Author Topic: Your favorite strategies to maintain liquidity when net worth is low?  (Read 1288 times)

deek

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Are you of the belief that a simple E-fund is the best way to go when needing to build up accessible funds? Or do you place your trust in investing that E-fund into something that will likely grow?

nereo

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #1 on: January 29, 2019, 10:06:41 AM »
In general, I follow the investment order.

This means one should start* by building up enough of an e-fund before deploying money anywhere else.  How much depends on circumstances (e.g. job security, dependents, familial circumstances), but for most people I would recommend 1-3 months when first starting out. As soon as this is achieved start moving down the investment order (fund 401(k) to get the match, pay down debt >5% of 10y treasury notes, etc.).

*the only exception I would take from this approach is if a person was carrying some credit card debt with very high interest rates (>15%), in which case the credit card is the de-facto e-fund, and every available asset should be used to push that debt down to $0.  Once that has been accomplished, build up an e-fund to your personal comfort level and then progress down the investment order.

mlipps

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #2 on: January 29, 2019, 10:30:46 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

deek

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #3 on: January 29, 2019, 10:39:00 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

mlipps

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #4 on: January 29, 2019, 10:55:08 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #5 on: January 29, 2019, 11:08:59 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

deek

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #6 on: January 29, 2019, 11:10:20 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

Would probably side with you here. Big fan of simplicity.

mlipps

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #7 on: January 29, 2019, 11:56:44 AM »
I certainly wouldn't save money in my Roth that I knew I was going to spend, such as a house downpayment. But for someone starting out who is relatively unlikely to use their emergency fund, but definitely needs to have one just in case, I still think it's a worthwhile approach. I also am pretty comfortable with taxes as I'm a 6 year and counting VITA volunteer, so I may be a bit biased as to level of complexity required, but it shouldn't be that difficult.

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #8 on: January 29, 2019, 12:04:24 PM »
i'm quite content to use credit cards as an e-fund

PoutineLover

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #9 on: January 29, 2019, 12:09:22 PM »
I keep a small liquid e fund, usually 2-3 months expenses in a high interest savings account. I would also suggest getting a line of credit, since it's much cheaper than a credit card if you do need to use it. Technically I could also withdraw from my TFSA if I needed to, but I don't plan on it unless it was a really big or long lasting emergency so that's invested in index funds.
« Last Edit: January 29, 2019, 12:39:40 PM by PoutineLover »

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #10 on: January 29, 2019, 12:33:54 PM »
I certainly wouldn't save money in my Roth that I knew I was going to spend, such as a house downpayment. But for someone starting out who is relatively unlikely to use their emergency fund, but definitely needs to have one just in case, I still think it's a worthwhile approach. I also am pretty comfortable with taxes as I'm a 6 year and counting VITA volunteer, so I may be a bit biased as to level of complexity required, but it shouldn't be that difficult.

FWIW, I never really planned on saving up a down payment in a Roth IRA. I simply didn't expect that the house I bought in 2011 for $135,000 would only be worth $105,000 when I sold it in 2015. Since that wiped out my savings, I had to look elsewhere for a downpayment. And I've been doing my own taxes for more than a decade, including two rental houses at various times, and trying to understand how to file such that I would not be charged an early withdrawal penalty on my Roth IRA contributions was one of the most frustrating things I've ever done. 100% would not recommend.

Radagast

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #11 on: January 29, 2019, 10:21:02 PM »
Right now I am all about the pursuit of sign up bonuses. I imagine I will run out of sign up bonuses that are available to me and enticing enough to be worth it soon though.
https://www.doctorofcredit.com/best-bank-account-bonuses/

Otherwise I have never been into low yield savings accounts like many people are. I just can't see keeping money in something that would be a long term detriment, especially a year and more ago when rates were well below the paltry inflation rate.

There are two bond options I like that can be part of a balanced portfolio and are good enough to not be in tax advantaged accounts, US Treasury I bonds and Vanguard High Yield Tax Exempt, split about 50/50.

Beyond that, I would probably keep an emergency fund in a safe balanced fund that met my tax needs.

MustacheAndaHalf

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #12 on: January 30, 2019, 12:41:15 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #13 on: January 30, 2019, 07:20:09 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.

nereo

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #14 on: January 30, 2019, 07:38:19 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.

