Author Topic: Emergency Fund Location  (Read 9444 times)

SrPennyLip

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Emergency Fund Location
« on: March 06, 2015, 07:04:09 AM »
I believe my question may be comically simple, but given it costs nothing to ask, I figured it worth the price of admission.

I currently have a 4-6 month emergency fund sitting in a money market account at Ally bank at 0.85% APR.  I just noticed their online saving accounts are at 0.99% APR.  The only difference between the two accounts I can see is that the money market account supports a debit card and checks while the online savings account does not.  Given this is an emergency fund, I do not require regular access via checks or debit cards and would simply electronic transfer money to my checking account if needed.

Is there any reason to keep the fund in the money market rather that move it to the savings account?

Thanks.

zurich78

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Re: Emergency Fund Location
« Reply #1 on: March 06, 2015, 07:09:37 AM »
I can't think of any.  I have my e-fund in the Ally savings as well at 0.99% APR.  To your point, I don't need the debit card.  In fact, I don't even want it.

I can't think of many emergencies that can't wait 2-3 days for money to transfer so I think I'm covered for about 99.9% of possible money emergencies.

terran

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Re: Emergency Fund Location
« Reply #2 on: March 06, 2015, 07:24:07 AM »
Yeah, get an ally savings account and an ally checking account. Instant transfers between the two and they reimburse for ATM withdrawals, so you could get cash out plenty fast if needed and most of the time it's just sitting there earning a bit more than the money market.

SrPennyLip

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Re: Emergency Fund Location
« Reply #3 on: March 06, 2015, 09:51:52 AM »
Excellent.  Thanks for confirming my suspicions.

Kaspian

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Re: Emergency Fund Location
« Reply #4 on: March 06, 2015, 10:15:29 AM »
At least you're on the right track--I've gotten into heated arguments with people who keep their emergency fund in investments.   I just can't persuade them in the following argument:  "When do you need you EF the most?  When you get laid off.  When is the best chance of you getting laid off?  In a recession.  What happens to the value of your investments in a recession?  They're not worth very much and you have to sell them at the bottom of the market.  Not smart."

johnny847

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Re: Emergency Fund Location
« Reply #5 on: March 06, 2015, 10:45:14 AM »
At least you're on the right track--I've gotten into heated arguments with people who keep their emergency fund in investments.   I just can't persuade them in the following argument:  "When do you need you EF the most?  When you get laid off.  When is the best chance of you getting laid off?  In a recession.  What happens to the value of your investments in a recession?  They're not worth very much and you have to sell them at the bottom of the market.  Not smart."

It's not quite that simple. http://forum.mrmoneymustache.com/ask-a-mustachian/emergency-fund-where-do-you-keep-it/msg563060/#msg563060

Long story short you're giving up a substantial amount of long term return by keeping your money in a bank account to insure yourself against an event that "should be" a rare event. It's the same concept but not on the same magnitude as people who hold gold to hedge against hyperinflation (stocks can hedge normal levels of inflation). In the long run gold has little to no real return, so holding it to protect yourself against something that is highly improbable isn't smart.

Lis

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Re: Emergency Fund Location
« Reply #6 on: March 06, 2015, 11:09:21 AM »
Like others that have responded, I have a short term/slush efund sitting in my current bank making a paltry .35% interest (only $500). The rest of my emergency fund is in GE Savings. I have $1000 in cash (at 1.05%) that would take maybe two days to get to my bank and the rest sitting in a CD ladder. I only made it last year, but the idea is you start off getting five CDs, one for 1 year, one for 2 years, etc. through 5 years. When the first CD expires, you reinvest that money in a five year CD. Eventually, each year one five year CD (running at 2.55% I think) will expire. If you do have an emergency, you're only penalized on the interest gained, not principal (at GE at least, check to make sure that's the case at whatever bank you use).

On the one hand, it's liquid enough that if there's a true emergency, the money is easy to get to. On the other hand, there are just enough loops (for me at least) to jump through that I wouldn't touch it unless it was an actual emergency.

Kaspian

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Re: Emergency Fund Location
« Reply #7 on: March 06, 2015, 12:45:18 PM »

Long story short you're giving up a substantial amount of long term return by keeping your money in a bank account to insure yourself against an event that "should be" a rare event.

Yep, I understand investment loss.  But an emergency is just that--you need it now.  No time to be selling index funds when they suck, keeping track of capital losses. Most people don't see auto accidents, unemployment, or illness coming.  It'd *really* suck to have a stroke and then have to log onto a web site and think about which funds you're going to sell through your broker.  I get the other side of the argument, but hell--I'll take 2% or something crummier on 5K for the security.  And every year I flip that small return into my main investment portfolio anyway. 

Please note:  You can save money by not buying car insurance and hoping you never get caught.  ...Or not building a foundation on your house and crossing your fingers about floods and hurricanes.  But prudent is prudent.  :)

Anyway, yeah--I actually think both sides are fairly simple and it's usually impossible to convince  the other.

(Sorry, did not mean to hijack this thread at all.) 

johnny847

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Re: Emergency Fund Location
« Reply #8 on: March 06, 2015, 12:53:15 PM »

Long story short you're giving up a substantial amount of long term return by keeping your money in a bank account to insure yourself against an event that "should be" a rare event.

Anyway, yeah--I actually think both sides are fairly simple and it's usually impossible to convince  the other.

