Author Topic: Invest more of my emergency fund?  (Read 1454 times)

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Invest more of my emergency fund?
« on: April 25, 2017, 11:22:58 AM »
Hello,

     I currently have 1 year (21K) of expenses stashed in an online savings account earning 1% and am debating investing half of it into our Roth IRA's. I have both of our IRA's maxed out for 2016 ($5500 each) and am considering maxing them out for the April 2018 deadline now to get more exposure to the market. I would pull out 11K from our stash to do this which would bring us down to 10K or around 6 months of expenses. We have no debt except our mortgage and save about 30K/year currently. I also contribute around 10K/year to an employer sponsored 401K (including 6% match) in an Index 2050 vanguard account. In all we will be contributing about 21K/year to our retirement with around 15K to spare. Asset allocation across all accounts is 90/10 (we are in our late twenties).

What are some viable options for that extra money aside from putting more into my 401K? I also plan to switch over to a HDHP later in the year when I can to get an HSA open and will max that out also going forward. Another plan we are considering is paying off our mortgage vs buying a duplex to house hack and potentially eliminate 12K/year of living expenses. Should I open a taxable account at this point? Should I start a savings/CD ladder to plan for either paying off our house or buying the duplex investement property?
Thank You

Babybalrog

  • 5 O'Clock Shadow
  • *
  • Posts: 57
  • Location: Raleigh, NC
Re: Invest more of my emergency fund?
« Reply #1 on: April 25, 2017, 01:13:26 PM »
For someone in their late twenties, I would recommend staying aggressive. No CD ladders for at least another 30 years.

A full year of living expenses is a lot (depending on living expenses). I would cut that in half like you planed, and if something goes horribly wrong, you can pull Roth contributions back out anytime (conversions have a 5 year delay). Here is an article about the value of investing in your 401k and IRAs early each year. I've read that only about 11% of IRA contributions are made in January each year.
http://www.madfientist.com/front-loading/

While I would prioritize the HSA for the triple tax advantage. Fund the IRA(Roth if it makes sense). And you still have room in your 401k. After all those are maxed I would consider a taxable account. If you are saving 30k/year, how is that broken down? 10k for the 401k, 11 IRA? Are you setting aside 9k taxable? Or was that 20 total? That taxable money is like an emergency fund. Just not as accessible, but you can turn it around in a few days. Think about it this way, if your transmission went out and you have a 3-4k bill. Could you charge it, sell some stocks, and pay the bill in 30 days? Sure.

I don't know enough to give you advise on house hacking, but if you're young and willing to do it. I say take the shot. Consider
http://www.coachcarson.com/live-in-house-flips-free-clear-home-6-years/
“He was swimming in a sea of other people’s expectations. Men had drowned in seas like that.”
― Robert Jordan, "New Spring"

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Re: Invest more of my emergency fund?
« Reply #2 on: April 25, 2017, 02:14:55 PM »
Staying at my 90/10 AA will be the goal for many years to come then. I will definitely be maxing out both Roth IRA's very soon then as that seems to be the logical thing to do with the extra cash. We have a very stable life so keeping just 10K completely liquid seems more than enough and at least its earning 1%. I did not explain the 30K/year savings well so here goes:

$5500 His Roth IRA
$5500 Her Roth IRA
$10000 His 401K (I am contributing 6% to get the full 100% match my company offers)
$3400 His HSA (When I open it later in the year I will immediately max it out)
$5600 left over which could go into my 401K or for real estate, which would diversify me a bit more and the duplex would save on living expenses.

I feel pretty good about the 6% into my 401K as its a fantastic retirement solution provided and has been doing very well. Thank you for the links.
Thank You

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 5286
Re: Invest more of my emergency fund?
« Reply #3 on: April 25, 2017, 04:31:21 PM »
I have $0 in an EF and use a $30K LOC for my EF. I am self-employed and don't have a super reliable job. $30K of LOC buys me a lot of time to deal with an issue. I can divert my monthly savings to pay down the LOC and if I absolutely needed to sell investments. I've never gotten past diverting savings to pay down the LOC.

I'm not rich enough to watch my cash get eaten up my inflation just in case I might need it one of these days.

Khanjar

  • Pencil Stache
  • ****
  • Posts: 618
Re: Invest more of my emergency fund?
« Reply #4 on: April 25, 2017, 10:29:35 PM »
You can withdraw your ROTH IRA contributions at any time for any reason, so you can withdraw the 2016 contributions($5500 each, so 11k right there), and prior year contributions if needed.

