Author Topic: Why do people keep emergency fund in a bank account versus an I-Bond or similar?  (Read 8546 times)

TomTX

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To be honest, I kind of feel like we're talking about chump change here. $10k in Ibonds at 2.76% vs $10k in a high yield savings at 1% is like a difference of $180 for the entire year. And that's assuming the bond even stays at 2.76%. I'm not sure if 180 bucks is worth the hassle of setting up a treasury direct account and losing immediate access to my cash. To me, if I've got "excess" cash it's going in the stock market. If I'm not comfortable with that (because I may need access to it), then it's in my high yield savings account. I don't see much point in a middle ground at current interest rates.

Well, that's a single year. I got my I-bond in 2008 and it's been zero effort to keep getting hundreds of dollars more every year than a high interest account.

I'm also getting 3.98% at the moment. So, more like an extra $300 a year. Over 10 years, that's $3,000. Over the life of the bond, it's more like $9,000.

Ignoring compounding and rate variations.

LAGuy

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To be honest, I kind of feel like we're talking about chump change here. $10k in Ibonds at 2.76% vs $10k in a high yield savings at 1% is like a difference of $180 for the entire year. And that's assuming the bond even stays at 2.76%. I'm not sure if 180 bucks is worth the hassle of setting up a treasury direct account and losing immediate access to my cash. To me, if I've got "excess" cash it's going in the stock market. If I'm not comfortable with that (because I may need access to it), then it's in my high yield savings account. I don't see much point in a middle ground at current interest rates.

Well, that's a single year. I got my I-bond in 2008 and it's been zero effort to keep getting hundreds of dollars more every year than a high interest account.

I'm also getting 3.98% at the moment. So, more like an extra $300 a year. Over 10 years, that's $3,000. Over the life of the bond, it's more like $9,000.

Ignoring compounding and rate variations.

Yeah, but imagine what that money could have done if you'd instead invested it in the stock market? Clearly you didn't have an immediate need for the money since you haven't touched it in nearly a decade. Surely you must have had some sort of "emergency" over the previous 9 years?

See, this is always the problem with emergency funds. People don't actually use/need them. When an actual emergency pops up they find some other way to cover the expense be it out of the "general" fund, or credit cards or just general money churning. "Oh no, I can't spend the emergency fund. That's for an EMERGENCY! Plus, it took me SO long to accumulate those emergency funds I sure wouldn't want to go through building it all up again! I'm just going to let that money be and never touch it again!" Derp. Just put it in the stock market. Either you have an immediate or soon to be immediate need (unstable job without the ability to quickly get another) and the money should be in your savings account. Or you don't and it should be in the market.

TomTX

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To be honest, I kind of feel like we're talking about chump change here. $10k in Ibonds at 2.76% vs $10k in a high yield savings at 1% is like a difference of $180 for the entire year. And that's assuming the bond even stays at 2.76%. I'm not sure if 180 bucks is worth the hassle of setting up a treasury direct account and losing immediate access to my cash. To me, if I've got "excess" cash it's going in the stock market. If I'm not comfortable with that (because I may need access to it), then it's in my high yield savings account. I don't see much point in a middle ground at current interest rates.

Well, that's a single year. I got my I-bond in 2008 and it's been zero effort to keep getting hundreds of dollars more every year than a high interest account.

I'm also getting 3.98% at the moment. So, more like an extra $300 a year. Over 10 years, that's $3,000. Over the life of the bond, it's more like $9,000.

Ignoring compounding and rate variations.

Yeah, but imagine what that money could have done if you'd instead invested it in the stock market? Clearly you didn't have an immediate need for the money since you haven't touched it in nearly a decade. Surely you must have had some sort of "emergency" over the previous 9 years?

See, this is always the problem with emergency funds. People don't actually use/need them. When an actual emergency pops up they find some other way to cover the expense be it out of the "general" fund, or credit cards or just general money churning. "Oh no, I can't spend the emergency fund. That's for an EMERGENCY! Plus, it took me SO long to accumulate those emergency funds I sure wouldn't want to go through building it all up again! I'm just going to let that money be and never touch it again!" Derp. Just put it in the stock market. Either you have an immediate or soon to be immediate need (unstable job without the ability to quickly get another) and the money should be in your savings account. Or you don't and it should be in the market.

As I posted earlier in the thread - the rest of the emergency fund IS in a savings account. A chunk of that portion has been used.

I have a good, stable job - but my skillset/certifications are really niche. I could get another job - but it's likely to both take awhile and require moving.

Everything we have in IRA/401k is in the stock market. The I-bond portion of the emergency fund is also our bond allocation.

A question for you on risk tolerance: What's your projected SWR for pulling the plug, and do you have anything planned for "backup" outside that? Lots of people here talk about a 4% (or lower) SWR, PLUS 1-3 years in cash/CDs.

LAGuy

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As I posted earlier in the thread - the rest of the emergency fund IS in a savings account. A chunk of that portion has been used.

I have a good, stable job - but my skillset/certifications are really niche. I could get another job - but it's likely to both take awhile and require moving.