(Sorry, did not mean to hijack this thread at all.)
I was actually convinced to get rid of mine. But if you read my original post in the other thread in more detail, my conclusion wasn't you absolutely should or shouldn't have a great emergency fund. It's that you should consider both sides of the argument before making a decision.
Well I guess I did conclude as your portfolio grows the mathematical usefulness of your emergency fund diminishes. But investing isn't just about the math, psychology is important too.

SrPennyLip

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Re: Emergency Fund Location
« Reply #9 on: March 06, 2015, 01:04:56 PM »
And this is why I love these forums.

My original question is answered: I'll move my emergency fund to the online savings account to eek out the laughably better interest rate.

However, my wife and I are 3 months away from being done with our mortgage which will soon put us in the category of "...as your portfolio grows the mathematical usefulness of your emergency fund diminishes".  When that time arrives (another year or two?), I may consider using the CD ladder technique to get a slightly better interest rate while still having a "true" emergency fund for the psychological benefits it provides my marriage.

I do like the fact that my suspicions of whether its truly useful are confirmed -- beyond the simple stability it provides in our relationship (for which I'd pay double).

rocketman48097

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Re: Emergency Fund Location
« Reply #10 on: March 06, 2015, 01:09:01 PM »
I believe that an emergency fund is best kept in a taxable stock fund.  We currently only keep 5k in cash, and the rest of our emergency money is tied up in the market.  Since most emergencies aren't very large, I am still working and putting away money, after tax, on a monthly basis, I figure I could "replenish" the sale of any investments.

The idea of six months cash tied up earning such low returns doesn't interest me in the least.  Over time, you may come to the same conclusion.  I have been doing this for many years, I'm 38. 

johnny847

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Re: Emergency Fund Location
« Reply #11 on: March 06, 2015, 01:13:00 PM »
And this is why I love these forums.

My original question is answered: I'll move my emergency fund to the online savings account to eek out the laughably better interest rate.

However, my wife and I are 3 months away from being done with our mortgage which will soon put us in the category of "...as your portfolio grows the mathematical usefulness of your emergency fund diminishes".  When that time arrives (another year or two?), I may consider using the CD ladder technique to get a slightly better interest rate while still having a "true" emergency fund for the psychological benefits it provides my marriage.

I do like the fact that my suspicions of whether its truly useful are confirmed -- beyond the simple stability it provides in our relationship (for which I'd pay double).

Haha I'm glad to be of help!
 I also claim that the emergency fund becomes less useful as beginners (not saying you are one) get a greater grip on their finances. If you look up top reasons to have an emergency fund, some of them are for completely predictable expenses.

RL12

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Re: Emergency Fund Location
« Reply #12 on: March 06, 2015, 01:55:18 PM »
To take things off topic here I have a question I've been wondering about. Where do you all keep your money for saving up for large purchases like house down payments or cars?

Me and my wife are less than a year away from paying off everything but the house and I've been curious where to put this money. It will be what's left over after we max out retirement and IRA's.

SrPennyLip

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Re: Emergency Fund Location
« Reply #13 on: March 06, 2015, 02:13:10 PM »
Where do you all keep your money for saving up for large purchases like house down payments or cars?

@RL12 I actually have the same question.  I will soon be purposefully saving toward several different categories of future large-ish purchases and am curious to know how others do it as well.


Lia-Aimee

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Re: Emergency Fund Location
« Reply #14 on: March 06, 2015, 02:18:03 PM »
RL12: I have one checking and two savings accounts, same bank. Money to be spent within a 2 week period is in my checking account, rent/bills money and "spend savings" is in Savings #1, and my very small e-fund is in Savings #2. Investments are in an online brokerage. This is all "rebalanced" each pay cheque.

About the size of the e-fund, I think it varies on individual situations. I rent, have no dependents, and my monthly expenses could be covered by a 25 hour/ week, minimum-wage job. If I received employment insurance, I could still save $1000 monthly. Obviously someone with higher expenses and dependents will need a larger e-fund.

johnny847

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Re: Emergency Fund Location
« Reply #15 on: March 06, 2015, 02:37:58 PM »
Where do you all keep your money for saving up for large purchases like house down payments or cars?

@RL12 I actually have the same question.  I will soon be purposefully saving toward several different categories of future large-ish purchases and am curious to know how others do it as well.
It really depends. Mostly on how rigid your time frame is. Bond funds are usually pretty stable but can experience drops. You can look into I bonds also. But I wouldn't recommend any stocks

Lis

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Re: Emergency Fund Location
« Reply #16 on: March 06, 2015, 03:16:10 PM »
I'm saving up now for a down payment and my money is in another high interest savings account (1.0%! Woohoo so much!). I'm hoping to use mine in the next year, so it seems like the best and safest option :/

ysette9

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Re: Emergency Fund Location
« Reply #17 on: March 06, 2015, 03:33:07 PM »
I find this discussion interesting because my husband and I have recently done an about-face on the topic of emergency fund. We've had 6+ months in a money market earning almost nothing since the beginning but recently have been moving it all over to Vanguard. He convinced me to do this by walking through what an actual emergency for us would look like.

Scenario 1: one of us loses our jobs. Response: stop saving (~50% savings rate now) and cut frivolous expenses a bit. No need to touch emergency funds here.
Scenario 2: Some big expense like medical or car crash or a family member is desperately in need of x. Response: we tend to keep $10k+ in checking and other various little accounts, so just grab some of that. Worst case situation, we wait a few days to sell something out of VTSAX.