Quote
You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules

I'd direct you to https://forum.mrmoneymustache.com/investor-alley/investment-order/ for the recommended investment savings orders, you can deviate for whatever reasons you think are relevant, but that's why you should choose the order listed with reasons.

Also see the following posts about not maintaining an emergency fund/springy debt/taxable account as emergency fund:
http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/
https://forum.mrmoneymustache.com/welcome-to-the-forum/understanding-springy-debt/
https://forum.mrmoneymustache.com/investor-alley/betterment-$50k-%27safety-net%27/

IMO if your emergency fund is actually for emergencies, and thus infrequently used(say <1 time in 10 year span), then having outsized ROTH account or taxable accounts(or combined) meets the needs of having accessible funds. Of course, your own temperament and plans for layoffs and such might change the dynamics for you personally. My plan for not having a job is to use my total net worth to fund whatever's needed, and/or go get a job wherever necessary, and anything that's worse than that blows any planning or 6 month fund out of the water anyways. In the meantime, I reap the market returns of having not held 20k in cash for the last 10+ years, which means an impossibly large crash at this point would be required to wipe out the gains I've had.

Or, here's a post from Boarder42 along the same lines:
I keep as close to 0/ negative as possible between my checking and credit card due. Everything else is invested.  Have a big ticket purchase coming up that I will double my money on so my cash is slightly growing for that. But that's really an investment. No market returns will do 100% ROI in 2 months.

Why - BC the downside risk plus having to withdraw is much smaller than the upside potential. 

What - do I do if big unexpected expenses come up.
1. Pay with a credit card
2. Halt taxable contribution
3. Halt Roth contribution
4. Halt 401k contribution.
5. Sell equities if necessary.

Never made it past halt taxable. Which is 2k per month.
« Last Edit: April 25, 2017, 10:42:42 PM by Khanjar »

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Re: Invest more of my emergency fund?
« Reply #5 on: April 26, 2017, 08:09:21 AM »
Thank you for the insight. I have decided I will keep a much smaller EF. Would you say a viable strategy is to take that 21K and use 11K to max out the Roth IRA's then put 5K in taxable with 5K left in the savings or just dump the whole 10K in? As stated I could always withdraw the 11K from our Roth accounts if needed. I would most likely utilize our 30K of credit card capacity and use the Roth contributions to pay it off as soon as possible should an actual emergency arise. We also have about 20K in equity on our home currently as another fallback.
Thank You

Khanjar

  • Pencil Stache
  • ****
  • Posts: 618
Re: Invest more of my emergency fund?
« Reply #6 on: April 26, 2017, 08:38:49 AM »
Thank you for the insight. I have decided I will keep a much smaller EF. Would you say a viable strategy is to take that 21K and use 11K to max out the Roth IRA's then put 5K in taxable with 5K left in the savings or just dump the whole 10K in? As stated I could always withdraw the 11K from our Roth accounts if needed. I would most likely utilize our 30K of credit card capacity and use the Roth contributions to pay it off as soon as possible should an actual emergency arise. We also have about 20K in equity on our home currently as another fallback.

Is this the entirety of your accounts? So you can save 30k/year, and you're just beginning your journey? Congratulations!
Then I would be slow about your changes for now, until you have a bigger stash. If all you had was 2 Roth accounts with a total of 22k of contributions(2016 + the possible 2017), and 10k besides that, and 20k of accessible savings makes you sleep well at night, than a 50% drop today would crater you at the start of your journey. Besides that, what makes me personally sleep well at night is having 3k-6k of cash in my credit union account, allowing me to have random paycheck disruptions or pay off CC/bills for 2-3 months before having any issue.

I'm also not sure about it, but I don't think the 20k in equity on your house is at all material for any calculations, or even HELOC access.

Me, I mostly skipped having an excessive emergency fund due to being in the military,(little need to keep major savings) and then going on a deployment and not wasting the money(immediate +20k, which shortly ended up in a CD(~3.5% yield at the time for 7 years?)/Roth/Taxable split). By the time I left the military, my taxable account was I think ~80k I think, and I had margin access on it, and I was immediately employed post-military. I was also familiar and confident with the speed of ACH transfers from credit union to taxable account, little need of having 10k of cash sitting around.

If I were in your shoes, and with the information currently available(and let's assume relatively stable jobs/desirable skills), and with my own temperament/knowledge, and say with monthly costs <3k/month, I think sinking half your 2017 contributions now wouldn't hurt, sleep on it a bit, and maybe finish up the contributions in 6 months. Find your own balance on actual cash in savings accounts/checking, I've tested myself and I am absolutely antsy if mine drops below 2k, even if a paycheck should clear before the mortgage comes due.

