The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Montecarlo on April 14, 2019, 05:27:59 PM
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It's been a topic on a couple of threads, and MMM himself recently released a video.
I think emergency savings should be broken up into two categories:
- Unanticipated expenses
- Job loss
Unanticipated Expenses
To me, credit card all the way. That gives plenty of time to liquidate assets or redirect cash flow as needed. Keep the $ invested!
Job loss
This one is trickier. I think with a high correlation between unemployment rate and prior 12 month stock returns, it is wise to keep in mind that if you need to liquidate stocks to cover a job loss, you are selling low. On the other hand, the chances of losing a job, even during a bad recession, aren't that high.
I met with a financial adviser a month ago. They suggested the typical strategy of higher exposure to stocks while accumulating, and reducing that as you get to distribution and moving wealth into safer investments.
I personally think this is backwards. Until recently I kept 1 year of emergency savings in a combination of cash and treasuries. As I've gotten closer and closer to FI, I've gotten more exposure to stocks. My reasoning? The closer to FI, the impact of job loss and stock market correction is less. Once I am FI, I could lose my job and sail right through a 50% correction, drinking my fine teas and going on long Monday morning walks.
How do you guys like to think about it?
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I have a couple k in savings for unanticipated expenses.
I Am an independent contractor so I keep 6 months in Vanguard MM for use between projects
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I keep 6 months between my Vanguard MM and my checking account earning 1%.
I like paying my bills without worrying about available funds.
No stress, no fear. It's that easy for me.
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DH (our sole breadwinner, at least for now) has an incredibly stable job, and in a month he locks in a pension that would make for a very lean FIRE for us (as long as we either kept our rental occupied, or sold it. We couldn't float that mortgage on an empty property for huge amounts of time while living off the pension). So we aren't terribly concerned about that aspect of planning.
For unexpected expenses, we would hopefully just be able to float them with our monthly slush, and possibly turning off auto investments for that month.
We keep about between $8k and $10k in the bank. And really, that's more to do with laziness than an EF. There's usually another ~$1000 in the account where our rent checks are deposited. Beyond that, we have credit cards and a huge HELOC (which is still way below our actual equity--about 1/5 of it--so there's little chance of it being canceled). Then we have our non-retirement investments.
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The chances of losing a job, even during a bad recession arent that high? Really?
Good luck.
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The chances of losing a job, even during a bad recession arent that high? Really?
Good luck.
This made me chuckle, as well.
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Worst unemployment since the great depression has been is 11%.
89% chance if you want a job, you got one.
If you have two breadwinners in the family, the chance of both being unemployed drop near 1%
I think 11% is too high to not have a years' worth of expenses without dipping into stocks (at least until near FI), but I can see other people willing to roll the dice and cram everything into stocks at every opportunity.
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I recently put a concept for a stock-based emergency fund for the risk averse in another thread, but will repost it, here with the hopes of vetting it a bit. First, have an existing emergency fund in a stable, insured, fungible account. Second, build the same amount of e-fund in an investment account (not tied to retirement). Put it in index funds. Third, once this is equal to the old emergency fund, transfer the old fund into the new account. Now you have an emergency fund that is earning returns at a market rate and can weather a 50% downturn.
The odds are that you will see growth before a drop that size (there have only been two downturns over 50% in the last 100 years). Even with a 50% downturn, you will have the original value of your emergency fund. This isn't risk free, but most of the time, it will shorten your time to FI and most of the time, you will have a larger E-fund than you would otherwise without losing returns.
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I recently put a concept for a stock-based emergency fund for the risk averse in another thread, but will repost it, here with the hopes of vetting it a bit. First, have an existing emergency fund in a stable, insured, fungible account. Second, build the same amount of e-fund in an investment account (not tied to retirement). Put it in index funds. Third, once this is equal to the old emergency fund, transfer the old fund into the new account. Now you have an emergency fund that is earning returns at a market rate and can weather a 50% downturn.
The odds are that you will see growth before a drop that size (there have only been two downturns over 50% in the last 100 years). Even with a 50% downturn, you will have the original value of your emergency fund. This isn't risk free, but most of the time, it will shorten your time to FI and most of the time, you will have a larger E-fund than you would otherwise without losing returns.
Yes a simpler way to look at this is to just double your EF and invest it in a suitable blend. You could also start at 100% EF in money market and as you work your way to 200% shift to riskier assets. Or save 150% and have a large bond allocation. I think an approach like this is valid since, as MMM points out, there's a low probability you would need to sell all of it near a bottom.
I don't do this because I use my after tax savings to invest in real estate and with each property my EF has to grow. Over the medium term the higher returns from levered real estate outweigh the opportunity to invest my EF in stocks.
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I have about a year's worth of expenses in personal LOC space just hanging around that I occasionally use for large business expenses. That's my e-fund.