Other scenarios were also discussed. Bottom line is that I couldn't think of something so desperate that we needed instant access to huge sums of cash because at this point in our financial lives, we have many other levers we can pull first. I do agree that when starting out, an emergency fund is really important to have.

Indexer

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Re: Emergency Fund Location
« Reply #18 on: March 06, 2015, 05:17:41 PM »
I personally keep the first 2 months in a savings account.

The rest I keep in VASIX.  I know some people are against using investments, but it is super conservative.  80% bonds and 20% stocks gives you great protection against market volatility and interest rates.  Historically a worst year scenario for something like that is down around 10% in a major crisis.  In 2008 VASIX was down about 10.5%.  I'm unlikely to need it anyway, and even IF I needed it right in the middle of a big crisis a 10.5% dip isn't going to cause a problem.  Just keep 6 1/2 months expenses in savings, and even after a 10% dip you still have around 6 months worth of expenses left behind. 

The trade off.  Likely 3-5% annual growth.  A whole lot better than less than 1%.  If CDs ever get back to 3-5% I'll consider that instead.

bacchi

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Re: Emergency Fund Location
« Reply #19 on: March 06, 2015, 05:28:03 PM »
I personally keep the first 2 months in a savings account.

The rest I keep in VASIX.  I know some people are against using investments, but it is super conservative.  80% bonds and 20% stocks gives you great protection against market volatility and interest rates.  Historically a worst year scenario for something like that is down around 10% in a major crisis.  In 2008 VASIX was down about 10.5%.  I'm unlikely to need it anyway, and even IF I needed it right in the middle of a big crisis a 10.5% dip isn't going to cause a problem.  Just keep 6 1/2 months expenses in savings, and even after a 10% dip you still have around 6 months worth of expenses left behind. 

The trade off.  Likely 3-5% annual growth.  A whole lot better than less than 1%.  If CDs ever get back to 3-5% I'll consider that instead.

Nice approach.

zurich78

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Re: Emergency Fund Location
« Reply #20 on: March 07, 2015, 08:05:05 AM »
Where do you all keep your money for saving up for large purchases like house down payments or cars?

@RL12 I actually have the same question.  I will soon be purposefully saving toward several different categories of future large-ish purchases and am curious to know how others do it as well.

I use a regular online savings account for these things.  I don't want to have to sell at a loss when I'm ready to make my purchase (or have to wait for the market to recover).  Sure, you're limiting your upside but you're also limiting your risk.

For me, if I'm going to need money for anything in the short-ish term, it goes in an online savings account.

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Re: Emergency Fund Location
« Reply #21 on: March 07, 2015, 08:23:00 AM »
If you are willing to use Square Cash to shift money back and forth using linked debit cards, there are accounts that pay 4+% on the first $15k.  The catch is you have to have a minimum number of debit card transactions per month.  I use Square to make debit card transactions to my kids' allowance accounts with no transaction fee.

johnny847

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Re: Emergency Fund Location
« Reply #22 on: March 07, 2015, 08:29:49 AM »
If you are willing to use Square Cash to shift money back and forth using linked debit cards, there are accounts that pay 4+% on the first $15k.  The catch is you have to have a minimum number of debit card transactions per month.  I use Square to make debit card transactions to my kids' allowance accounts with no transaction fee.

I've used Square Cash before but I had never thought about using that to meet the debit card transaction minimums on reward checking accounts. I have an Amex Serve, and schedule daily debit card transactions every month.

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Re: Emergency Fund Location
« Reply #23 on: March 07, 2015, 08:33:27 AM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

johnny847

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Re: Emergency Fund Location
« Reply #24 on: March 07, 2015, 08:39:18 AM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

zurich78

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Re: Emergency Fund Location
« Reply #25 on: March 07, 2015, 08:44:47 AM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

I think some people, like me, are uncomfortable with the idea of investing your e-fund.  To me, it's supposed to be a pile of cash I can get to at any time, and there is a guarantee of a certain minimum balance being available.

I'll probably invest in P2P at some point as well, but, with money earmarked for investments, not emergencies. 

What happens if a borrower defaults on a loan, do you lose your investment?

Indexer

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Re: Emergency Fund Location
« Reply #26 on: March 07, 2015, 09:02:25 AM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

Give me a second while I pick my jaw up from the floor.........

THANK YOU Johnny847!!!


Link:  https://www.mangomoney.com/what-is-mango#savings

6% on up to 5k as long as you set up the debit card which is $3 a month and you have direct deposit.  The direct deposit appears to require $50.  So you could just split your direct deposit so $50 goes to the card, and then you can just move it to the savings.  I'm going to set this up right now!  How did I not know about this?  It should probably get its own page!

Oh and 6% on 5000 is $300.  Minus $36 fee(annualized) = $264.    264/5000 = 5.28% after fee interest rate.  Which is still freaking amazing!

I love VASIX, but 5.28% guaranteed can't be turned down when VASIX has averaged 4.74% over the past 10 years.

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Re: Emergency Fund Location
« Reply #27 on: March 07, 2015, 09:17:38 AM »
Quote
What happens if a borrower defaults on a loan, do you lose your investment?

In short, yes. But the key is to be invested in a lot of loans -- 200 minimum is what's generally recommended -- so that if you do have a default or two, it won't ruin your whole investment. You can invest with as little as $25 per loan, so you should start out with $5,000 minimum.