After you have your taxable/Roth e-fund to a satisfactory size(IMO always consider the possibility of a 50% drop for equities, especially emergency funding related), I'd also consider your tax bracket, and consider maxing 401k. See Madfientist Retire Even Earlier:
http://www.madfientist.com/retire-even-earlier/

And later on in our journey, an "emergency" that took us out of the job market would mean we could use our taxable + roth accounts to float the unemployment if necessary, and it also means an opportunity to fill the Roth back up with 401k-> Trad IRA -> Roth IRA conversions up to the top of the 15% tax bracket if you feel like it(or whatever place you want to stop below that mark for ACA subsidies).

If you are into Real Estate/landlording, do consider that equities are not the place to save for the short term for downpayments.
« Last Edit: April 26, 2017, 09:02:12 AM by Khanjar »

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Re: Invest more of my emergency fund?
« Reply #7 on: April 26, 2017, 02:16:25 PM »
Thank you for the insight. I have decided I will keep a much smaller EF. Would you say a viable strategy is to take that 21K and use 11K to max out the Roth IRA's then put 5K in taxable with 5K left in the savings or just dump the whole 10K in? As stated I could always withdraw the 11K from our Roth accounts if needed. I would most likely utilize our 30K of credit card capacity and use the Roth contributions to pay it off as soon as possible should an actual emergency arise. We also have about 20K in equity on our home currently as another fallback.

Is this the entirety of your accounts? So you can save 30k/year, and you're just beginning your journey? Congratulations!
Then I would be slow about your changes for now, until you have a bigger stash. If all you had was 2 Roth accounts with a total of 22k of contributions(2016 + the possible 2017), and 10k besides that, and 20k of accessible savings makes you sleep well at night, than a 50% drop today would crater you at the start of your journey. Besides that, what makes me personally sleep well at night is having 3k-6k of cash in my credit union account, allowing me to have random paycheck disruptions or pay off CC/bills for 2-3 months before having any issue.

I think a good number for us to keep in savings is 5-10K.

I'm also not sure about it, but I don't think the 20k in equity on your house is at all material for any calculations, or even HELOC access.

Disregarding that then.

Me, I mostly skipped having an excessive emergency fund due to being in the military,(little need to keep major savings) and then going on a deployment and not wasting the money(immediate +20k, which shortly ended up in a CD(~3.5% yield at the time for 7 years?)/Roth/Taxable split). By the time I left the military, my taxable account was I think ~80k I think, and I had margin access on it, and I was immediately employed post-military. I was also familiar and confident with the speed of ACH transfers from credit union to taxable account, little need of having 10k of cash sitting around.

I agree especially only earning 1% and not even keeping up with inflation.

If I were in your shoes, and with the information currently available(and let's assume relatively stable jobs/desirable skills), and with my own temperament/knowledge, and say with monthly costs <3k/month, I think sinking half your 2017 contributions now wouldn't hurt, sleep on it a bit, and maybe finish up the contributions in 6 months. Find your own balance on actual cash in savings accounts/checking, I've tested myself and I am absolutely antsy if mine drops below 2k, even if a paycheck should clear before the mortgage comes due.

After you have your taxable/Roth e-fund to a satisfactory size(IMO always consider the possibility of a 50% drop for equities, especially emergency funding related), I'd also consider your tax bracket, and consider maxing 401k. See Madfientist Retire Even Earlier:
http://www.madfientist.com/retire-even-earlier/

And later on in our journey, an "emergency" that took us out of the job market would mean we could use our taxable + roth accounts to float the unemployment if necessary, and it also means an opportunity to fill the Roth back up with 401k-> Trad IRA -> Roth IRA conversions up to the top of the 15% tax bracket if you feel like it(or whatever place you want to stop below that mark for ACA subsidies).

If you are into Real Estate/landlording, do consider that equities are not the place to save for the short term for downpayments.

I have been hesitant to contribute more to my 401K since I'm already contributing enough to get a 100% match. I was considering bumping it up from 6% to 10% however just because we can with no issues. I'm going to max the ROTH accounts out now and just leave the 10K in savings alone (for now). I need to decide what to do with it at some point but it does not hurt to have it around for the time being. I do plan on opening and maxing an HSA account towards the end of the year when I am allowed as well so that's $3400. It's either dump more into 401K or open a taxable account at this point for whats left over. As long as the taxable account has everything reinvested and I never sell off, it wont create a bad tax situation anyways right?
Thank You

Heroes821

  • Pencil Stache
  • ****
  • Posts: 537
Re: Invest more of my emergency fund?
« Reply #8 on: April 26, 2017, 02:36:07 PM »
I think you should read through this thread: https://forum.mrmoneymustache.com/investor-alley/investment-order/

Particularly the second post from MDM.  Maxing your 401k or boosting it instead of an IRA might be all around better for you.

chasesfish

  • Handlebar Stache
  • *****
  • Posts: 1789
  • Location: Texas
    • Years in the making, I created a journal!
Re: Invest more of my emergency fund?
« Reply #9 on: April 27, 2017, 04:48:04 AM »
It may not be a popular stance, but I'd recommend you start investing some in a "regular" account that you can access is.

