5,000 bucks sitting there doing just a few percentage points. ...But it was good to have as a cushion when I screwed up earlier this year to the tune of $1300. Since Mustachians are pretty tight with their budgets and our automatic DCA schemes, it took me about 3 months to put back. On my LOC this would only have been a paltry $10. On a credit card, more like $55. From my savings account? Nothing. If the number had've been much larger and I had to go to credit or cash out investments, I would have been uncomfortable.
However it hardly matters much. The opportunity cost of keeping a small emergency fund in cash is fairly low. So this discussion is pretty academic.
This thread actually made me laugh last night when I was thinking about. Here are all these high percentage stash-cashers, we're all on the same page, reading the same manual, and heatedly quibbling over the finer points. :) It's like we're all on a giant yacht and sitting around arguing over the colour the boat horn should be while the rest of society is drowning themselves by jumping overboard.
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I keep a small emergency fund in a 3% checking account (yes, it exists).
Now I'm just trying to figure out the best way to diversify everything else, I certainly don't want everything in index funds. I'll probably start putting some into real estate in 2016. Helps to be diversified imo.
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
I don't think anyone was advocating for a zero cash position. The debate is between a small fund of a couple thousand, or a large cash fund that can cover months of zero income. I just favor the small cash fund coupled with a few months worth of investments in an accessible (read taxable) account. It's not a great idea to keep those invested e-funds in a retirement account, but to some degree, even the contributions to a five year old Roth; or the 'loan' feature of a 401k for those who have access to that, can count towards the most extreme of crisis funds.
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I don't think anyone was advocating for a zero cash position. The debate is between a small fund of a couple thousand, or a large cash fund that can cover months of zero income. I just favor the small cash fund coupled with a few months worth of investments in an accessible (read taxable) account. It's not a great idea to keep those invested e-funds in a retirement account, but to some degree, even the contributions to a five year old Roth; or the 'loan' feature of a 401k for those who have access to that, can count towards the most extreme of crisis funds.
I thought the whole thing was about having near-zero-cash vs EF. If the debate is what you say it is, I guess that since my average monthly expenditure is $700, a few thousand already covers several months of zero income. Maybe I don't have to change anything after all.
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i keep everything invested. i dont understand the concept of keeping massive amounts of cash for emergency sitting around.
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
I don't think anyone was advocating for a zero cash position...
OP was advocating for a zero cash position. Perhaps he/she could clarify if I'm mistaken.
Anyway, my original thinking was to get several months worth of expenses into a savings account for emergencies, like if I lose my job and have to make mortgage payments, I have something to fall back on... Then I started to wonder if having all that cash sitting around in savings, doing nothing, is actually all that wise. Maybe I should just dump it all into a Vanguard account and at least let it grow while the inevitable layoffs may (or may not) come.
Are there any downsides to just putting the cash into index funds? I know there's a chance the market takes a dive, like the last few days, but on the other hand savings accounts miss out on any growth that might happen over time anyway.
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I'm in the cash camp on this one. I understand the springy debt concept and the idea of keeping your money working, but having zero cash on hand is irresponsible to me.
I don't think anyone was advocating for a zero cash position...
OP was advocating for a zero cash position. Perhaps he/she could clarify if I'm mistaken.
He was asking for the forum's opinons on the matter, so I don't consider his statement advocation. No one who was responding with an opinion was advocating zero cash, at least not until boarder43.
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I don't think anyone was advocating for a zero cash position. The debate is between a small fund of a couple thousand, or a large cash fund that can cover months of zero income. I just favor the small cash fund coupled with a few months worth of investments in an accessible (read taxable) account. It's not a great idea to keep those invested e-funds in a retirement account, but to some degree, even the contributions to a five year old Roth; or the 'loan' feature of a 401k for those who have access to that, can count towards the most extreme of crisis funds.
I thought the whole thing was about having near-zero-cash vs EF.
Near, maybe. Not zero.
If the debate is what you say it is, I guess that since my average monthly expenditure is $700, a few thousand already covers several months of zero income. Maybe I don't have to change anything after all.