LC has a page where you can check the historical performance of different loan grades over different time periods - https://www.lendingclub.com/info/demand-and-credit-profile.action

Personally, I started with $10,000 in my account, but I've only been doing it for about 3 months, so it's too early to determine results.

johnny847

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Re: Emergency Fund Location
« Reply #28 on: March 07, 2015, 09:54:08 AM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

Give me a second while I pick my jaw up from the floor.........

THANK YOU Johnny847!!!


Link:  https://www.mangomoney.com/what-is-mango#savings

6% on up to 5k as long as you set up the debit card which is $3 a month and you have direct deposit. 
There's no direct deposit requirement. They just charge you $3/month regardless. But if you do make one direct deposit, there's a $20 bonus, so you should definitely do this at least once.

It should probably get its own page!
There is, but the OP in the thread is used the old fee structure of $5/month unless you had a $500 DD. http://forum.mrmoneymustache.com/investor-alley/6-savings-account-with-mangomoney-com-all-the-details/

Oh and 6% on 5000 is $300.  Minus $36 fee(annualized) = $264.    264/5000 = 5.28% after fee interest rate.  Which is still freaking amazing!

Not quite. You get taxed on the 6%, and then pay the $3/month fee. So for a 25% marginal rate, that's $300 gross interest, $225 net interest, and $36 in fees for a $189 or 3.78% post tax return. Which would be equivalent to a gross interest of 5.04% without any fees, not the 5.28% that you calculated.


The effect of the fees on past tax yield isn't that big, but it depends on your tax rate. Still though, having a guaranteed yield like this, and FDIC insurance, is a good deal.

To do a mathematically fair comparison of post tax yield to VASIX, you would need to calculate the taxes on VASIX as well. Though I'm pretty sure that depending on the size of your emergency fund, while the percentage difference in yields between VASIX and Mango may be large, the difference in absolute numbers won't be all that large.


I believe you can have 3 Mango accounts.

zurich78

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Re: Emergency Fund Location
« Reply #29 on: March 07, 2015, 10:35:06 AM »
I find this discussion interesting because my husband and I have recently done an about-face on the topic of emergency fund. We've had 6+ months in a money market earning almost nothing since the beginning but recently have been moving it all over to Vanguard. He convinced me to do this by walking through what an actual emergency for us would look like.

Scenario 1: one of us loses our jobs. Response: stop saving (~50% savings rate now) and cut frivolous expenses a bit. No need to touch emergency funds here.
Scenario 2: Some big expense like medical or car crash or a family member is desperately in need of x. Response: we tend to keep $10k+ in checking and other various little accounts, so just grab some of that. Worst case situation, we wait a few days to sell something out of VTSAX.

Other scenarios were also discussed. Bottom line is that I couldn't think of something so desperate that we needed instant access to huge sums of cash because at this point in our financial lives, we have many other levers we can pull first. I do agree that when starting out, an emergency fund is really important to have.

What if you rely on one income and you don't have $10K in your checking?  I mean, YMMV here, but for most people, I don't think they have $10K in a checking account.

Emilyngh

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Re: Emergency Fund Location
« Reply #30 on: March 07, 2015, 05:20:11 PM »

What if you rely on one income and you don't have $10K in your checking?  I mean, YMMV here, but for most people, I don't think they have $10K in a checking account.

We live on one income and don't have $10k in our checking.   If I lost my job we'd cash out investments in our Roth IRA if/as needed for longer term funds, and could use CC's to tide us over short-term. We can withdraw all contributions without taxes or penalties and live completely off of that for at least a year with no income, several years if we picked up any side income by either of us at all during that period.  One may consider this emergency money, but it is invested.   If we have the horrible luck of ever required to withdraw it in a down market, oh well.   It doesn't represent that much of our stache and the gains it will probably see by leaving it in investments outweighs the risks of pulling it in a down market.

Although, the real key is having a super low cost of living.   Once we cut extras like helping DH's daughter with college (which we wouldn't do if unemployed), various savings, gifts, fancy food, home renovation projects, trips, etc, we could probably get by pulling little from the Roth for a long time as long as we brought in even a minimal income.    For example picking up some work like waitressing, delivery pizzas, teaching classes at a community college, substitute teaching, etc, could allow this to stretch considerably considering how low our expenses would be.   Even better, we'd be able to come very close to being able to completely living off of this type of low wage work completely and pull nothing if one of us were able to find enough to do it full time, or if the two of us were able to each do it for like 20 hrs a week.

I sleep very well at night knowing that all we'd need to support ourselves at a level very close to how we currently live would be two people each making an average of $10k a year (assuming as a family of three that we'd then qualify for very close to fully subsidized health care, and about $3k in the EITC) if we absolutely needed to.   We probably wouldn't even need to use any other gov't programs although we'd probably qualify (eg., SNAP, etc).

« Last Edit: March 07, 2015, 05:23:33 PM by Emilyngh »

TheBuddha

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Re: Emergency Fund Location
« Reply #31 on: March 07, 2015, 05:39:42 PM »
I haven't set up my full EF yet (will do it after student loans paid off) but I plan to put it in a regular savings account and gradually move it into I-bonds. That way at least it keeps up with inflation. (I don't consider it an investment.)

zurich78

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Re: Emergency Fund Location
« Reply #32 on: March 07, 2015, 06:01:38 PM »

What if you rely on one income and you don't have $10K in your checking?  I mean, YMMV here, but for most people, I don't think they have $10K in a checking account.