In the end it depends a great deal on your circumstances and how many 'layers of safety' you have.
A two-earner household with no debt living off of one person's income and access to investments, credit cards, a HELOC, family money and lots of stuff that could easily be sold will have much different needs than a single person who rents an apartment, has a free-lance job and carries a lot of student loans debt and has parents who are in bad physical and financial shape.

Like you Mississippi Mudstache we've never felt the need to carry an E-fund, but we can put 5-figure expenses on a cc and pay them off within 30 days with the excess from our income, and we've got both taxable investments, and a stable family, and lots of insurance, and as a last resort a large social network that could help bail us out.  We fully recognize others are not nearly as fortunate, and for those people it may be smart to carry more cash, at least until they are in a better financial position.

Malkynn

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #15 on: January 30, 2019, 07:47:36 AM »
Yep, as PP explained, e-funds, like everything else in personal finance and life, need to be customized to your particular circumstances.

Look at your situation: income, job stability, cash flow needs, cash flow flexibility, risk tolerance, etc, and determine how best to meet those needs.

For some, credit cards or LOCs are a totally comfortable option for e-funds because they know that they can adjust spending/increase repayment rapidly if needed. For others, cash flow demands are high, fixed, and they don't have a lot of options if they need more money. Those people may be better off with actual cash available. Likewise some people aren't phased by their savings taking a hit while others are so desperate to leave their day jobs that the idea of a savings set back by selling at a bad time is just too stressful.

It's a very informative and useful exercise to analyse exactly where you stand in terms of cash flow and risk. It will really help you in terms of decision making in general.

There is no "one size fits all" when it comes to e-funds. As stressful as this is, is actually the best thing for you to realize because there are no rules out there that will keep you safe. There's just knowing your own personal situation and planning accordingly.

It's all on you to decide what you really need. As terrifying as that is, it's also for the best, because only you can really know what's best for YOU.

PoutineLover

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #16 on: January 30, 2019, 08:01:43 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.
2-10k in chequing and savings sounds to me like an emergency fund. It's more than I keep in cash on hand anyway. This just illustrates that everyone has different cash flows and what seems like a small amount to you is about 2-6 months of expenses for me.
When choosing my efund amount, I look at necessary expenses like rent, food, bills that would have to be covered no matter what. Then I look at potential emergencies, like losing my job, medical emergency, theft, fire, etc. while balancing the likelihood of any given situation. Using my personal risk tolerence, I can determine an amount of cash that feels safe. Since I have no kids, no car, good health, life, disability and home insurance, and low expenses, my emergency fund is fairly small and I have the backup of credit cards, line of credit and investments if it came to that.

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #17 on: January 30, 2019, 08:16:23 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.
2-10k in chequing and savings sounds to me like an emergency fund. It's more than I keep in cash on hand anyway. This just illustrates that everyone has different cash flows and what seems like a small amount to you is about 2-6 months of expenses for me.
When choosing my efund amount, I look at necessary expenses like rent, food, bills that would have to be covered no matter what. Then I look at potential emergencies, like losing my job, medical emergency, theft, fire, etc. while balancing the likelihood of any given situation. Using my personal risk tolerence, I can determine an amount of cash that feels safe. Since I have no kids, no car, good health, life, disability and home insurance, and low expenses, my emergency fund is fairly small and I have the backup of credit cards, line of credit and investments if it came to that.

I agree with what you are saying. Whether or not you call it an emergency fund, having the money on hand makes it one.

I've never had a dedicated "emergency fund". But I have money that could be used for that purpose.

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #18 on: January 30, 2019, 08:24:56 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.
2-10k in chequing and savings sounds to me like an emergency fund. It's more than I keep in cash on hand anyway. This just illustrates that everyone has different cash flows and what seems like a small amount to you is about 2-6 months of expenses for me.
When choosing my efund amount, I look at necessary expenses like rent, food, bills that would have to be covered no matter what. Then I look at potential emergencies, like losing my job, medical emergency, theft, fire, etc. while balancing the likelihood of any given situation. Using my personal risk tolerence, I can determine an amount of cash that feels safe. Since I have no kids, no car, good health, life, disability and home insurance, and low expenses, my emergency fund is fairly small and I have the backup of credit cards, line of credit and investments if it came to that.