I was basing that statement on roughly my own setup. I keep $1500 in cash, which is about one week's take home pay for me. A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K. Everything is relative.
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I was basing that statement on roughly my own setup. I keep $1500 in cash, which is about one week's take home pay for me. A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K. Everything is relative.
Now I can see why some people would not want several months of EF. I'd only need 4.2k, and I am currently keeping 5k in savings
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I was basing that statement on roughly my own setup. I keep $1500 in cash, which is about one week's take home pay for me. A minimalist week's expenses, for me, would be $927; so a month of e-funds would be $3700 and a six month e-fund would be $22K. Everything is relative.
Those are almost exactly the same #'s for me. I have $2500 in cash on hand already saved, and I won't touch that. But it just seems a bit 'chicken-little' to keep more than that liquid.
Anyway, thanks for everyone's input - I am keeping $2500 in cash and just opened up a Vanguard index found account today and put in my first $3k!
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1. I think I recall that limits on many, many HELOC's were slashed drastically or even disappeared during the Great Recession. Am I wrong?
2. Did the OP actually say he killed his mortgage? I thought he said he killed everything except the mortgage. Am I wrong?
3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?
WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.
P.S. It doesn't really matter if I'm wrong or right, I'm just trying to be funny.
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3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?
Well, I have a net worth around a quarter million, so I guess it depends upon what defines "little NW" in this context.
WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.
Religion, politics and cash emergency funds are always dangerous topics.
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Religion, politics and cash emergency funds are always dangerous topics.
Perfect, MoonShadow, I'll make a note of that for future reference. I literally laughed out loud, now DH is wondering what I'm up to.
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Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?
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Really interesting discussion so far! The MMM community really kicks ass at threshing out tough issues like this. I have a couple of thoughts, and a question.
You can also limit your need for a cash cushion by diversifying your income sources. Side jobs will cushion some of the blow from a layoff - however, they won't offer as much protection you from unexpected medical expenses or home repairs (though home repair costs can be nullified by renting).
At the end of the day, the size of your emergency fund should be tied to the risks you face in your own life, not a one size fits all approach. What's your job security like (are you a contractor or government employee; do you have a spouse? are they employed by the same company)? What housing expenses do you have (do you rent or own)? What about transportation expenses (do you have an old car that could breakdown or do you use the subway)? What's your health situation (medical history and how much insurance do you carry - and what's the deductible)? If you evaluate the downside risks in your life, it should help you determine how much of an emergency fund cushion is appropriate.
Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?
Thanks!!!
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Really interesting discussion so far! The MMM community really kicks ass at threshing out tough issues like this. I have a couple of thoughts, and a question.
You can also limit your need for a cash cushion by diversifying your income sources. Side jobs will cushion some of the blow from a layoff - however, they won't offer as much protection you from unexpected medical expenses or home repairs (though home repair costs can be nullified by renting).
At the end of the day, the size of your emergency fund should be tied to the risks you face in your own life, not a one size fits all approach. What's your job security like (are you a contractor or government employee; do you have a spouse? are they employed by the same company)? What housing expenses do you have (do you rent or own)? What about transportation expenses (do you have an old car that could breakdown or do you use the subway)? What's your health situation (medical history and how much insurance do you carry - and what's the deductible)? If you evaluate the downside risks in your life, it should help you determine how much of an emergency fund cushion is appropriate.
Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?
Thanks!!!
I remember the bank kept sending me panflets to open up a credit line. If you have good credit, I think all banks offer them.
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Also, if you have money in a 401k, you can take a loan against your 401k funds at any time. When you pay back the loan, the interest goes to you, not to the bank.
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Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend.
I don't like the idea of a credit line.
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Now for my question - I'm seeing people refer to LOCs and HELOCs in this post. Are they different, or are people abbreviating? Is it possible for a non-homeowner with excellent credit to walk into his bank today and request a line of credit? Are there any products you'd recommend?
Thanks!!!
