Author Topic: Emergency fund question  (Read 1120 times)

Jamese20

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Emergency fund question
« on: July 15, 2017, 02:23:34 AM »
I don't like the idea of my growing emergency fund sitting in my bank but the Mmm blog post talks about something that I don't think is doable here in the UK

Should I just put it into a vanguard lifestrategy of 20/80 stocks /bond index so it doesn't lose its value through Inflation and is fairly Conservative in terms of growth? It only takes about 2 weeks to get this money if required? I will jsut leave a small float for small emergencys in a bank account?

Please advise

Feivel2000

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Re: Emergency fund question
« Reply #1 on: July 15, 2017, 03:08:10 AM »
I don't like the idea of my growing emergency fund sitting in my bank but the Mmm blog post talks about something that I don't think is doable here in the UK

Should I just put it into a vanguard lifestrategy of 20/80 stocks /bond index so it doesn't lose its value through Inflation and is fairly Conservative in terms of growth? It only takes about 2 weeks to get this money if required? I will jsut leave a small float for small emergencys in a bank account?

Please advise
Not a good idea. Emergencies can be time critical. Also, you either have the risk that you have to sell your stocks with a loss or your won't have any relevant interest.

What's the interest difference between the Vanguard and a savings account?

Maybe your emergency fund is to big?
You could think about a multi-level emergency fund with 1 month of living expenses available directly and the remaining in the Vanguard or similar products. But again, what's the opportunity cost here?


JohnWC

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Re: Emergency fund question
« Reply #2 on: July 15, 2017, 12:09:56 PM »
I'll just tell you what I'm doing with my emergency fund. I have half of it in high interest savings (I recognize it is slowly losing value to inflation).  The other half is in a well constructed (over-funded) whole life policy earning about 5% over a 10 year period. That portion of the money can be accessed through policy loans, where the interest gets paid back into my own account, or as collateral for a lower than market value personal loan (1.5%-2%range). That portion of the money stays put and earns compound interest even if it's being used or collateralized, thereby making it preferential to many other options.

CDs seem to be popular among forum goers here. Too rigid for me.

Frankies Girl

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Re: Emergency fund question
« Reply #3 on: July 15, 2017, 12:31:07 PM »
A true emergency fund is not there to earn money. It's a solid chunk of cash meant to be available with less than 24 hour notice to take care of emergencies. You can't think of it as doing nothing. It's purpose is to remain complete and liquid, which is impossible to guarantee if you invest it in any way due to short term volatility.

The only good way to ensure both quick availability and that the entire amount is going to be there when you need it is to place it in something like a savings account or CDs or other similar no-loss/easy access types of situations.

That being said, an E fund should not be so large as to be a significant portion of your portfolio, as that would be taking a large percentage out of your growth potential. Again, it's there for emergencies, so shoot for having 3-6 months worth of expenses in cash - not years of expenses - since you likely could come up with other, better alternatives given more time.

« Last Edit: July 15, 2017, 12:33:08 PM by Frankies Girl »
I frequently have no idea what I'm talking about. Like now.

FIREd as of: March 6th, 2015!

lifeminimalized

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Re: Emergency fund question
« Reply #4 on: July 16, 2017, 06:46:52 AM »
I had your unsettled mindset for a while, and here is what I had to sit back and remind myself.

-The EF is not meant to be looked at as an investment or considered part of your portfolio
-Do not try to keep up with inflation, you will just end up chasing rates
-Keep EF in a convenient location that is easy to access

For me, I have my checking with USAA. I use it for my main hub for paying bills and cashflow coming and going throughout the month. Because of this I chose to open up a savings with USAA despite their horrible APR and use that as my EF vehicle.

Now that my EF is satisfied. At the end of the month, all my net savings gets transferred over to Vanguard and distributed out according to my portfolio allocation.

Our community is prone to over complicating finances. Thats due to the fact we see our finances as a hobby, not a chore. The only down side of this is it can be hard for us to remain status quo and be satisfied with the infrastructure of our own finances. Just like any other hobby we tend to want to change something around in order to exercise the hobby.

