Author Topic: Emergency fund investing mistake?  (Read 3575 times)

Meesh

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Emergency fund investing mistake?
« on: September 24, 2017, 03:35:46 PM »
So recently I tallied up our necessary living expenses and took 6m worth plus an extra 30% for volatility and invested it in a safety net fund on betterment. Now I'm second guessing myself. Should I put it back in a savings account or keep it where it is?

We are a one income family but DH's job is pretty secure...

What do you do with your EFund?

Edit: kinda freaked out after I read "there's another recession coming" post...
« Last Edit: September 24, 2017, 05:11:01 PM by Meesh »

MrsWolfeRN

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Re: Emergency fund investing mistake?
« Reply #1 on: September 24, 2017, 05:52:21 PM »
I do the same thing, and we are pretty much one income as well. We don't keep more than 2-3k in checking/savings at any given time, but we have over $100k in taxable investments we could withdraw within a week if needed. Yes, it would suck if the market tanked and then you needed a major roof repair or something, but the odds of this seem pretty small, and you would miss out on a lot of gains in the meantime.  My strategy would probably be different if I was living off my investments or if my job was less stable.

Frankies Girl

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Re: Emergency fund investing mistake?
« Reply #2 on: September 24, 2017, 06:01:31 PM »
You are either mis-using the term "emergency funds" or misunderstood the true reasoning behind having emergency funds.

You don't invest emergency funds. They are generally supposed to be around 6 months to a year's worth of expenses, and supposed to sit in a savings account or laddered CDs, boring as hell, but bulletproof from any market fluctuations. The point of emergency funds is to be there 100% intact, losing as little as possible to inflation (thus the CD/savings accounts suggestions instead of gold or dollar bills stuffed in a mattress).

Not sure what the correlation between what you're supposed to be doing with an emergency fund and the Chicken Little "recession is coming" posts. There is always another recession coming. Not a big deal in the least if you know this is normal. 

Telecaster

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Re: Emergency fund investing mistake?
« Reply #3 on: September 24, 2017, 06:13:56 PM »
Having an emergency fund is a mistake. 

Frankies Girl

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Re: Emergency fund investing mistake?
« Reply #4 on: September 24, 2017, 06:22:13 PM »
Having an emergency fund is a mistake.

Having an emergency fund is optional and makes sense sometimes for some and not for others, but it is not a "mistake."

Some folks prefer having a cushion for safety reasons in savings or laddered CDs.




Meesh

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Re: Emergency fund investing mistake?
« Reply #5 on: September 24, 2017, 08:47:01 PM »
We had a 20k Efund in savings for about 10 years and it wasn't a mistake we needed that on the back burner at the time; used a ton of it and filled it back up too. We had pretty unstable jobs. Now that things have mellowed out it was driving me crazy to have that much essentially losing money after inflation. So I invested it thinking if I really need it it's there and I padded it for things exactly like recessions. Definitely chicken little syndrome lol. Especially since I have another 10k or so in savings which would get us through about 4 months tightly. Insert facepunch here. I'm not new to the idea of FI (just couldn't because job security issues) or personal finance in general but I am new to investing. Always worried I'm doing something wrong!
« Last Edit: September 24, 2017, 08:54:38 PM by Meesh »

Gone_Hiking

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Re: Emergency fund investing mistake?
« Reply #6 on: September 24, 2017, 09:37:55 PM »
There is nothing, in my humble opinion, with keeping most of emergency fund in investments. However, it would be prudent to have a cushion of money sitting in a checking or savings for the expenses that sometimes creep up unexpectedly.  Two or so thousand dollars, just like MrsWolfeRN described, will cover unexpected costs such as a replacement of failed water heater without selling shares. 

About your DH's job security, the question is not how secure his job is.  The question is whether your DH could find another job quickly if he lost his current job.  If he could get another job within a month, keeping most of your emergency fund in investments makes sense.  If not, however, perhaps it's time to start adding money to saving account?

Meesh

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Re: Emergency fund investing mistake?
« Reply #7 on: September 24, 2017, 10:14:46 PM »
There is nothing, in my humble opinion, with keeping most of emergency fund in investments. However, it would be prudent to have a cushion of money sitting in a checking or savings for the expenses that sometimes creep up unexpectedly.  Two or so thousand dollars, just like MrsWolfeRN described, will cover unexpected costs such as a replacement of failed water heater without selling shares. 