Good point. The $2K-10K in our checking means very little without the context of our spending needs. We typically spend about $4K-5K* per month, so at its absolute maximum, our available cash represents only two months' worth of normal spending. Generally speaking my account hits $7K-$8K right after my paycheck hits each month, and my accounts dwindle to $2K-3K by the end of the month as the bills are paid. Occasionally I get up to $10K when we've had a few good months back-to-back.

We would need to keep somewhere between $12,000 (for a bare minimum 3-month e-fund) and $30,000 (for a well-funded 6-month e-fund) to meet the e-fund requirements that most people suggest. It seems silly to keep that much cash on hand. The only time in my life I've ever needed $30,000 cash was when I closed on my house two years ago, and I knew that was coming for a year in advance. If I ever get into a financial bind, the easiest solution will be to pay for stuff with a credit card, then just turn off the automatic investing until we can pay off the cards. I understand that some people may need to keep a bigger e-fund for various reasons, but 3-6 months' worth of expenses seems like bad general advice for the Mustachian crowd.

*Admittedly, that number includes some frivolities that could be dispensed with in an actual emergency, but the point remains that if I face an emergency at months' end when my accounts are down to their lowest, I have nowhere near 3 months worth of bare-minimum spending available in cash.

Malkynn

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #19 on: January 30, 2019, 08:32:38 AM »
i'm quite content to use credit cards as an e-fund
I thought the purpose of an emergency fund is to avoid paying credit card interest rates, and avoid selling stocks at a loss.  So equities and credit cards wouldn't be suitable for an emergency fund, since either one would defeat the purpose.

Given the infrequency with which an emergency fund is typically used, I think you would lose more money in the long run just through opportunity costs by not having the money invested, even when balanced against a few months' worth of interest charges if you do need to put something on a credit card that can't be paid off immediately. Even MMM recommends this strategy. My wife and I do not, nor have we ever, kept an "emergency fund" in our 9 years of marriage. Even though we've faced tons of unexpected expenses during that time, at no point have we ever been charged interest on our credit cards. We typically keep between $2,000-$10,000 in checking and savings accounts at any given time, and when our accounts exceed about 10 grand, I sweep the excess into IRAs. It's a very informal approach, but it works well for us and I see no reason to change.
2-10k in chequing and savings sounds to me like an emergency fund. It's more than I keep in cash on hand anyway. This just illustrates that everyone has different cash flows and what seems like a small amount to you is about 2-6 months of expenses for me.
When choosing my efund amount, I look at necessary expenses like rent, food, bills that would have to be covered no matter what. Then I look at potential emergencies, like losing my job, medical emergency, theft, fire, etc. while balancing the likelihood of any given situation. Using my personal risk tolerence, I can determine an amount of cash that feels safe. Since I have no kids, no car, good health, life, disability and home insurance, and low expenses, my emergency fund is fairly small and I have the backup of credit cards, line of credit and investments if it came to that.

Good point. The $2K-10K in our checking means very little without the context of our spending needs. We typically spend about $4K-5K* per month, so at its absolute maximum, our available cash represents only two months' worth of normal spending. Generally speaking my account hits $7K-$8K right after my paycheck hits each month, and my accounts dwindle to $2K-3K by the end of the month as the bills are paid. Occasionally I get up to $10K when we've had a few good months back-to-back.

We would need to keep somewhere between $12,000 (for a bare minimum 3-month e-fund) and $30,000 (for a well-funded 6-month e-fund) to meet the e-fund requirements that most people suggest. It seems silly to keep that much cash on hand. The only time in my life I've ever needed $30,000 cash was when I closed on my house two years ago, and I knew that was coming for a year in advance. If I ever get into a financial bind, the easiest solution will be to pay for stuff with a credit card, then just turn off the automatic investing until we can pay off the cards. I understand that some people may need to keep a bigger e-fund for various reasons, but 3-6 months' worth of expenses seems like bad general advice for the Mustachian crowd.

*Admittedly, that number includes some frivolities that could be dispensed with in an actual emergency, but the point remains that if I face an emergency at months' end when my accounts are down to their lowest, I have nowhere near 3 months worth of bare-minimum spending available in cash.