Warren Buffet has a good quote about making simple stuff hard. Its very true haha.

Good luck.

Cheers.
« Last Edit: July 16, 2017, 06:52:52 AM by lifeminimalized »

Ocinfo

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Re: Emergency fund question
« Reply #5 on: July 16, 2017, 08:16:21 AM »
This is meant in the nicest way possible, search the forums either using the board search or via google as there are many long threads related to EF investment strategies.


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Another Reader

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Re: Emergency fund question
« Reply #6 on: July 16, 2017, 09:12:06 AM »
I'll just tell you what I'm doing with my emergency fund. I have half of it in high interest savings (I recognize it is slowly losing value to inflation).  The other half is in a well constructed (over-funded) whole life policy earning about 5% over a 10 year period. That portion of the money can be accessed through policy loans, where the interest gets paid back into my own account, or as collateral for a lower than market value personal loan (1.5%-2%range). That portion of the money stays put and earns compound interest even if it's being used or collateralized, thereby making it preferential to many other options.

CDs seem to be popular among forum goers here. Too rigid for me.

I see we likely have another insurance salesperson trying to generate sales leads.  Never get suckered into buying this horrible insurance product.  The insurance company makes money.  You pay high fees and get poor returns.  Buy term life and invest the difference.  Put the emergency fund into a high yield savings account linked to a checking account with ATM refunds.

JohnWC

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Re: Emergency fund question
« Reply #7 on: July 16, 2017, 10:45:15 PM »
Trying to generate leads? Interesting perspective. Trying to educate is more like it. There are many good financial tools out there people just don't know about, or have wrong-headed notions about.

Another reader, your reaction to insurance products is common however I'd like to point out that you have no idea what product I have except that it's whole life. Not all are created equal. Yes the insurance company makes money but provides guarantees as well as returns that beat cds. If you're so critical of financial institutions making money why not also pick on banks who make much more money for loaning out your CD deposits while providing paltry returns? Whole life is a horrible product if return is your prime concern. We're talking about a safety reserve fund here where preservation and liquidity are primary - not going for max gains. Whole life always loses compared to the S&P, and I don't think you're suggesting that someone invests their reserve fund in the S&P.

There's more than one way to operate a reserve and some insurance products are viable in certain situations. You'll also note that I didn't recommend this strategy to the op since we know very little about his/her life.

Another Reader

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Re: Emergency fund question
« Reply #8 on: July 17, 2017, 06:43:05 AM »
The good news is most people here are educated enough not to fall into the trap of high fee products they don't understand.  What you sell might be appropriate in limited circumstances for high net worth individuals seeking to minimize estate taxes.  These policies are not appropriate for people seeking to establish an emergency fund. 

JohnWC

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Re: Emergency fund question
« Reply #9 on: July 17, 2017, 11:26:04 AM »
Clearly you haven't investigated a properly funded and structured dividend paying whole life policy from a mutual life company. Such a product can be very appropriate for bolstering an existing emergency fund for your typical middle class household and above, *only* once they have already developed the core funding necessary to over-fund the policy correctly. Again, You can invest in CDs at equivalent risk if you want to lock in your losses and limit your liquidity. You can make more money by just investing in low cost index funds if you don't mind the volatility. The problem with this and other life products is that they can be complex and they definitely can financially harm people who buy them if they buy the wrong one or fund it incorrectly. This is a major reason why I didn't recommend this for the op but it may be a perfectly legitimate option.

Another Reader

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Re: Emergency fund question
« Reply #10 on: July 17, 2017, 11:45:25 AM »
In the interests of complete disclosure, please post a detailed example of a product you sell that serves this purpose.  Include the product issuer, product name, and ALL of the details, including fees.  Also, include how much up front commission and how much of the annual premium you earn.  Should be very enlightening.