About your DH's job security, the question is not how secure his job is.  The question is whether your DH could find another job quickly if he lost his current job.  If he could get another job within a month, keeping most of your emergency fund in investments makes sense.  If not, however, perhaps it's time to start adding money to saving account?

Hmm that IS a good question. On that front I'm not worried at all. He'd freelance almost immediately, which would weather the storm until he found another desk job.

Thanks everyone, this put a lot of things into needed perspective and made me realize things are much better than I thought. I guess I was a little terrified of the past repeating itself. Betterment fund stays put.

Telecaster

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Re: Emergency fund investing mistake?
« Reply #8 on: September 25, 2017, 03:03:45 PM »
Having an emergency fund is a mistake.

Having an emergency fund is optional and makes sense sometimes for some and not for others, but it is not a "mistake."

Some folks prefer having a cushion for safety reasons in savings or laddered CDs.

Let me amend my statement:  Having an emergency is usually a mistake, and big one most of the time.  To quote MMM "safety is an expensive illusion."  Sure, if you are just starting out financially, then you should have a cash cushion.   And of course, if you are planning on putting a new roof on the house next summer, planning a wedding, or have irregular employment, you should keep more money in cash.  But new roofs and weddings (or old water heaters for that matter) aren't emergencies.  They are predictable future expenses.  Water heaters are also predictable, but irregular, future expenses.  Irregular employment means irregular income that has to be planned for, but that by itself isn't an emergency either.  Just something that has to be planned for. 

The reality is stock market drops of more than about 20% are rare, and are usually preceded by a large run up, and are characterized by quick (18 month or so) recoveries.  So once you get to about 120% of your target number, you really don't need an emergency fund at all.    The chances of having an emergency and taking a significant market loss at the same time are really low.  The chances of having a large market gain prior to an emergency are pretty good. 

You can use cfiresim to calculate the effect of a large cash drag on your portfolio.  It makes you significantly less safe. 



RidetheRain

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Re: Emergency fund investing mistake?
« Reply #9 on: September 25, 2017, 03:47:03 PM »
The chances of having an emergency and taking a significant market loss at the same time are really low.

That doesn't seem right to me at all. People generally claim to use emergency funds for medical issues (ie broken arm) which can happen anytime. Or job loss. Which is statistically more likely to occur when the markets are down. I'd say you're MORE likely to need the money at an economic downturn.

Telecaster

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Re: Emergency fund investing mistake?
« Reply #10 on: September 25, 2017, 04:32:59 PM »
The chances of having an emergency and taking a significant market loss at the same time are really low.

That doesn't seem right to me at all. People generally claim to use emergency funds for medical issues (ie broken arm) which can happen anytime. Or job loss. Which is statistically more likely to occur when the markets are down. I'd say you're MORE likely to need the money at an economic downturn.

I said significant market loss.  Look at it this way.  Lets say your e-fund is fully invested in 2005, and everything is fine for three years.  In that the time the market is up 30%.  Now the recession hits, you lose your job, and the market drops 35%.  You're only down 10% off your e-fund target.  And that's only if you have liquidate your entire e-fund account on the worst day.   If you take out a little each month like most people would do in the event of job loss, then the losses would be less, possibly trivial.  Remember, after March 2009 the market went on a tear. 

Remember also, the e-fund target is an arbitrary number.  If you have say a 12 month expenses target, in my example it was reduced to 10.8 months.  Is that really significant?  But that's also why I said you should have about 20% above your e-fund target before getting rid of the cash portion of your e-fund. 


aetheldrea

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Re: Emergency fund investing mistake?
« Reply #11 on: September 25, 2017, 06:49:47 PM »
MMM's blog post about having a springy debt cushion rather than an emergency fund was the one that convinced me it was worthwhile to pay attention to him.

RidetheRain

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Re: Emergency fund investing mistake?
« Reply #12 on: September 26, 2017, 09:47:03 AM »
The chances of having an emergency and taking a significant market loss at the same time are really low.

That doesn't seem right to me at all. People generally claim to use emergency funds for medical issues (ie broken arm) which can happen anytime. Or job loss. Which is statistically more likely to occur when the markets are down. I'd say you're MORE likely to need the money at an economic downturn.

