Author Topic: What else should I be doing savings wise? And how?  (Read 6239 times)

zurich78

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What else should I be doing savings wise? And how?
« on: February 28, 2015, 09:29:10 AM »
I'm pretty much in a good flow now of doing the basic things to save not only for a cushion, but also for retirement.  (A lot of that is thanks to this forum!)  I still have quite a bit of extra money leftover each paycheck, and so I want to make sure I'm making the right decisions with how I'm handling it.  Below is what I currently have and am doing, and so any suggestions would be greatly appreciated.

- 6 months of emergency funds (in an Ally Bank high yield savings account).
- Max out on 401K contribution
- Max out on Roth IRA contribution
- Debt-free (outside of home mortgage)

This leaves me with about $1,500 per month still left after all bills, retirement savings and regular entertainment is factored in.

Here's what I'm currently doing with that $1,500/month:

- $250/month ($3K/year) goes to fund a taxable investment account that strictly serves as part of my retirement.  I never sell anything in this account (well, at least until I'm retired), I mainly use it help adjust my asset allocation for my retirement portfolio.
- $1000/month goes to general savings.  What I essentially do, is keep a general savings account with a minimum of $3,000 in it.  Each pay check, I contribute $500 to it.  If something like a car repair or some small, non-ordinary expense comes up, it is covered by the money in this account.  Every 3 months, any funds in excess of the baseline $3,000 will be re-distributed arbitrarily to other savings accounts I hold.  Every 3 months there is around $3,000 in excess there ($500/check times 6 weeks).  So for instance, I have a "next car down payment" account so I might put some of that excess in there.  I have a "wedding bells" account that, in the event I want to get married, I'll have at least a decent head start.  I have a "near term purchase" account which is almost always zero, but if I want something like a new computer, or the next go pro camera, or some other luxury item, I'll wait until that account has enough funds in it before buying it.  I have a "Home Savings" account which will be used for repairs, remodeling, or a down payment for a future rental property.  I also have a travel account, and so on.
- $250/month pretty much just gets spent on excess unfortunately.  You might wonder why I don't just put this in the other accounts I have, but mainly, it's because I'll literally never pull money from an account unless I need it for that specific purpose.

You might also wonder why I don't put that $1000/month I'm currently placing in savings accounts, and invest it in a taxable investment account instead.  Primarily, it's because I'm assuming I'm going to need to spend that money at some point.  Inevitably, I'm going to need another car some day.  I will probably get married (I think?).  And I wouldn't want to have to sell those invested assets at a loss, or, at a less than optimal time, which could happen since I don't know exactly when I'm going to need it.  So the liquidity is appealing to me.

Anyway, net-net, once you've done the basics... emergency fund funded, 401K and Roth maxed, and you had $1,500 left over each month -- what would you do with it?  I get that from a purely financial perspective, all of it should probably be invested, but, I need SOME liquidity factored in just for peace of mind.  I'm pretty sure my method is far from optimal, but I'm curious as to how other people handle/manage this kind of excess.
« Last Edit: February 28, 2015, 09:32:02 AM by zurich78 »

trailrated

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Re: What else should I be doing savings wise? And how?
« Reply #1 on: February 28, 2015, 09:49:13 AM »
I think you are doing fine, looks like a solid plan! Reminds me of this blog post from MMM

http://www.mrmoneymustache.com/2012/08/16/what-it-feels-like-to-become-rich/

zurich78

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Re: What else should I be doing savings wise? And how?
« Reply #2 on: February 28, 2015, 10:33:43 AM »
Haha thanks man.  But I definitely do not feel rich.  I do make a really good living, but frankly, I still feel like I need my job which is fine.  I'm only 36, but, I feel like there is so much more I can do.

I guess, if I could sum up what I feel like I am missing, it's that I feel like I should put my money in something that is doing more for me than all of those savings accounts.  But I hesitate because I worry that when I need the money, I may have to sell at a loss.  So I could certainly open another taxable investment account and put some of the money in there, but, since I already have one for my retirement portfolio, what exactly would that account be there for?  Maybe that's my problem.  I feel like every account needs to have a purpose, and then I get the type of account that best suits that purpose.

Anyone else feel that way or am I just weird?  haha.

MDM

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Re: What else should I be doing savings wise? And how?
« Reply #3 on: February 28, 2015, 10:45:21 AM »
There is nothing objectively wrong with what you are doing, and much that is commendable. 

You might, however, ask yourself how much extra spending you do because you have money available.  If you were to invest your extra, you still could withdraw it if really needed, but it sets a psychological barrier that can help separate needs from wants.

Retired To Win

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Re: What else should I be doing savings wise? And how?
« Reply #4 on: February 28, 2015, 11:57:37 AM »
I'm pretty much in a good flow now of doing the basic things to save not only for a cushion, but also for retirement.  (A lot of that is thanks to this forum!)  I still have quite a bit of extra money leftover each paycheck, and so I want to make sure I'm making the right decisions with how I'm handling it.  Below is what I currently have and am doing, and so any suggestions would be greatly appreciated.

- 6 months of emergency funds (in an Ally Bank high yield savings account).
- Max out on 401K contribution
- Max out on Roth IRA contribution
- Debt-free (outside of home mortgage)

This leaves me with about $1,500 per month still left after all bills, retirement savings and regular entertainment is factored in.


Might I suggest starting by beefing up your emergency fund so it covers one year of your expenses?  I keep that much in one savings account as a Basic Living Expenses Reserve, and an amount equal to my potential maximum annual medical out-of-pocket ($5000) in another savings account.  I find that with those two backups I have minimum (or no) worries about possible unexpected nasty financial surprises.