Timodeus

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Re: Emergency fund question
« Reply #11 on: July 17, 2017, 12:51:28 PM »
I keep one year's worth of cash in three different cash equivalent accounts. First I put a third in an online savings account (roughly 1%), I consider this a hedge to rising rates (savings account rates rise when interest rates rise). Another third goes into a CD ladder where once the ladder is complete all are earning the higher long term CD rate, I consider this a hedge against falling rates since these lock rates in over time. The final third I put into US I-Bonds (aka Savings Bonds) which have an interest rate based on the current inflation rate. My bonds currently yield about 2.5%. They don't fluctuate in value so there is no risk in principal loss. I consider this a hedge against inflation.

The cash in the savings account is the most liquid so if I had an urgent emergency I'd use that first but I rarely have needed anything that fast. If I needed money instantly I'd use my credit cards or the personal line of credit I set up at my credit union.

JohnWC

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Re: Emergency fund question
« Reply #12 on: July 17, 2017, 02:53:16 PM »
In the interests of complete disclosure, please post a detailed example of a product you sell that serves this purpose....

I'm a little strapped for time this month launching a business but If I can find the time later in the week I will start a new thread on the topic and will link it here. I'll also have to figure out how to post a document to this site. Just to warn you I'll also have to craft a hypothetical financial scenario where the product fits - will try to keep it simple but hopefully there's not too much hollering about that. I will do my best to identify the commission an agent would receive as well (this varies widely based on how much business that agent writes and/or assets under management). I will also have to look to see if there are any state or company rules about posting a fictional illustration online & if there are I will try to post as much as I possibly can without violating rules or laws. I do appreciate the challenge.

Jamese20

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Re: Emergency fund question
« Reply #13 on: July 18, 2017, 02:47:05 PM »
Thanks for the advice folks

OK my original idea seems pretty pants then lol...

I will leave in cash for now as I'm still building it up after 10 years of complete wasting of money

By the end of the year I should have a comfortable amount to sit on for a while and Invest the rest


skip207

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Re: Emergency fund question
« Reply #14 on: July 18, 2017, 04:07:22 PM »
We use 123 account, its not as good as it once was (used to be 3% now only 1.5%) but its better than most other accounts as its up to 20k.

After that the next best bet is probably premium bonds at c.0.8% (tax free though) on a lot larger sum.

Talking immediate access here btw.

I think Vanguard will allow you to withdraw from an ISA and replace the money within a time limit - something to look into.

HTH

Hotstreak

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Re: Emergency fund question
« Reply #15 on: July 18, 2017, 08:16:41 PM »
Thanks for the advice folks

OK my original idea seems pretty pants then lol...

I will leave in cash for now as I'm still building it up after 10 years of complete wasting of money

By the end of the year I should have a comfortable amount to sit on for a while and Invest the rest


I remember when I started and I experienced the same thing.  I wanted a certain amount in an EF, and achieving it meant I couldn't invest any money for a while.  Looking at all the other people here putting huge amounts of money in to brokerage accounts, and talking about their investment gains, was tough!  Very worth it though, for the peace of mind.

Timodeus

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Re: Emergency fund question
« Reply #16 on: July 19, 2017, 06:40:41 AM »
Thanks for the advice folks

OK my original idea seems pretty pants then lol...

I will leave in cash for now as I'm still building it up after 10 years of complete wasting of money

By the end of the year I should have a comfortable amount to sit on for a while and Invest the rest

I was in the same position a couple years ago. I got so frustrated and impatient to invest that I convinced myself to invest in a very conservative fund (70% bond/30% stock) which I thought would only go down 20% in a major crisis (ala 2008-2009). In early 2016 with a major layoff scare and the stock market dipping into a correction, that fund went down 5% when I thought I would be needing it most. I realized at that point I made a mistake. Sold it off and ate the $1,000 loss for the security of cash during a job loss scenario. Thankfully I didn't lose my job and have learned my lesson-your emergency fund should be as liquid and safe as possible allowing your other money to be invested in risk assets. Now that I have that cash, any money pressure has faded and I can focus on increasing investments.

I remember when I started and I experienced the same thing.  I wanted a certain amount in an EF, and achieving it meant I couldn't invest any money for a while.  Looking at all the other people here putting huge amounts of money in to brokerage accounts, and talking about their investment gains, was tough!  Very worth it though, for the peace of mind.