Your investment choices are up to you depending on how secure your job is and your liabilities.  I stopped worrying about having a "cash" emergency fund once I had $100,000 invested in a regular brokerage account.  Fidelity also gave me a no-cost line of credit against it which I've only used once for a short-term cash need instead of eating capital gains taxes for selling the stock I held.

The flexibility it gave me has been wonderful.  Other's opinions may vary
Counting down the days until I Stop Ironing Shirts

I occasionally Blog

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Re: Invest more of my emergency fund?
« Reply #10 on: April 27, 2017, 06:43:02 AM »
MDM's post makes it pretty clear, taxable account is dead last on the priority list so I am definitely disregarding that. I'm following all other steps aside from maxing 401K and HSA (this will be later in the year when I can opt in to HDHP). I am very motivated to began rental property investing and if I max my 401K, that will give me much less capital or none at all to utilize. I also have a 100K mortgage balance at 5.1% interest and according to step 2 I should get that paid off since its above 5%. What is your opinion on that? In 3 years we will be able to sell/rent our house and move to a multifamily to house hack on an FHA loan. I have not decided if we will live in it for 1-2 years then refinance to conventional and either move back to our original home (renters would be on one year leases) or just sell it outright. That will depend on the market at the time and we can cross that bridge later. Either way that will be around a 10K/year boost to our income.

As far as 401K contributions to lower income, we are already in the 15% tax bracket and I cant foresee us making enough anytime soon to cross to the 25% bracket. This also puts us in a 0% capital gains tax bracket which is wonderful and why im considering getting into my ESOP. What is your opinion on that? They match 100% up to $850 and the holding period is 5 years. Stock is doing VERY well, is this a no brainer?

My main problem is the feeling of lost opportunity with the money stashed. It took me 5 years (25-30) to wipe out all of our debt aside from our mortgage and yes I'm starting young at 30 but I still have that urge to "catch up". The whole reason I started the Roth accounts is because I like the idea of being able to take contributions should the day ever come. It's the mental feeling of having the money locked up and being penalized if I did need it that mentally stops me from contributing more to my 401K. Is this ridiculous?
« Last Edit: April 27, 2017, 06:45:24 AM by Tim89 »
Thank You

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 5286
Re: Invest more of my emergency fund?
« Reply #11 on: April 27, 2017, 06:49:49 AM »
Is this ridiculous?

I actually like that feeling with my retirement accounts - especially when I started investing. Throwing the $$ in a hole for retirement kept me from ever considering touching it and as a high earner/saver [relative to the typical Canadian] I had lots of other options for addressing the need to $$ at any given point in time without messing with my retirement accounts.

Get a line of credit if you want a bunch of cheap cash available to you in a pinch without leaving money sitting on the sidelines. You only pay for a LOC when you need it so it's low cost and it may help you sleep at night.

Tim89

  • 5 O'Clock Shadow
  • *
  • Posts: 37
  • Location: USA
  • “he who will not economize will have to agonize”
Re: Invest more of my emergency fund?
« Reply #12 on: April 27, 2017, 07:02:18 AM »
Is this ridiculous?

I actually like that feeling with my retirement accounts - especially when I started investing. Throwing the $$ in a hole for retirement kept me from ever considering touching it and as a high earner/saver [relative to the typical Canadian] I had lots of other options for addressing the need to $$ at any given point in time without messing with my retirement accounts.

Get a line of credit if you want a bunch of cheap cash available to you in a pinch without leaving money sitting on the sidelines. You only pay for a LOC when you need it so it's low cost and it may help you sleep at night.

I can definitely see the beneficial point of having the money essentially untouchable. with me its definitely a mental thing of having more control over the money. I come from a low income background so that "control" is what drives that feeling. Our investments are exclusively with Vanguard so I am not sure if they offer an LOC but a 0% interest loan would be a great alternative to keeping a lot of cash on hand earning very little. I'm sure this requires a very large portfolio as well as with most things at Vanguard. Definitely something to consider down the road though.
Thank You