There is no general advice for the Mustachian crowd.
I really don't know how to make this any clearer.

For some, 3-6 months may not be nearly enough. For someone else, it may be astronomically too much.

You really must assess for yourself what makes sense.

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #20 on: January 30, 2019, 08:50:31 AM »
I really don't know how to make this any clearer.

For some, 3-6 months may not be nearly enough. For someone else, it may be astronomically too much.

You really must assess for yourself what makes sense.

Yeah, I totally agree with you. I am only a part of this thread to directly respond to one poster who suggested using a Roth IRA as a vehicle for an e-fund (which I suggest is a bad idea because it can unnecessarily complicates one's tax situation) and another poster who warned against using credit cards as an e-fund (which is a strategy that I prefer and use personally).

Malkynn

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #21 on: January 30, 2019, 08:53:47 AM »
I really don't know how to make this any clearer.

For some, 3-6 months may not be nearly enough. For someone else, it may be astronomically too much.

You really must assess for yourself what makes sense.

Yeah, I totally agree with you. I am only a part of this thread to directly respond to one poster who suggested using a Roth IRA as a vehicle for an e-fund (which I suggest is a bad idea because it can unnecessarily complicates one's tax situation) and another poster who warned against using credit cards as an e-fund (which is a strategy that I prefer and use personally).

Yep. Sorry, it wasn't clear that I was expanding on your point, not criticizing it. I just kind of jumped in and used it as an example to further the concept that this really is an individualized issue and that there are no "rules of thumb" that work for everyone.

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #22 on: January 30, 2019, 11:08:28 AM »
That would also depend on your savings rate and cash flow. Not all financial emergencies are the same: There is a big difference between your old car finally reaching the final mile and e.g. losing employment. If the income dries up, you need to replace that income. If the car dies, maybe you can just halt savings for 2 or 3 months and pay for the car.

In my case, having one net income in checking/cash after the month is done will be enough. The German social security system, which I pay for dearly with insane taxation, guarantees 60% of my last net income for a year. My savings rate is 40%. If I lost my job, I would not need to worry about food and housing for a year.

The last line of defense is a line of credit at my bank of 3k (which I could increase), and my single credit card with a limit of 4k.

« Last Edit: January 30, 2019, 11:10:35 AM by BobTheBuilder »

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #23 on: February 08, 2019, 09:02:52 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

Interesting, I used a Roth for my house downpayment and found it relatively simple, it was just another form to fill out. I have everything at Vanguard so it's easy to keep track of the cost basis, maybe that's it.

I am a fan of credit cards with a bonus, no annual fee, and a 0% interest promo period. You can run up the balance on those, get paid for it, and build up cash in your checking account. So my emergency fund is basically a Roth+good credit score.

nereo

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #24 on: February 08, 2019, 09:27:36 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

Interesting, I used a Roth for my house downpayment and found it relatively simple, it was just another form to fill out. I have everything at Vanguard so it's easy to keep track of the cost basis, maybe that's it.

I am a fan of credit cards with a bonus, no annual fee, and a 0% interest promo period. You can run up the balance on those, get paid for it, and build up cash in your checking account. So my emergency fund is basically a Roth+good credit score.

The problem I have with using a Roth as my first or second line of defense against an emergency (or to buy a home) is you are basically losing out on all that tax-free growth.  You are basically giving the shaft to your future self. For example, if we assume average market returns and a marginal tax-bracket of 25% - taking $10k from a Roth today means you lose an additional $14,600 in tax free growth over the next 20 years beyond what you would get in a taxable account*. '

For someone with very little in savings this may be their best option, but taking money out of your Roth hurts big-time over the longterm.


*a bit more of an explanation;  assuming 8% returns $10k would grow to $32k over two decades after taxes.  At the same time $10k in a Roth will grow to $46,600k - with the difference being taxes paid on dividends and CG. The difference is less but a still sizable $6k if we assume sub-average 5% returns (including divided yield of 1.9%).

Mississippi Mudstache

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #25 on: February 08, 2019, 10:02:10 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

Interesting, I used a Roth for my house downpayment and found it relatively simple, it was just another form to fill out. I have everything at Vanguard so it's easy to keep track of the cost basis, maybe that's it.