We live on one income and don't have $10k in our checking.   If I lost my job we'd cash out investments in our Roth IRA if/as needed for longer term funds, and could use CC's to tide us over short-term. We can withdraw all contributions without taxes or penalties and live completely off of that for at least a year with no income, several years if we picked up any side income by either of us at all during that period.  One may consider this emergency money, but it is invested.   If we have the horrible luck of ever required to withdraw it in a down market, oh well.   It doesn't represent that much of our stache and the gains it will probably see by leaving it in investments outweighs the risks of pulling it in a down market.

Although, the real key is having a super low cost of living.   Once we cut extras like helping DH's daughter with college (which we wouldn't do if unemployed), various savings, gifts, fancy food, home renovation projects, trips, etc, we could probably get by pulling little from the Roth for a long time as long as we brought in even a minimal income.    For example picking up some work like waitressing, delivery pizzas, teaching classes at a community college, substitute teaching, etc, could allow this to stretch considerably considering how low our expenses would be.   Even better, we'd be able to come very close to being able to completely living off of this type of low wage work completely and pull nothing if one of us were able to find enough to do it full time, or if the two of us were able to each do it for like 20 hrs a week.

I sleep very well at night knowing that all we'd need to support ourselves at a level very close to how we currently live would be two people each making an average of $10k a year (assuming as a family of three that we'd then qualify for very close to fully subsidized health care, and about $3k in the EITC) if we absolutely needed to.   We probably wouldn't even need to use any other gov't programs although we'd probably qualify (eg., SNAP, etc).

If you withdraw the money from the Roth, you can't put it back in.  If one was 25 and withdraw $5K from Roth, that would be more like $30K they are withdrawing if you factor in growth over time.

The point to me of having a cushion liquid is so you can pull from it without any repurcussions.

Emilyngh

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Re: Emergency Fund Location
« Reply #33 on: March 07, 2015, 06:11:31 PM »

If you withdraw the money from the Roth, you can't put it back in.  If one was 25 and withdraw $5K from Roth, that would be more like $30K they are withdrawing if you factor in growth over time.

The point to me of having a cushion liquid is so you can pull from it without any repurcussions.

Withdrawing the money from the Roth is no different from never having put it in there in the first place.   There's no difference between putting $5k in a Roth during one year and then withdrawing it later vs. keeping that first $5k out for an "emergency fund."   Oh yeah, wait, nevermind, there is a difference: by not putting the money in in the first place you're missing out on all of the tax-free compounding of the gains for years to come.  You're better off withdrawing it than not having ever put it in.

Emergency money that's set aside effectively comes from somewhere; it has even more lost investing potential associated with it than withdrawn money because it's never being invested.   I'd choose a potential repercussion if I have to possibly pull some of it out later over the guaranteed repercussion of having never put it in to begin with.
« Last Edit: March 07, 2015, 06:13:34 PM by Emilyngh »

Dimitri

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Re: Emergency Fund Location
« Reply #34 on: March 07, 2015, 08:03:35 PM »
The thread about where to keep an emergency fund seems to come up relatively frequently.  Really the question is where to keep liquid/near liquid assets.  You know, the funds you will need to deal with life’s little problems sooner or later.  And there are lots of good choices.  A lot of it just depends on how soundly you like to sleep.  But none of them are appropriate for an emergency fund.

In a real emergency whether your FRNs are three days away or a half hour away won’t matter.  A real emergency necessitates real money – not pieces of paper.  That is when you will want to be able to place your hands on Sovereigns, Krugerrands, Eagles or some other recognizable bullion coin.

Think last plane out of Saigon type of emergency (and you don’t work for Citibank Saigon).  FRNs will be good for few things.  Buying your ticket out won’t be one of them.

lovesasa

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Re: Emergency Fund Location
« Reply #35 on: March 07, 2015, 10:10:32 PM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

Give me a second while I pick my jaw up from the floor.........

THANK YOU Johnny847!!!


Link:  https://www.mangomoney.com/what-is-mango#savings

6% on up to 5k as long as you set up the debit card which is $3 a month and you have direct deposit. 
There's no direct deposit requirement. They just charge you $3/month regardless. But if you do make one direct deposit, there's a $20 bonus, so you should definitely do this at least once.

It should probably get its own page!
There is, but the OP in the thread is used the old fee structure of $5/month unless you had a $500 DD. http://forum.mrmoneymustache.com/investor-alley/6-savings-account-with-mangomoney-com-all-the-details/

Oh and 6% on 5000 is $300.  Minus $36 fee(annualized) = $264.    264/5000 = 5.28% after fee interest rate.  Which is still freaking amazing!

Not quite. You get taxed on the 6%, and then pay the $3/month fee. So for a 25% marginal rate, that's $300 gross interest, $225 net interest, and $36 in fees for a $189 or 3.78% post tax return. Which would be equivalent to a gross interest of 5.04% without any fees, not the 5.28% that you calculated.


The effect of the fees on past tax yield isn't that big, but it depends on your tax rate. Still though, having a guaranteed yield like this, and FDIC insurance, is a good deal.

To do a mathematically fair comparison of post tax yield to VASIX, you would need to calculate the taxes on VASIX as well. Though I'm pretty sure that depending on the size of your emergency fund, while the percentage difference in yields between VASIX and Mango may be large, the difference in absolute numbers won't be all that large.