I said significant market loss.  Look at it this way.  Lets say your e-fund is fully invested in 2005, and everything is fine for three years.  In that the time the market is up 30%.  Now the recession hits, you lose your job, and the market drops 35%.  You're only down 10% off your e-fund target.  And that's only if you have liquidate your entire e-fund account on the worst day.   If you take out a little each month like most people would do in the event of job loss, then the losses would be less, possibly trivial.  Remember, after March 2009 the market went on a tear. 

Remember also, the e-fund target is an arbitrary number.  If you have say a 12 month expenses target, in my example it was reduced to 10.8 months.  Is that really significant?  But that's also why I said you should have about 20% above your e-fund target before getting rid of the cash portion of your e-fund.

Fair enough. I know I was thinking of my fairly small EF when I made that comment. The smaller your overall EF changes how much you can tolerate in an iffy market. OP said 6 months which for me at least is not a very big number. Personally, I have half my EF invested so I'm not disagreeing with your point. It all depends on the person really.

charis

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Re: Emergency fund investing mistake?
« Reply #13 on: September 26, 2017, 10:47:44 AM »
We have cash in a CD and high interest savings account, plus substantial HSA funds, much of which is currently invested, which could be used for a medical emergency.  At this point, I see the cash as less of an EF than a savings account for for a large unexpected household repair or what have you.  We keep the amount relatively low and move some of it to investments when the opportunity arises.  We also have a HELOC.

Our biggest hedge against a costly emergency or job loss is setting up a lifestyle that costs well below our means.  We bought a house that we could easily afford on one moderate salary and we continue to live that way despite dual salary increases.   Therefore, we could make ends meet by picking up lower-paying jobs if we had to.

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Re: Emergency fund investing mistake?
« Reply #14 on: September 26, 2017, 11:11:38 AM »
You are either mis-using the term "emergency funds" or misunderstood the true reasoning behind having emergency funds.

You don't invest emergency funds. They are generally supposed to be around 6 months to a year's worth of expenses, and supposed to sit in a savings account or laddered CDs, boring as hell, but bulletproof from any market fluctuations. The point of emergency funds is to be there 100% intact, losing as little as possible to inflation (thus the CD/savings accounts suggestions instead of gold or dollar bills stuffed in a mattress).

Not sure what the correlation between what you're supposed to be doing with an emergency fund and the Chicken Little "recession is coming" posts. There is always another recession coming. Not a big deal in the least if you know this is normal.

Maybe YOU don't invest an emergency fund, but ours is invested in the stock market.

Our taxable investment accounts are our emergency funds. The only reason we would withdraw from them is if there was an emergency that our typical accounts could not cover.

Frankies Girl

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Re: Emergency fund investing mistake?
« Reply #15 on: September 26, 2017, 11:48:31 AM »
You are either mis-using the term "emergency funds" or misunderstood the true reasoning behind having emergency funds.

You don't invest emergency funds. They are generally supposed to be around 6 months to a year's worth of expenses, and supposed to sit in a savings account or laddered CDs, boring as hell, but bulletproof from any market fluctuations. The point of emergency funds is to be there 100% intact, losing as little as possible to inflation (thus the CD/savings accounts suggestions instead of gold or dollar bills stuffed in a mattress).

Not sure what the correlation between what you're supposed to be doing with an emergency fund and the Chicken Little "recession is coming" posts. There is always another recession coming. Not a big deal in the least if you know this is normal.

Maybe YOU don't invest an emergency fund, but ours is invested in the stock market.

Our taxable investment accounts are our emergency funds. The only reason we would withdraw from them is if there was an emergency that our typical accounts could not cover.

Then YOU do not have an actual Emergency Fund. Which is fine.

Sigh. I'm not sure why everyone is trying to make the term "emergency fund" something it's not. Again, what you (specific individual) choose to do with your investments/cash or portfolio as a whole is not wrong. But using the specific term "emergency fund" when you actually mean a HELoC or general investments, or don't feel the need to have a low risk account at all and insisting that anyone that isn't following the same pathway is the problem.