I'm a home owner, but my EF plan is based around a LOC that is not home equity based. My mortgage is not with my bank. They have no idea I have any home equity. My LOC is strictly based on my credit score and reported income. Nobody has verified that I actually have a job/business income in decades beyond noting that I pay my bills reliably. My LOC has no collateral.
I've been with the same bank for 25yrs+ and have an amazing credit record. So I got a low interest LOC that will not be affected if housing prices tank [which is unlikely in my area anyways]. My long credit history with the bank means that they are unlikely trouble me as long as my minimum LOC payments are made. I can live off my LOC for 1yr+ if I needed to without taking in any extra cash.
So the answer is yes you can get a LOC with no home equity. You may even prefer that so there is no risk that a housing crash affects your LOC.
IMO a LOC makes an excellent EF with the dual back up of the willingness to work even if it's a crappy retail job and having a large investment account. With so many levels of redundancy you can select the best way to respond to a problem and the actual costs of borrowing against a LOC are so much less than the costs of carrying months $$ for an EF in a low interest account for decades just in case you'll be several years of savings or RE ahead of yourself by not holding cash.
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3. In general, it seems the more a person has to lose, the more they're willing to keep a well-stocked EF. Newbs with little NW seem to make up the bulk of the anti-EF crowd. Am I wrong?
WTF does it matter in the grand scheme of things if you keep a little cash available for emergencies? Why are folks so vehemently against it? I do not understand why it's such a polarizing topic.
When I was young, and house prices and markets only ever went up, I kept virtually no EF--we had a HELOC attached to our checking account and never paid any attention to it. We'd dip into it, pay it off, dip into it, pay it off, sometimes to the tune of tens of thousands of dollars. Market crash of 2008-09 scared us, and we started amassing cash, at one point we had over $150K in cash. Then, after finding MMM, we invested most of that, but still kept 35K or so in cash. And just this week, I invested another 25K of it in stocks. So, not sure if I've proven or disproven your point, but we have the smallest EF we've had in years, despite our advanced age (44 and 47) and decent NW (1.7 million).
Now, 10K may seem like a big EF to most people here, but that is something more than one month's, but less than two month's, expenses for us, so not large by my estimation.
Having a plan for a number of different scenarios is smart, though, so I'd probably better rethink mine since my EF is newly-small.
And I, for one, couldn't care less whether or not people have a large EF. It's an unwinnable argument, as it's simply about tradeoffs, and some people prefer one set of tradeoffs and others prefer another, and at various points in my life, I have preferred one over the other and then flip-flopped.
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Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?
We only care if they hired them on credit.
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Religion, politics and cash emergency funds are always dangerous topics.
so that's why no one talks about the politicians that cater to the religious while hiring prostitutes with cash?
We only care if they hired them on credit.
'Cause only a Dem is stupid enough to do it. The mayor of Cincinnati wrote a personal check.
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I have a bunch of perpetually recycling Term Deposits that it would be too much of a PITA to shift over into my investment account. They amount to about 3 months of income (though of course in the event of job loss our costs would drop dramatically, as well as savings opportunities). I just leave them alone and accept that I might lose the 1.5% or whatever if I cash them prematurely.
Ultimately I'd like to set up 12 GICs (term deposits) that mature on the first of each month, and each value at the equivalent of just over 1 month of expenses. They will be earning something at least, be totally secure, and I can start cashing them out in the event of an emergency. If it's more than a year long then it's a more serious emergency and all bets are off anyway (time to sell the house?)
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Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return
If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.
Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)
In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...
IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.
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I keep about $10,000 in cash, and use it for checking sign up bonuses. So far it's up 5.5 percent since May!
It's not for everybody, but it's an easy way to put your emergency fund to work once you get the hang of it. Doctorofcredit was the site that helped me get started on it.
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As long as you have high income, low expenses, and cheap credit on tap, no.
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As long as you have high income, low expenses, and cheap credit on tap, no.
Well, the basic idea of an emergency fund is that one or more of the above conditions could suddenly change.
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In reading through this thread, it seems people have "savings" and "investing" in the same breath.
Savings are not technically investments.