I believe you can have 3 Mango accounts.

Sorry if I'm hijacking this thread. Replying to the original Mango thread prompted me to start a new thread, so I thought continuing the discussion here was more prudent.

What if you don't have to pay tax on the returns? I currently claim the FEIE so pay no income tax on earned income, and have no investments (soon to change as I pay off my last high interest student loan this month!), so I think my capital gains is below a taxable amount.

The other thread stated you can do a ACH push to Mango from another account which could count as the "direct deposit". So if I did two ACH pushes from my Capital One account or my Compass checking account, this would count? I have approximately $38 a month in automatic payments currently paid by my Discover card at 1% cash back. If I fund the Mango account with $5K via two ACH pushes (to earn the $20 direct deposit bonus) and set up to pay ~$22 of my monthly automatic payments (that I'm paying anyway) to keep the balance at $5K, I could essentially earn the 6% (-$3 monthly fee) on my EF indefinitely.

Given that my current Capital One Savings (formerly ING Orange) is earning a paltry 0.75%, this sounds really appealing... I'd basically just be using the interest to pay $22 a month for things I'm already paying for, effectively netting me another $22 a month in 'savings' to put in other investments. This sounds too good to be true.

Am I missing something here?

johnny847

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Re: Emergency Fund Location
« Reply #36 on: March 07, 2015, 10:26:11 PM »
What if you don't have to pay tax on the returns? I currently claim the FEIE so pay no income tax on earned income, and have no investments (soon to change as I pay off my last high interest student loan this month!), so I think my capital gains is below a taxable amount.

Doesn't the FEIE only apply to income that's actually earned abroad? I've never been in that situation so I don't know. But I mean if for whatever reason you don't owe taxes on the Mango Money interest, then you don't need to factor it in into post tax yield

The other thread stated you can do a ACH push to Mango from another account which could count as the "direct deposit". So if I did two ACH pushes from my Capital One account or my Compass checking account, this would count?
Whenever a bank says direct deposit, any ACH push may count as a direct deposit. Their scheme for detecting whether ACH activity is a true direct deposit or just a ACH push may change at any time. But b/c Mango changed their policies, the DD is only required for the one time $20 bonus, not to avoid the monthly fee. So if you care about the $20, I'd do a real DD. If you don't care all that much but would like to get it anyway, then do a ACH push.

I have approximately $38 a month in automatic payments currently paid by my Discover card at 1% cash back. If I fund the Mango account with $5K via two ACH pushes (to earn the $20 direct deposit bonus) and set up to pay ~$22 of my monthly automatic payments (that I'm paying anyway) to keep the balance at $5K, I could essentially earn the 6% (-$3 monthly fee) on my EF indefinitely.

Sounds good to me.

This sounds too good to be true.

Yea I thought so too when I first heard about it, but I've been getting my 6% APY.

Am I missing something here?

Nope.

lovesasa

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Re: Emergency Fund Location
« Reply #37 on: March 07, 2015, 10:41:09 PM »
What if you don't have to pay tax on the returns? I currently claim the FEIE so pay no income tax on earned income, and have no investments (soon to change as I pay off my last high interest student loan this month!), so I think my capital gains is below a taxable amount.

Doesn't the FEIE only apply to income that's actually earned abroad? I've never been in that situation so I don't know. But I mean if for whatever reason you don't owe taxes on the Mango Money interest, then you don't need to factor it in into post tax yield

It does apply only to earned income, not to capital gains or domestic income. My point was that at this point, I don't have any other investments to earn capital gains. Since my earned taxable income is essentially $0, I think I'm in a low enough tax bracket that I wouldn't have to pay any taxes on ~$300 in capital gains. Does that sound right? I do plan on investing ~$3K-$6K in an index fund (or two) later this year, so that might bump up my capital gains to a taxable amount. I'm not sure. Maybe this is a topic for a new thread.

The other thread stated you can do a ACH push to Mango from another account which could count as the "direct deposit". So if I did two ACH pushes from my Capital One account or my Compass checking account, this would count?
Whenever a bank says direct deposit, any ACH push may count as a direct deposit. Their scheme for detecting whether ACH activity is a true direct deposit or just a ACH push may change at any time. But b/c Mango changed their policies, the DD is only required for the one time $20 bonus, not to avoid the monthly fee. So if you care about the $20, I'd do a real DD. If you don't care all that much but would like to get it anyway, then do a ACH push.

I work in China, so unfortunately my only options are to get paid in cash (Chinese RMB) or Direct Deposit into a Chinese bank account (and only the bank they specify). I won't cry over $20 but it would be a nice bonus, especially since I need to fund the account someway anyway... I thought a post in the original Mango thread said something about an ACH push working as a DD, but that may be outdated.

I have approximately $38 a month in automatic payments currently paid by my Discover card at 1% cash back. If I fund the Mango account with $5K via two ACH pushes (to earn the $20 direct deposit bonus) and set up to pay ~$22 of my monthly automatic payments (that I'm paying anyway) to keep the balance at $5K, I could essentially earn the 6% (-$3 monthly fee) on my EF indefinitely.

Sounds good to me.

This sounds too good to be true.

Yea I thought so too when I first heard about it, but I've been getting my 6% APY.

Am I missing something here?

Nope.