Did you qualify as a first-time homebuyer? If so, it's very simple.

I had contributions to my IRA in multiple forms: direct contributions, rollovers from old work pension plans, re-characterizations, and traditional-to-Roth conversions - all muddled together in one Roth IRA. It was a damn mess, I and had to figure out the cost basis by hand. I suppose it's a good thing that it's done, but it sucked, and I don't want to do it again until I'm retired.

mlipps

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #26 on: February 08, 2019, 10:40:05 AM »
I think an underrated strategy is to put your emergency fund in a Roth when you're starting out. You can always take the contributions back out, but if you don't need the money you can preserve that space. People conflate Roths with investing, but the money market fund in my Fidelity account has a perfectly respectable interest rate. Therefore, everyone starting out should put $500/month (or as much as they can up to the annual limits) into their Roth in a money market fund. As they're able to afford to save both in cash & in the Roth, then they can gradually move the Roth dollars into the market as their normal savings account builds up.

are there any charges at all for taking from money market?

Not that I'm aware of.

I would recommend against it, personally. I saved up my house downpayment in a Roth IRA, and the paperwork was a nightmare when filed my taxes the year after withdrawing my contributions (note: it would have been much simpler if we'd been considered "first-time homebuyers", but we were not). I will never make an early withdrawal from a Roth IRA again unless there is literally no other option. Yeah, you can do it tax-free, but it complicates the tax situation around the tax basis for your IRA forevermore.

Interesting, I used a Roth for my house downpayment and found it relatively simple, it was just another form to fill out. I have everything at Vanguard so it's easy to keep track of the cost basis, maybe that's it.

I am a fan of credit cards with a bonus, no annual fee, and a 0% interest promo period. You can run up the balance on those, get paid for it, and build up cash in your checking account. So my emergency fund is basically a Roth+good credit score.

The problem I have with using a Roth as my first or second line of defense against an emergency (or to buy a home) is you are basically losing out on all that tax-free growth.  You are basically giving the shaft to your future self. For example, if we assume average market returns and a marginal tax-bracket of 25% - taking $10k from a Roth today means you lose an additional $14,600 in tax free growth over the next 20 years beyond what you would get in a taxable account*. '

For someone with very little in savings this may be their best option, but taking money out of your Roth hurts big-time over the longterm.


*a bit more of an explanation;  assuming 8% returns $10k would grow to $32k over two decades after taxes.  At the same time $10k in a Roth will grow to $46,600k - with the difference being taxes paid on dividends and CG. The difference is less but a still sizable $6k if we assume sub-average 5% returns (including divided yield of 1.9%).

Totally agree. But I think if you're starting out and your option is to save in a savings account OR fund your Roth, it's the best of both worlds.

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #27 on: February 10, 2019, 09:12:52 AM »
In general, I follow the investment order.

This means one should start* by building up enough of an e-fund before deploying money anywhere else.  How much depends on circumstances (e.g. job security, dependents, familial circumstances), but for most people I would recommend 1-3 months when first starting out. As soon as this is achieved start moving down the investment order (fund 401(k) to get the match, pay down debt >5% of 10y treasury notes, etc.).

*the only exception I would take from this approach is if a person was carrying some credit card debt with very high interest rates (>15%), in which case the credit card is the de-facto e-fund, and every available asset should be used to push that debt down to $0.  Once that has been accomplished, build up an e-fund to your personal comfort level and then progress down the investment order.




Never seen this before , this is great! Thanks!

PDXTabs

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Re: Your favorite strategies to maintain liquidity when net worth is low?
« Reply #28 on: February 11, 2019, 10:13:00 AM »
Not necessarily conventional, but I saved enough to not be totally terrified of an emergency (~$3K US), then I started buying a small amount of I-Bonds per month to slowly build up more. So every month I buy about $1600 of equities inside my retirement account and $100 of I-Bonds outside. I'm slowly amassing more emergency savings that also serves as an inflation hedge, deflation hedge, tax deferred bond portfolio, and could one day be used as a down-payment during a recession.
« Last Edit: February 11, 2019, 12:50:18 PM by PDXTabs »