Author Topic: Case Study: Invest in Stocks or Emergency Fund?  (Read 1831 times)

GoldenNeko

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Case Study: Invest in Stocks or Emergency Fund?
« on: January 11, 2016, 02:45:52 PM »
Hello Mustachians,

I've just finished paying my student loans (in December), and just got a windfall of 4000. So, what to do with the money?

I earn 2000 euros as take home pay. I invest 1000/month. I'm 30 and my job is in a public service, so very small chance to get fired.
My SO is earning well (but is NOT trying to FIRE, though he is by no mean a spendypant), and we have no child at the moment. We just bought together an apartment that we will use as a rental income once it's finished and as a tax deduction tool (being built at the moment).

My small but growing stash is:
- around 2000 euros on different accounts with credit cards, waiting to be invested
- 3000 euros in Emergency Fund (a tax free account saving account, bringing 0.75% annually, the money can be taken in/out instantly)
- 3000 euros in stocks (in a PEA, which is a tax free account, but the money is there to stay 8 years at least, or I'll pay massive taxes if I get the money out - I currently own Vanguard ETF: VEUR and VNRT - not all Vanguard funds are eligible for the PEA account type. Thinking about investing in a third ETF tracking emerging countries)
- 2000 in a life insurance account (tax sheltered, but money is not liquid at all. If I want to sell and get the money, have to wait 4 months at least).

I wonder if I should raise the Emergency fund, or go to the stocks at once (especially now with the market having stocks on sale).
I've never had much cash as an Emergency fund (my current EF is 3 months expense), but wonder if the recent real estate purchase (I'll rent it, not use it as a home) will create more need of cash.

My target investment goal is:
Equity 90%   Vanguard VNRT: USA small & large      50%  (0.10% fee)
              Vanguard VEUR: Europe small & large      40%  (0.12% fee)
              Amundi Emerging markets                      10%  (0.20% fee)
Bond   10%      50% europe / 50% international      

Waiting for your advice.
« Last Edit: January 11, 2016, 04:05:21 PM by GoldenNeko »

frugaldrummer

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Re: Invest in Stocks or Emergency Fund
« Reply #1 on: January 11, 2016, 02:58:44 PM »
As just a general emergency fund, I think 3 months living expenses is adequate for someone in a two-income household (although some would like more).  Whether you need to add more to cover contingencies with the rental apartment depends, I think, on what your cash flow with the apartment will be like.  For example:

1) If the rent you will receive covers your mortgage and taxes and yields say 30% over that amount - simply putting that 30% into a separate account for the apartment should eventually yield a sufficient fund for repairs, maintenance and vacancies.

2) If, on the other hand, this rental apartment is really a speculation in the real estate market, and the rent only covers your mortgage and property taxes, then you will actually be operating at a negative cash flow and should keep that 4,000 Euros in an emergency fund to cover things like repairs, maintenance and vacancies.

How much is your mortgage and property taxes on the apartment, and how much rent do you expect to receive?

GoldenNeko

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Re: Invest in Stocks or Emergency Fund
« Reply #2 on: January 11, 2016, 03:10:39 PM »
Thanks for the answer.
The apartment will befinished and ready to be rented in September 2017 (so in an year and half). It'll be brand new and under a 1 year guarantee (for all inconveniences) and 10 years for the infrastructure.

The cash flow from it will be slightly negative: 1400 mortgage, 750 from rent, and tax reduction of almost 6000/year. So the monthly payment is around 350 for me (basically the amount of my previous student loan payment) and 350 for my SO if the apartment is rented, and 750 for each of us if vacant. Once the deduction is done, it's down to 100/150 euros per month that will really be paid out of my pocket. Basically, the state pays us for building a new house. After 15 years, 50% of the price should be paid by the renter, 30% by the tax deduction, and only 20% out of our pocket. 