Woo! All great to hear! Thanks for the quick response and for sharing your personal experience.

johnny847

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Re: Emergency Fund Location
« Reply #38 on: March 07, 2015, 10:49:01 PM »
It does apply only to earned income, not to capital gains or domestic income. My point was that at this point, I don't have any other investments to earn capital gains. Since my earned taxable income is essentially $0, I think I'm in a low enough tax bracket that I wouldn't have to pay any taxes on ~$300 in capital gains. Does that sound right? I do plan on investing ~$3K-$6K in an index fund (or two) later this year, so that might bump up my capital gains to a taxable amount. I'm not sure. Maybe this is a topic for a new thread.
Mango Money will give you interest income, not capital gains. But yea, delving into this is probably it's own thread. If you start one and want my input on it, let me know.

I work in China, so unfortunately my only options are to get paid in cash (Chinese RMB) or Direct Deposit into a Chinese bank account (and only the bank they specify). I won't cry over $20 but it would be a nice bonus, especially since I need to fund the account someway anyway... I thought a post in the original Mango thread said something about an ACH push working as a DD, but that may be outdated.
Ah gotcha. Just try the ACH push. It'll probably work - apparently detecting if ACH activity is a true DD or not is kind of difficult.

zurich78

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Re: Emergency Fund Location
« Reply #39 on: March 08, 2015, 10:59:42 AM »

If you withdraw the money from the Roth, you can't put it back in.  If one was 25 and withdraw $5K from Roth, that would be more like $30K they are withdrawing if you factor in growth over time.

The point to me of having a cushion liquid is so you can pull from it without any repurcussions.

Withdrawing the money from the Roth is no different from never having put it in there in the first place.   There's no difference between putting $5k in a Roth during one year and then withdrawing it later vs. keeping that first $5k out for an "emergency fund."   Oh yeah, wait, nevermind, there is a difference: by not putting the money in in the first place you're missing out on all of the tax-free compounding of the gains for years to come.  You're better off withdrawing it than not having ever put it in.

Emergency money that's set aside effectively comes from somewhere; it has even more lost investing potential associated with it than withdrawn money because it's never being invested.   I'd choose a potential repercussion if I have to possibly pull some of it out later over the guaranteed repercussion of having never put it in to begin with.

"Never having put it in to begin with..."

What's up with that statement?  If you had an e-fund in a regular savings account in addition to your Roth, you'd never need to touch your Roth.  Wouldn't that be even better?  Isn't that precisely the point of having your emergency dollars be easily accessible?  Isn't that also why we typically cap our e-funds to 3/6/12 or whatever months we feel comfortable having cushion for?

An e-fund serves two purposes for me.  To pay for unexpected expenses and most importantly, serve as protection against having to touch the investments we make for our future.

If you want to start out building up your e-fund via a Roth, I could see that argument, sure.  But if your point is that one should never have any funds in a savings account because it has lost investing potential, then I can't agree.  It's not always ONLY about investing potential.  You have to factor in, to some degree, the psychology and convenience of things.  If you don't, then I guess you never carry a balance for long in your checking account and every time you need to pay a bill you sell off assets and shift funds in to it.

I think we're coming at this from two different perspectives.  I'm coming at it from the perspective that I WILL withdraw a significant amount of money for an emergency.  You're coming at it as if you won't.  I don't know how to calculate this quantitatively, but I sleep well at night knowing, that when that day comes, I won't have to worry about the investments I've ear marked for my future.

Indexer

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Re: Emergency Fund Location
« Reply #40 on: March 08, 2015, 03:45:37 PM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

Give me a second while I pick my jaw up from the floor.........

THANK YOU Johnny847!!!


Link:  https://www.mangomoney.com/what-is-mango#savings

6% on up to 5k as long as you set up the debit card which is $3 a month and you have direct deposit. 
There's no direct deposit requirement. They just charge you $3/month regardless. But if you do make one direct deposit, there's a $20 bonus, so you should definitely do this at least once.

Johnny, they might have changed it since you looked at it last.  Direct deposit does get you the $20 bonus, but it is also required for the 6% interest rate. 

source: https://www.mangomoney.com/what-is-mango#savings  [Bold was done to highlight important section.]
"If you enroll in our free Direct Deposit you can open a Savings Account with as little as $1 and get up to 6.00% APY†. You can enjoy up to 6 free transfers out each month."

And at the bottom.
"† The Annual Percentage Yield (APY) and the APY comparison as advertised are effective as of July 15, 2014. Rates are subject to change at any time and may change after accounts are opened. The APY advertised applies only to the portion of your savings account balance, which is $5,000.00 or less; or 2.00% if you are not on Direct Deposit Service. An APY of 0.10% will be paid on the portion of your savings account balance that exceeds $5,000.00. Fees could reduce the earnings on your savings account. Please see the Savings Account Customer Agreement for full disclosures."
« Last Edit: March 08, 2015, 03:47:14 PM by Indexer »

Emilyngh

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Re: Emergency Fund Location
« Reply #41 on: March 08, 2015, 05:39:28 PM »


"Never having put it in to begin with..."

What's up with that statement?  If you had an e-fund in a regular savings account in addition to your Roth, you'd never need to touch your Roth.  Wouldn't that be even better?  Isn't that precisely the point of having your emergency dollars be easily accessible?  Isn't that also why we typically cap our e-funds to 3/6/12 or whatever months we feel comfortable having cushion for?