According to Keynesian economics, the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.
Savings can be turned into further increased income through investing.
Read more: Savings Definition | Investopedia http://www.investopedia.com/terms/s/savings.asp#ixzz3kcQ5NFf8
Follow us: Investopedia on Facebook
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I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.
So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.
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I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.
So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.
That is an excellent rule-of-thumb.
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Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return
If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.
Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)
In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...
IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.
I think your assumption is that the worst case scenario happens at the end of the 10 year period. If it happened in year 1, the result would greatly differ. That's the problem with risk. You never know when shit hits the fan. That's why it's called emergency fund.
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I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.
Where do you bank? I want in on this for where my paycheck directly deposits to.
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Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return
If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.
Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)
In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...
IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.
I think your assumption is that the worst case scenario happens at the end of the 10 year period. If it happened in year 1, the result would greatly differ. That's the problem with risk. You never know when shit hits the fan. That's why it's called emergency fund.
No my assumption was that the "event" happened in month 5 of the 10 year period.
I think what people fail to account for when doing this comparison is the 6 months of building back up your emergency fund after you spend 6 months depleting it. That money would otherwise be going to your investment accounts.
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Messing with some numbers here with the following assumptions...
$20k emergency fund
$3k in monthly expenses
$3k in "savings" each month (when employed)
1% return on savings account
7% market return
If there are no emergencies, over 10 years investing that emergency fun will give an 82% return ($16.3k) over keeping it in the savings fund.
Now in a worst case scenario (which would be exceedingly unlikely) you experience, in order...
1) 40% drop in the market
2) Job Loss (6 months)
3) Pull 20k from investments to cover expenses while OOW
4) Market recovers to previous levels (your $20k is already out)
In that scenario, you would end up losing out on 76% ($15.3k) over 10 years vs having a EF in a savings account...
IMO its worth the risk to invest that money as the worst case scenario is so unlikely to happen.
I would also like to point out that a 40% drop would be far and away the biggest crash in US history. Black monday was around 20% and oct 1929 was about 13%. The whole year of 2008 was 32%.
If you left everything else the same, but changed the 40% drop to a 20% drop, then investing you EF would result in a 5% GAIN over leaving it in savings even during the "worst case scenario".
Ive also attached the spreadsheet I used if you want to poke holes in it.
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I would want $10,000 or 6 months expenses as an EF. However, I would reduce that by $1,000 per $10,000 taxable investments down too a small amount just to avoid the inconvenience of selling and transferring routine $.
So if I had $80,000 or more in a Vanguard taxable account I'd be fine with a $2,000 "emergency fund" which basically just covered daily expenses.
This is what I do. Really fits with my risk temperament.
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I think having an EF is a no-brainer.
HOW MUCH, that's the wildcard.
I suspect for most people, at least $1k - $2k should be expected.
Do you need $5k?
Do you need $10k?
Do you need $30k?
I can't tell you since I don't know your tolerance for risk.
The universal truth for almost everyone though is, you need some cash now and then (versus 100% credit) so at least $1k - $2k is worth having on hand.
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As long as you have high income, low expenses, and cheap credit on tap, no.
Well, the basic idea of an emergency fund is that one or more of the above conditions could suddenly change.
It's different for each of us, I suppose. As a nearly unfireable federal employee with disability insurance and multiple side gigs, I have a pretty cush worst-case scenario that gets better every month. During aggressive course corrections, I've literally emptied my checking account more than once to maximize the utility of every dollar. Having free overdraft protection and $20K+ on tap means no risk there - any surprises can be covered within two weeks. Cash on hand reduces risk for every scenario; if risk is vanishingly low, for whatever reason, that cash is better invested.
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I'll see the comment above and raise it a few more thousand, lol. I suspect there's a direct correlation between age and amount of cash on hand. The older you are, the more you appreciate the value of readily available money when an opportunity presents itself. And to be fair, you've had longer to amass a nice stache.