For those that are new to all of this, misusing the terminology can being confusing and misleading.

https://www.bogleheads.org/wiki/Emergency_fund
From the investor's unofficial bible (Bogleheads link above):
Quote
An emergency fund is a cash reserve required to meet unanticipated needs for cash, such as medical bills, car or home repair, or job loss. The quantity of emergency funds is usually specified as an integer multiple of monthly expenses, e.g., three months to one year's worth of expenses.

Emergency funds should be placed in a highly liquid, low risk vehicle (e.g., money market, bank savings account).

And calling it wrong to have an actual, as-defined-above emergency fund (instead of using a HELoC, counting on taxable investments, whatever) is wrong in itself. We're not all MMM with extensive lines of credit, ability to make money easily, or able to be as comfortable with the idea of drawing off investments no matter what the market is doing.

All of the commentary after the OP's initial question is about whether having an ER is even necessary... and I get the idea that the OP is confused still as they invested their ER funds into the market and are still nervous about market drops/recessions. Investing when you're scared of things like a recession is the exact type of mentality that might feel better psychologically for having an ER sitting in the conventional savings/CD accounts - NOT invested in a volatile market.

And for the record... I don't have much of an ER myself. I have sufficient investments where even a 50% drop in the market wouldn't significantly change my drawdown needs in the event of any emergency. But I do know how important it is to use my terminology clearly and try to explain for posterity how this stuff works because I used to be brand new and completely uneducated when it comes to investing and portfolio management. This shit is scary enough when you're new and trying to learn, so trying to be as clear as possible is sort of a public service.







« Last Edit: September 26, 2017, 11:50:53 AM by Frankies Girl »

I'm a red panda

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Re: Emergency fund investing mistake?
« Reply #16 on: September 26, 2017, 11:50:27 AM »
From the investor's unofficial bible

Let me just highlight a word here. 

SeattleStache

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Re: Emergency fund investing mistake?
« Reply #17 on: September 26, 2017, 12:08:05 PM »
I keep $3k in cash in a savings account and the rest of my "emergency" money (around $14k) in a lower risk Vanguard fund. I view my Roth as a true life threatening emergency fund and don't like to keep too much cash on hand.

Imustacheyouaquestion

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Re: Emergency fund investing mistake?
« Reply #18 on: September 26, 2017, 12:37:12 PM »
Simply a question of personal risk tolerance and which one of these potential loss scenarios makes you more uncomfortable. If you keep your emergency fund in cash, you will lose a bit of it to inflation and you lose out on the opportunity costs of deploying that capital elsewhere (invested, for example). If you invest it, you risk having to sell investments to cash out for a market loss.

A recession is always coming - you just never know when. That's how the market works.

Personally, I'm good with springy debt with more than $100k of available credit, about a one-month's buffer of expenses in my checking account, a high savings rate (I could always dial back my TSP/HSA/etc contributions to cover a major expense), a stash in my HSA that would cover my catastrophic out-of-pocket max. Also, in a life-threatening or major catastrophe, I wouldn't hesitate to sell investments at a loss, use a hardship withdrawal from retirement accounts, or pull equity out of my mortgage (HELOC) - there are more important things in life than optimizing my net worth at all costs.

boarder42

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Re: Emergency fund investing mistake?
« Reply #19 on: September 26, 2017, 12:40:58 PM »
i have as much money invested as possible we earn high income and if we lost one it wouldnt be a disaster.  there is always a recession coming we just dont know when.

here's my E-Fund withdrawal strategy.

1. Put it on a credit card - in the USA there is almost nothing that cant be put on a credit card - this should buy you anywhere from 30-60 days to come up with the cash
2. Stop funding our taxable accounts - 2600 a month
3. stop funding our 401k's - 2000/month
4. if the 4600-9200 didnt cover the expenditure in the first 2 months i'd probably do some manufacutred spending on some credit cards to extend my window another 30-60 days
5. If it was that great an expense i'll just sell my shares of my taxable account.  this will be 6 figures by the end of the year.

Its not worth the opportunity LOST to not being invested to me to have any money sitting idle. 


Meesh

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Re: Emergency fund investing mistake?
« Reply #20 on: September 26, 2017, 01:58:00 PM »
You are either mis-using the term "emergency funds" or misunderstood the true reasoning behind having emergency funds.