An e-fund serves two purposes for me.  To pay for unexpected expenses and most importantly, serve as protection against having to touch the investments we make for our future.

If you want to start out building up your e-fund via a Roth, I could see that argument, sure.  But if your point is that one should never have any funds in a savings account because it has lost investing potential, then I can't agree.  It's not always ONLY about investing potential.  You have to factor in, to some degree, the psychology and convenience of things.  If you don't, then I guess you never carry a balance for long in your checking account and every time you need to pay a bill you sell off assets and shift funds in to it.

I think we're coming at this from two different perspectives.  I'm coming at it from the perspective that I WILL withdraw a significant amount of money for an emergency.  You're coming at it as if you won't.  I don't know how to calculate this quantitatively, but I sleep well at night knowing, that when that day comes, I won't have to worry about the investments I've ear marked for my future.

    I can only say the same thing so many different ways: there is no free money.   The money you put in your e-fund could have been used for another purpose, like investing (eg., in a Roth).   By putting it in your efund  you are guaranteeing that your investment account has that amount (plus all gains from it) less than if you invested it, vs risking having to possibly take the amount of the contribution out one day while still compounding any gains.

I'm arguing the logic of it.   If you want to argue that you feel better doing it, even if it's not logical, fine.   But I sleep well knowing that even if I have to withdraw from an investment, over the course of my life I'm still probably better off financially than not having put that money in there in the first place.   Although you are correct that I assume that the chances of me having to withdraw a large amount of money from investments for an emergency is super low.   We have a large enough savings rate, and enough credit on available cards, that I could easily cover a $10-$20k "emergency" (I would not consider this amount an emergency, but I'm getting the feeling that you would) without withdrawing anything.   I'd just charge it on 0% cards and then put what I was putting towards savings towards the "emergency" until it's paid within a few months, at which point I begin investing again.   

Oh, and yes, I do keep a super low balance in my checking account.   I keep a buffer of less than $100, sometimes as low as $10.   I get paid and within about 3 days my entire check is whisked away to pay all credit card balances in full, bills due that month, and savings funded.   We use credit cards for all spending the rest of the month (which are then obviously paid off in full at the end of it).   

I'm surprised about the need to describe all of this.   I was under the impression this was all very standard practice here on MMM.


« Last Edit: March 08, 2015, 05:43:27 PM by Emilyngh »

johnny847

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Re: Emergency Fund Location
« Reply #42 on: March 08, 2015, 08:48:53 PM »
Lending Club or some other P2P lending service is another, albeit unconventional option. I've seen people investing some of their e-fund there, buying up the safer A-rated loans, aiming for a 5%-6% return, while still being somewhat liquid (although not full liquid, which is the biggest downside IMO).

Still, I think it's an interesting approach and one I might take up myself soon. I think 5% is absolutely doable, and much better than sitting in a simple savings account.

Well for the first $5k, Mango Money offers 6% APY, but there's a $3 monthly fee. So if you want FDIC insurance and better liquidity, that's an option.

Give me a second while I pick my jaw up from the floor.........

THANK YOU Johnny847!!!


Link:  https://www.mangomoney.com/what-is-mango#savings

6% on up to 5k as long as you set up the debit card which is $3 a month and you have direct deposit. 
There's no direct deposit requirement. They just charge you $3/month regardless. But if you do make one direct deposit, there's a $20 bonus, so you should definitely do this at least once.

Johnny, they might have changed it since you looked at it last.  Direct deposit does get you the $20 bonus, but it is also required for the 6% interest rate. 

source: https://www.mangomoney.com/what-is-mango#savings  [Bold was done to highlight important section.]
"If you enroll in our free Direct Deposit you can open a Savings Account with as little as $1 and get up to 6.00% APY†. You can enjoy up to 6 free transfers out each month."

And at the bottom.
"† The Annual Percentage Yield (APY) and the APY comparison as advertised are effective as of July 15, 2014. Rates are subject to change at any time and may change after accounts are opened. The APY advertised applies only to the portion of your savings account balance, which is $5,000.00 or less; or 2.00% if you are not on Direct Deposit Service. An APY of 0.10% will be paid on the portion of your savings account balance that exceeds $5,000.00. Fees could reduce the earnings on your savings account. Please see the Savings Account Customer Agreement for full disclosures."

That's odd. I had no ACH or DD activity last month and I got the full 6% rate. I'm not sure why that is.

Runge

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Re: Emergency Fund Location
« Reply #43 on: March 08, 2015, 10:16:17 PM »
I personally think the ideal, best case way to handle efunds for the financially adept is to have it all in your investments. The investments have an asset allocation that you've determined to be best for your retirement needs. (aside: I see no point in having investments that are not for retirement) In addition, your savings rate is high.

So if an unexpected large expense comes along, all you do is put it on a credit card and decrease your savings rate temporarily. Using the credit card will allow you to float that expense back a month, giving you effectively 1.5/2 months or so to make sure that money is there. If you can't save up all the money, they you pull the difference from your investments Be sure to maintain your asset allocation. Once the emergency is paid for, go back to building up that stash. This option will work for all major expenses so long as you have the money in your investments.

As for job losses, the high savings rate can be cut to zero and you go on a bare-bones budget to minimize the draw on your investments. Yes you'll take a hit on your retirement date, but you'll likely make up for it by having your efund in your investments.

I don't want to put words in his mouth, so someone correct me if I'm wrong, but I believe this is also the method that MMM utilizes and advocates for.