Yeah, nothing like having the Furnace fail in the house, requiring total replacement last month, then all 3 cars broke down in the same week, and I found bad rot on both the house and shed siding too. A cash buffer is nice when all the bad stuff that we'd like to have spread out decides to happen all at once... :)
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The emergency fund is essentially an insurance problem. Do you forgo the extra investment income you could earn on money that is instead sitting at a bank to guard against a low probability high cost event?
If you can weather the low probability high cost event, by cutting expenses, finding a side gig, selling investments in your taxable account, etc., and the probability of the event is low enough, then the strictly financial answer is no, you should not have an emergency fund.
Of course, you also have to consider whether you can sleep well at night without having an emergency fund.
Additionally, assessing the probability of an emergency, and estimating the actual cost of a true emergency, is hard.
I find myself with what I deem to be a very secure job, a $60k taxable portfolio, $15k in IRAs, and a 50% savings rate. I believe that I can weather any emergency. I sleep well at night without having an explicit fixed value emergency fund.
I do however adhere to some of the YNAB philosophy. The part about living on last month's income. So I always have an emergency fund in the form of the last month's income. The true purpose of this money sitting in the bank is to make sure that I am spending/budgeting money I already have as opposed to money I expect to earn (I use credit cards). However, it is an emergency fund, even if it is not the typical fixed value emergency fund.
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I have always been in the low/no emergency fund camp. My family is faced with the potential of a very large legal bill/settlement through no fault of ours. Since it is slow developing, we are able to redirect savings to build a cash buffer and plan for worst case scenarios, but if something of a similar magnitude came up quickly, springy debt/credit would probably be the answer. I don't think you're ever going to convince me to keep several years take home pay in fixed income or cash on the assumption this will happen again.
Two points:
- there is no ONE right answer
- the emergency is something you didn't plan for (no way we saw this coming)
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I keep my e-fund in a taxable index account at Vanguard. Got to have those soldiers working...even if they have a bad day, or week, or year; my green soldiers march on!
Yes, this is exactly what I have started thinking, after reading MMM and a few other sites, it doesn't seem to make sense to have a bunch of cash sitting around.
Agreed, I've heard of a lot of people doing this very thing. Credit cards can cover you until taxable shares can make it into your bank account.
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I'm in the no/low EF group(1-2 months of cash just to prevent overdraft). I understand all the arguments for a substantial EF, but I disagree with the % probability of an emergency being likely enough to warrant having substantial cash positions. I accept the risk that I may have to use my emergency assets in a down market as worth it, given the possible/likely returns having them invested during non-emergency periods will give me.
This discussion is boba, and is akin to the discussion of paying down the mortgage or keeping it. In the end, whatever plan works for you is the one you should take. There may be a handful of Mustachians here who hold to gold as an asset, and the Permanent Portfolio, and then there's everyone else. There are people here who like how "real" dividend investing is as opposed to index investing, and then there are the indexers. There are the hard EMH proponents, vs. the weak EMH proponents. Real estate investors vs. those of us who don't feel up to it.
Every position has validity, and if it's worth it to you, or if an "emergency" is more likely to happen to yourself, or you feel more comfort from cash, then you do you, and those of us who are in the emergency asset class, or springy debt class will do us.
For me, the only emergency that would be a true emergency would be personal incapacitation or armageddon(economic, world, technological), and I honestly don't and haven't ever seen any proper course for planning for either of those events(actually, I think I'll use this topic as the impetus for having a living will or whatever written). For anything else, I will move, I will use the funds I have, I will take the jobs available without regard to location, and I will sleep soundly with my own choices in the matter.
I look to Moonshadow, and VikB's excellent prior posts as good explanations for why I hold the position I have with regards to cash savings.
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What I mean to say is this, I don't think that us in the no/low cash savings group are here to try and preach the gospel to you heathen unbelievers. ;)
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Wife and I are planning to slow travel after FIRE and will have an international health insurance with a fairly high deductible. We will have the deductible amount as a cash emergency fund. Chances are, when one of us is sick (knock on wood), we won't have the mental clarity and rational we have now leading us to make bad decisions. Also we believe it is the best way to quantitatively assess the right emergency fund amount. Health problems are as hard to predict as a market correction. Therefore shouldn't be timed. So we beat two birds with one stone IMHO.