You don't invest emergency funds. They are generally supposed to be around 6 months to a year's worth of expenses, and supposed to sit in a savings account or laddered CDs, boring as hell, but bulletproof from any market fluctuations. The point of emergency funds is to be there 100% intact, losing as little as possible to inflation (thus the CD/savings accounts suggestions instead of gold or dollar bills stuffed in a mattress).

Not sure what the correlation between what you're supposed to be doing with an emergency fund and the Chicken Little "recession is coming" posts. There is always another recession coming. Not a big deal in the least if you know this is normal.

Maybe YOU don't invest an emergency fund, but ours is invested in the stock market.

Our taxable investment accounts are our emergency funds. The only reason we would withdraw from them is if there was an emergency that our typical accounts could not cover.

Then YOU do not have an actual Emergency Fund. Which is fine.

Sigh. I'm not sure why everyone is trying to make the term "emergency fund" something it's not. Again, what you (specific individual) choose to do with your investments/cash or portfolio as a whole is not wrong. But using the specific term "emergency fund" when you actually mean a HELoC or general investments, or don't feel the need to have a low risk account at all and insisting that anyone that isn't following the same pathway is the problem.

For those that are new to all of this, misusing the terminology can being confusing and misleading.

https://www.bogleheads.org/wiki/Emergency_fund
From the investor's unofficial bible (Bogleheads link above):
Quote
An emergency fund is a cash reserve required to meet unanticipated needs for cash, such as medical bills, car or home repair, or job loss. The quantity of emergency funds is usually specified as an integer multiple of monthly expenses, e.g., three months to one year's worth of expenses.

Emergency funds should be placed in a highly liquid, low risk vehicle (e.g., money market, bank savings account).

And calling it wrong to have an actual, as-defined-above emergency fund (instead of using a HELoC, counting on taxable investments, whatever) is wrong in itself. We're not all MMM with extensive lines of credit, ability to make money easily, or able to be as comfortable with the idea of drawing off investments no matter what the market is doing.

All of the commentary after the OP's initial question is about whether having an ER is even necessary... and I get the idea that the OP is confused still as they invested their ER funds into the market and are still nervous about market drops/recessions. Investing when you're scared of things like a recession is the exact type of mentality that might feel better psychologically for having an ER sitting in the conventional savings/CD accounts - NOT invested in a volatile market.

And for the record... I don't have much of an ER myself. I have sufficient investments where even a 50% drop in the market wouldn't significantly change my drawdown needs in the event of any emergency. But I do know how important it is to use my terminology clearly and try to explain for posterity how this stuff works because I used to be brand new and completely uneducated when it comes to investing and portfolio management. This shit is scary enough when you're new and trying to learn, so trying to be as clear as possible is sort of a public service.

I get what you are saying and agree that definition for newbies is important. Without it, it can make it all the more confusing. Once you put it into investments by general consensus, it should no longer be called an emergency fund. So I should just call it what it is a taxable low risk account.

"Something you could use in an emergency" doesn't have a definition that I know of, which I think most people here are talking about.

I looked at the numbers and no longer feel nervous about market drops. I realize I was being irrational. Even with a 50% drop we'd make it back in 3 months tops if we started shoveling money into it. And as I mentioned earlier, job loss isn't an issue.

By definition I guess I should call my 3-4 months cash on hand a true "emergency fund". That seems way more than enough for us.

Lastly, thanks for acknowledging that this stuff can be scary when you are just starting out.

koshtra

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Re: Emergency fund investing mistake?
« Reply #21 on: September 26, 2017, 03:00:13 PM »
All the important stuff has already been said here :-) I'll just add that I've found it useful to REALLY walk through my various emergency scenarios, and figure out in some detail what I would do in each case. Some emergencies actually dissolve into silly anxieties, when I do that (we both lose our jobs, and neither of us are able to find ANY work, even at minimum wage, for six months? Chance pretty near zero, and anyway we just camp in our kids' garage and eat beans until the new FDR comes along) and some come into focus as things that would really wreck us (one of us turns up with early Alzheimer's? Total ruin.) Then I can weigh probabilities against risks in a meaningful way. And then I can either actually look up the likelihood of early Alzheimer's, or just concede that we're totally screwed in that case whether we have an emergency fund or not. I guess what I'm saying is... vagueness is the enemy. The real usefulness of an emergency fund varies wildly from case to case and year to year.