Everything we have in IRA/401k is in the stock market. The I-bond portion of the emergency fund is also our bond allocation.

A question for you on risk tolerance: What's your projected SWR for pulling the plug, and do you have anything planned for "backup" outside that? Lots of people here talk about a 4% (or lower) SWR, PLUS 1-3 years in cash/CDs.

Well, that's a good question and sort of the reason I came to this thread in the first place. I've recently done a "semi-retirement" and only work half the year and the other half I do healthcare contract work (like a traveling nurse). My last fulltime job was rather unstable. While I can easily get another job in my line of work, in the case of a layoff I wanted to take a few months break. I knew a layoff would come with some severance, vacation pay out, and unemployment benefits but I still wanted to keep some cash on hand. So I kept around $8k to $15k in a savings account. It would fluctuate quite a bit as I either bought stuff I needed (or didn't), threw some cash at the taxable account, or identified some other use for the money. I definitely didn't want to tie it up for even as long as a year, though, because the layoff could have come any day (though it took nearly 5 years from start to finish).

Now, though, I've sold my place and invested the proceeds. Right now I'm in my half year of working and all my expenses are covered and I don't spend much at all. But, I've still got in excess of $20k in cash accounts. It feels high, but it's money I need to spend in the coming months where I won't be working. One of the reasons I held it back from investing in stocks is that I didn't want to get hit with a short term capital gains tax for money that I needed in the year after I invested my condo sale proceeds. Another reason I held a significant amount back is because I'm not entirely sure how much I'll be spending in this new life. Ideally, though, I'd like to reach a point where I have a few months worth of spend in cash and otherwise I'll pull from my taxable account (in the form of dividends mostly) as well as any leftover earnings from work for my spend (half of my earnings get dumped into retirement accounts).

boarder42

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why do you keep an emergency fund at all.  after a year of saving most here should have enough in investments that make an E fund unecessary. 

TomTX

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why do you keep an emergency fund at all.  after a year of saving most here should have enough in investments that make an E fund unecessary.

I could go into lots of rationale (almost everything else is in tax-advantaged accounts) - but the simplest is that it makes my wife happy.

Laserjet3051

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Actually, NO. Maybe YOU can pay rent with a credit card, but for the last 9 years, NONE of my landlords would take a credit card for rent payment under any circumstance. and i am certainly not the ONLY American for which this is true.

Actually YES. You should have kept reading. I should have given more detail: There is a service called Plastiq. You pay them with your credit card, plus a 2-2.5% fee and they send a check for your rent. I have done this for my mortgage with no issues.

If you use a referral code (mine is 592445) - you can send up to $400 for free. Plastiq.com

My apologies. The additional detail you provided in your follow up response clarified your point. Yes,
Plastiq does seem intriguing and a way to leverage credit lines as a substitute for an EF for payments where the recipient does not accept plastic. Will this company and this service still be around when the SHTF and I need it? Perhaps.

Noahjoe

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I stopped reading many of these, because they're all so similar. A couple things I'd consider when determining what my EF should be:

1. What kind of expenses can I realistically expect based on my lifestyle? That's to say, what do I have for debts outstanding, health conditions, car expenses (do I drive a fancypants Escalade?) etc?
2. What kind of drag on my portfolio am I willing to accept to have access to cash at the drop of a hat?
   a. Remember, saying that you might need 10,000 dollars TODAY is pretty unrealistic. You can pay for almost anything with a credit card.
3. Is there a better way to cover emergencies? What about a HELOC? Mine gives me access to 5 figures same day, should I desire it. The interest rate is something like 1.99% for the first 6 months.
4. How secure is my job?
5. How big is my money mustache?

For your dollars that aren't sitting in a real investment vehicle like VTSAX, you're willingly forgoing that magical 7% return (or whatever you have told yourself the stock market can give you every year). So if you sit on a 10k emergency fund for 10 years, you just lost what - 8500 bucks? Give or take? There's your emergency fund right there. And if you're a real mustachian, you can cashflow most emergencies because an emergency to the average American is probably a surprise $500 bill. That's small potatoes to you, right?

All of this 6 month expenses in cash is horseshit, unless  you're in a high risk profession or feel you're at risk for losing your job and would have a problem finding another one. Even then, the returns you forego with a large emergency fund likely outweigh what you gain by having cash on hand in case of an emergency.

TomTX

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Two confessions:

my I-bond was only $5k.

For the past 4 months, i have been using the efund cash to open bank accounts for the signup bonuses. $900 so far just under my name. More from my wife. It will taper off now that I got the best ones.

boarder42

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why do you keep an emergency fund at all.  after a year of saving most here should have enough in investments that make an E fund unecessary.

I could go into lots of rationale (almost everything else is in tax-advantaged accounts) - but the simplest is that it makes my wife happy.

feelings forgot about those.