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Also, if you have money in a 401k, you can take a loan against your 401k funds at any time. When you pay back the loan, the interest goes to you, not to the bank.
Although this strategy could cover some emergencies it is typically ineffective against job loss. When you leave your company the loan must be repaid typically in 90 days or it is considered a withdraw and you are hit by taxes and fees.
I know this is true with regard to the tax law that governs it, but I've never worked at a company that both permitted 401k loans and did not also permit continuing of payments.
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I have no cash reserves. The very first MMM post I read was on Springy Debt, and it got me on my path to Mustachianism one year ago.
I'm fortunate to be in a very good position financially, but I completely embraced MMM's concept. I set up an HELOC on my house. It's a ridiculous amount, and a very good interest rate. I told the guy when I set it up I had no intention of ever using it.
The idea as I understood it is that an emergency fund is truly that--an emergency. Something you can't or don't see coming. Of course, I save for things that I know about (e.g., property tax bill coming up). But for me, if I suddenly have a $10,000 expense to replace an air conditioning unit or something, then that's where the HELOC comes in. It's less than 4% interest, which is not that much over a few months to pay back. I can also sell mutual funds. A 10% or 20% market drop is not going to kill you. Take out only what you need, and maybe you get $800 instead of a $1,000, which sucks, but not crisis-inducing. And charging the expense to the credit card if possible (assuming it's paid off!) buys you another 4-6 weeks.
I do think it's a good idea to have known short-term items that you're budgeting for in cash or savings, and I might be hesitant to have no cash reserves if I didn't have an HELOC. But I think MMM's post is spot on that more of your money can be working for you if you've gotten yourself into a reasonably good financial position.
One more thing. There is a really good MMM post about the cost of fear. A few posts above talk about what happens if you lose your job, the market drops 40%, and several other horrible things happen. I think those posts miss the point of the emergency fund, because most people are not talking having $50,000-$100,000 in cash to protect against worst-case scenarios. Emergencies are unlikely to happen, and when they fall in the $5,000-$10,000 category, I believe MMM's springy debt concept works well. The most likely outcome is no emergencies, so extra cash can go in the market, where the most likely outcome (over the long term) is up.
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I think if you don't have a significant amount of equity in your home, then using the HELOC as springy debt carries a lot more risk because it doesn't take much market drop to cancel out equity and essentially make the HELOC go away. But if you've got a lot of equity, it's pretty unlikely that all of your equity will be wiped out, short of economic collapse
On paper (it's complicated) I've got a couple hundred thousand dollars in equity, though my HELOC is just under 6 figured because we set it up a while ago and it has great terms that are no longer available if we adjust the amount. Anyway, if the value of my home drops that much, the economy has crashed and burned and it probably won't much matter. So I feel entirely comfortable with that as much of our emergency plan.
If something comes up, we'd pay for it with the money we keep in our checking out largely so that we don't have to be on top of every penny at every moment. If that's not enough, we'd put it on a CC and pay it off within the billing cycle by adjusting spending and stopping automatic investments. That could easily buy is at least several thousand in a month. If that weren't enough, we'd continue those tactics and pull some money out of the CC, which I can have in my checking account in about 4 minutes. I think the interest is 1.6%. And we'd pay if off with the spending and investing cuts.
I'm pretty conservative when it comes to things like SWR and other issues, and yet I'm entirely comfortable with this strategy. There seems to be so very, very little risk.
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Yes, HELOC's are incrediblely dangerous as a form of springy debt to finance a crisis. The rate may be low, but there are a lot of gotcha's and escape clauses that favor the bank. One common one to watch for is if your credit score drops by a certain amount, that they can either raise your rate, or simply call the outstanding loan similar to a default. People tend to ignore that bit, because no one thinks their score can drop that much; but simple things like losing your job or losing your insurance (a DUI drop, for example) can undercut your score. A CC has terrible rates, but for springy debt it's still better; because even if you use it, you are going to want to get out from under it as soon as possible.