Thing is, the apartment is in Bordeaux, which has a lot of students, is currently growing, and is one of the cities where the prices are still going up in France. The public transportation and services around are numerous, so should be ok, (+ the rent has to be low for us to have the tax deduction, so there should be people interested to rent).
So there is a risk of course (vacancies, repairs etc), but the investment should give a 10/15% return due to the special tax deduction program.
« Last Edit: January 11, 2016, 03:13:40 PM by GoldenNeko »

GrowingTheGreen

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Re: Invest in Stocks or Emergency Fund
« Reply #3 on: January 11, 2016, 03:21:08 PM »
E-Fund, dude!

No e-fund is what gets people in trouble more than anything.

frugaldrummer

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Re: Invest in Stocks or Emergency Fund
« Reply #4 on: January 11, 2016, 03:27:45 PM »
So this is really NOT a rental purchase per se (since, according to you, even 15 years from now you will be cash flow negative on the rental, and that would not make any sense for a real rental) but a speculative investment (hoping the value of the apartment goes up over time, so that you can sell it for more than what you have been investing into it). 

I don't see where you think you are getting the 10-15% return from, and you don't seem to have calculated in the costs of vacancies, maintenance and repairs (typically at least 30% over the mortgage).   Are you planning to move into this property yourselves at some later date?  (Sorry, things are different here in the states so I may not be understanding this completely).

GoldenNeko

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Re: Invest in Stocks or Emergency Fund
« Reply #5 on: January 11, 2016, 03:53:11 PM »
E-Fund, dude!

No e-fund is what gets people in trouble more than anything.
Dude-ette ;)

So this is really NOT a rental purchase per se (since, according to you, even 15 years from now you will be cash flow negative on the rental, and that would not make any sense for a real rental) but a speculative investment (hoping the value of the apartment goes up over time, so that you can sell it for more than what you have been investing into it). 

I don't see where you think you are getting the 10-15% return from, and you don't seem to have calculated in the costs of vacancies, maintenance and repairs (typically at least 30% over the mortgage).   Are you planning to move into this property yourselves at some later date?  (Sorry, things are different here in the states so I may not be understanding this completely).

Apartment value is 280 000 euros.
Indeed, this apartment is considered as a potential future house (but in 10/15 years, as a place to retire, hopefully). And if we change our mind, we'll also also have the option to sell it when the tax deduction is done and use it to buy a smaller house with no mortgage.
According to our simulations and the ones made with the vendor (including taxes, and the insurance for vacancies, and a reasonable inflation of the price based on average inflation of 0.75%), we should be positive of + 95 000 if we sell in 15 years, so around + 11% return. The investment return goes down after that, especially if we decide to live in the apartment and lose the cashflow form the rent, but basically, the house would still be cheaper for us than if we'd bought it as our home from the start.

I agree though, that stock market would certainly be a better bet in the long time, but my SO is afraid of stock investing, and isn't really into FIRE, so it's a devilish way to make him create a stash for himself. And to me, it's a way to diversify my portfolio with real estate and balance the risk of a 100% stock market stash.  So, the fact of buying a real estate is not a question for us.

My current problem is more to find a balance between 1) my portfolio/stock investment and 2) the need of creating a sufficient emergency cash fund.
I was thinking of upping the EF Fund to 5000 euros, then 100% index fund + mortgage payment.

Retire-Canada

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Re: Case Study: Invest in Stocks or Emergency Fund?
« Reply #6 on: January 11, 2016, 06:12:33 PM »
I wonder if I should raise the Emergency fund, or go to the stocks at once (especially now with the market having stocks on sale).
I've never had much cash as an Emergency fund (my current EF is 3 months expense), but wonder if the recent real estate purchase (I'll rent it, not use it as a home) will create more need of cash

I'll argue that you don't need an emergency fund. You do need a plan for how you will respond to emergencies. My answer is to have a couple years worth of living expenses available in a line of credit.

What I would do is write down all the reasonably likely things that could go wrong in your life and how you would deal with them financially. You can use this list to determine how much emergency fund $$ you need or if some other mechanism like a line of credit will work for you.

Whatever the outcome I would invest the excess you have in the market according to your asset allocation.