Laserjet3051

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I stopped reading many of these, because they're all so similar. A couple things I'd consider when determining what my EF should be:

1. What kind of expenses can I realistically expect based on my lifestyle? That's to say, what do I have for debts outstanding, health conditions, car expenses (do I drive a fancypants Escalade?) etc?
2. What kind of drag on my portfolio am I willing to accept to have access to cash at the drop of a hat?
   a. Remember, saying that you might need 10,000 dollars TODAY is pretty unrealistic. You can pay for almost anything with a credit card.
3. Is there a better way to cover emergencies? What about a HELOC? Mine gives me access to 5 figures same day, should I desire it. The interest rate is something like 1.99% for the first 6 months.
4. How secure is my job?
5. How big is my money mustache?

For your dollars that aren't sitting in a real investment vehicle like VTSAX, you're willingly forgoing that magical 7% return (or whatever you have told yourself the stock market can give you every year). So if you sit on a 10k emergency fund for 10 years, you just lost what - 8500 bucks? Give or take? There's your emergency fund right there. And if you're a real mustachian, you can cashflow most emergencies because an emergency to the average American is probably a surprise $500 bill. That's small potatoes to you, right?

All of this 6 month expenses in cash is horseshit, unless  you're in a high risk profession or feel you're at risk for losing your job and would have a problem finding another one. Even then, the returns you forego with a large emergency fund likely outweigh what you gain by having cash on hand in case of an emergency.

I know right? What stupid tschlub could possibly be at risk of losing their job in corporate America these days? And even in the uber-rare event that could happen, what highly qualified, credentialed, experienced professional could possibly have a hard/long time finding another job?  That nanoscopically-sized demographic must all be losers, right?

Just how old were you in 2008/2009?

Noahjoe

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Some industries leave you  more employable than others (this is also a decision to be made by you). I am  35 now, so while I may not be as old as  you, I saw 2008/9 and was a functional and employed adult. As someone on this forum though, I'd expect that between your IRA, 401k, taxable account, and probably home equity that you have more than you'll ever need for an emergency - even one like a job loss. If you have a working spouse and a reasonable savings rate, this is an even lesser risk. So before you go getting all high and mighty and talking down to me, maybe really sit back and evaluate if the traditional "have six months living expenses in cash" really applies to the majority here. And if you couldn't figure out living expenses/a real emergency using tools other than liquid cash then you're probably being inefficient with your money, which is contrary to what this community is all about anyhow. If your only plan to counteract job loss is to have six months expenses saved up, then I'd say you're not prepared enough. Giving up the potential investment returns by having a 6 month EF in cash is only sensible if your other assets are so small that tapping anything but that 6 month EF would ruin you. If one can live for 6 months, or a year, or two years based on what's in a taxable account, why would you drag your portfolio down with such a large amount of cash? Why wouldn't I choose to effectively double my "emergency fund" every 10 years or so by having the majority of it invested? Even with a 2008-esque drop and I have to withdraw for a job loss at the bottom of the market, unless my taxable account is brand new I'm still likely to come out ahead by having my money invested there rather than letting it waste away in a savings account.

Bonus points if you use math and real examples instead of anecdote and feelings.

How old were you in 2008?

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/



Ann

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...Even with a 2008-esque drop and I have to withdraw for a job loss at the bottom of the market, unless my taxable account is brand new I'm still likely to come out ahead by having my money invested there rather than letting it waste away in a savings account.

I think a lot of people are making assumptions.  My assumption when a poster uses terms like "why do people" or that the general "you" is that those terms refer to the average American.  That is obviously an American assumption.  Other posters are assuming that "you" and "people" refer to an established Mustachian. 

Even Noahjoe highlights that one's "emergency" plan is going to depend on the stage of investing/financial health one has.   I don't think established Mustachians with healthy investment accounts necessarily need a dedicated emergency fund.  I do think that the more "average" citizen of my country or a beginning Mustachian benefits from one.  I really can't speak for other countries, sorry.

Paul der Krake

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There is a documented trend of people taking on more risk during long running bull markets. Investments are seen as quasi-cash that can be liquidated instantly with little downside. Why would anyone hold liquid funds in those conditions?

Everyone will find out where they stand the next time the tide goes out.

Noahjoe

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Paul,

My assumption is that even if I withdraw funds after a 25% dip, I'll have been in the market long enough with those funds that I'm still beating the 1% I would have gotten by simply letting the money lose value in my savings account. Does that help clarify my position?

TomTX

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Paul,

My assumption is that even if I withdraw funds after a 25% dip, I'll have been in the market long enough with those funds that I'm still beating the 1% I would have gotten by simply letting the money lose value in my savings account. Does that help clarify my position?

Are you ready for the 50% gut-check?

I've been invested in the stock market through two - and actually was quite heavy in tech for 1999/2000. Painful.

Paul der Krake

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Paul,

My assumption is that even if I withdraw funds after a 25% dip, I'll have been in the market long enough with those funds that I'm still beating the 1% I would have gotten by simply letting the money lose value in my savings account. Does that help clarify my position?
I understand the strategy and have no doubt that some can pull it off, and some cannot.

I have never lived through a sharp bear market. I like to think that I will be strong and won't panic, but until it happens it's all wishful thinking.