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Yes, HELOC's are incrediblely dangerous as a form of springy debt to finance a crisis. The rate may be low, but there are a lot of gotcha's and escape clauses that favor the bank. One common one to watch for is if your credit score drops by a certain amount, that they can either raise your rate, or simply call the outstanding loan similar to a default. People tend to ignore that bit, because no one thinks their score can drop that much; but simple things like losing your job or losing your insurance (a DUI drop, for example) can undercut your score. A CC has terrible rates, but for springy debt it's still better; because even if you use it, you are going to want to get out from under it as soon as possible.
The contrast between MMM's blog and the forum is sometimes the difference between positivity and negativity. The question is whether you need some money in cash for a short-term need. The answer is probably not, and an HELOC is a good place to cover you. Most of the (rare) times you would need money would be to cover unexpected emergencies like having to buy a new appliance or something. But even in the worst-case scenario of losing your job and needing money to float for a couple months, do you think your employer immediately calls the bank and lets them know you've been let go? Do you think the bank is running daily credit checks on you to make sure your credit is the same as yesterday? Do you think the bank is running appraisals on your property daily to see if today you've dropped below a certain level?
The concerns raised are of course ones to be aware of. But part of MMM's appeal (at least for me) is that he takes a realistic view of risk. What is likely to happen? If the housing market is plummeting and you're getting close to what the equity line is in the house, yes, you probably will take steps to make sure that you have other options. But that doesn't happen overnight. Yes, if your credit situation is starting to get out of control, you should get it under control and give yourself some options.
But the realistic and most likely outcome of having an HELOC based on good equity in your house is that you can tap it short-term for when you need unexpected money. Thinking that you should pay 3-6 times the interest rates on a credit card because of an almost zero risk that the bank is suddenly going to yank the rug out from under you is probably a mistake. And of course, even then, you can sell stocks or index funds to cover the short-term needs.
There are many options available as the financial picture improves, and worrying about things that are highly unlikely to happen is probably not worth it.
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I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.
The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.
I'd like to know what institution you are using to get those rates. The best I've found is 1% on money market accounts.
Thanks.
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I have my emergency fund (8 months worth of expenses) sitting in 3 different reward checking accounts earning between 2.5% and 3.25%. I know this is not a popular strategy around here but I like the piece of mind.
The air conditioner in my home just failed yesterday and it's still mighty warm around here. Even though it's going to cost between $6,000 - $8,000 to replace I'm not breaking a sweat over my investments or the unexpected expense.
I'd like to know what institution you are using to get those rates. The best I've found is 1% on money market accounts.
Thanks.
One example is consumers credit union {my consumers.org - there's two named that).
Be aware that most rewards checking accounts require a certain number of debit card transactions per month
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I keep a few months of cash to ensure I can cover if we go over budget and have to balance checks.
The whole point of saving heavily is to develop an early retirement/financial independence fund. I measure my progress in how many years it can sustain me.
Well, if that isn't a job-loss fund, what is? Why do I have to wait to use it until it's fully funded? So what if it will only sustain my family for x years at this point? Retiring early is optional. Having my family starve is not.
If all goes well, I will have it fully funded and be able to retire early. If not, I'll still keep my retirement savings intact and retire in the traditional way, when I'm 67 or whatever.
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But the realistic and most likely outcome of having an HELOC based on good equity in your house is that you can tap it short-term for when you need unexpected money. Thinking that you should pay 3-6 times the interest rates on a credit card because of an almost zero risk that the bank is suddenly going to yank the rug out from under you is probably a mistake. And of course, even then, you can sell stocks or index funds to cover the short-term needs.
There are many options available as the financial picture improves, and worrying about things that are highly unlikely to happen is probably not worth it.
Agreed about the negativity and worrying about stuff that is so unlikely as to be not worth thinking about. Fear can get very expensive.
I would also [again] add that you can get a LOC with low interest rate that is not tied to your home equity if that element of the HELOC bugs you.