Good luck with your savings plan.

zurich78

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Re: What else should I be doing savings wise? And how?
« Reply #5 on: February 28, 2015, 12:37:16 PM »
I'm pretty much in a good flow now of doing the basic things to save not only for a cushion, but also for retirement.  (A lot of that is thanks to this forum!)  I still have quite a bit of extra money leftover each paycheck, and so I want to make sure I'm making the right decisions with how I'm handling it.  Below is what I currently have and am doing, and so any suggestions would be greatly appreciated.

- 6 months of emergency funds (in an Ally Bank high yield savings account).
- Max out on 401K contribution
- Max out on Roth IRA contribution
- Debt-free (outside of home mortgage)

This leaves me with about $1,500 per month still left after all bills, retirement savings and regular entertainment is factored in.


Might I suggest starting by beefing up your emergency fund so it covers one year of your expenses?  I keep that much in one savings account as a Basic Living Expenses Reserve, and an amount equal to my potential maximum annual medical out-of-pocket ($5000) in another savings account.  I find that with those two backups I have minimum (or no) worries about possible unexpected nasty financial surprises.

Good luck with your savings plan.

Thanks.  And not a bad idea at all.  I recently volunteered to be laid off because the package was too lucrative to pass up on and found another job within 6 weeks.  Even still, I got very lucky and I can't always rely on luck so it is best to be overprepared for peace of mind's sake.  I'll do that.

zurich78

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Re: What else should I be doing savings wise? And how?
« Reply #6 on: February 28, 2015, 12:43:13 PM »
There is nothing objectively wrong with what you are doing, and much that is commendable. 

You might, however, ask yourself how much extra spending you do because you have money available.  If you were to invest your extra, you still could withdraw it if really needed, but it sets a psychological barrier that can help separate needs from wants.

Thanks MDM!  I definitely overspend.  I mean, the $1,500 of overage I have is after I've already paid for entertainment (golf/massages/dining out/etc).  Yes, I know, I'm not anywhere near full mustachian but definitely more so than 3-5 years ago.

I like the idea of investing extra, but, for some reason, I feel like I need to know what I'm investing the money for.  Knowing that helps me know how much of my overage to put in there.

Do you guys just have some random investment accounts that really serve no purpose?  If so, how do you decide how much of your money to put in there?

abhe8

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Re: What else should I be doing savings wise? And how?
« Reply #7 on: February 28, 2015, 02:30:56 PM »
How about an HSA?

FrugalKube

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Re: What else should I be doing savings wise? And how?
« Reply #8 on: April 10, 2015, 12:11:23 AM »
I'm pretty much in a good flow now of doing the basic things to save not only for a cushion, but also for retirement.  (A lot of that is thanks to this forum!)  I still have quite a bit of extra money leftover each paycheck, and so I want to make sure I'm making the right decisions with how I'm handling it.  Below is what I currently have and am doing, and so any suggestions would be greatly appreciated.

- 6 months of emergency funds (in an Ally Bank high yield savings account).
- Max out on 401K contribution
- Max out on Roth IRA contribution
- Debt-free (outside of home mortgage)

This leaves me with about $1,500 per month still left after all bills, retirement savings and regular entertainment is factored in.

Here's what I'm currently doing with that $1,500/month:

- $250/month ($3K/year) goes to fund a taxable investment account that strictly serves as part of my retirement.  I never sell anything in this account (well, at least until I'm retired), I mainly use it help adjust my asset allocation for my retirement portfolio.
- $1000/month goes to general savings.  What I essentially do, is keep a general savings account with a minimum of $3,000 in it.  Each pay check, I contribute $500 to it.  If something like a car repair or some small, non-ordinary expense comes up, it is covered by the money in this account.  Every 3 months, any funds in excess of the baseline $3,000 will be re-distributed arbitrarily to other savings accounts I hold.  Every 3 months there is around $3,000 in excess there ($500/check times 6 weeks).  So for instance, I have a "next car down payment" account so I might put some of that excess in there.  I have a "wedding bells" account that, in the event I want to get married, I'll have at least a decent head start.  I have a "near term purchase" account which is almost always zero, but if I want something like a new computer, or the next go pro camera, or some other luxury item, I'll wait until that account has enough funds in it before buying it.  I have a "Home Savings" account which will be used for repairs, remodeling, or a down payment for a future rental property.  I also have a travel account, and so on.
- $250/month pretty much just gets spent on excess unfortunately.  You might wonder why I don't just put this in the other accounts I have, but mainly, it's because I'll literally never pull money from an account unless I need it for that specific purpose.

You might also wonder why I don't put that $1000/month I'm currently placing in savings accounts, and invest it in a taxable investment account instead.  Primarily, it's because I'm assuming I'm going to need to spend that money at some point.  Inevitably, I'm going to need another car some day.  I will probably get married (I think?).  And I wouldn't want to have to sell those invested assets at a loss, or, at a less than optimal time, which could happen since I don't know exactly when I'm going to need it.  So the liquidity is appealing to me.

Anyway, net-net, once you've done the basics... emergency fund funded, 401K and Roth maxed, and you had $1,500 left over each month -- what would you do with it?  I get that from a purely financial perspective, all of it should probably be invested, but, I need SOME liquidity factored in just for peace of mind.  I'm pretty sure my method is far from optimal, but I'm curious as to how other people handle/manage this kind of excess.

Sounds similar to what I do but I should reallocate the money I have saved every few months good idea. I too have small savings funds for a variety of expenses say car repairs at 60k. Picked up some of this at Get Rich Slowly

Kiwi Mustache

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Re: What else should I be doing savings wise? And how?
« Reply #9 on: April 10, 2015, 12:43:02 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

Valhalla

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Re: What else should I be doing savings wise? And how?
« Reply #10 on: April 10, 2015, 01:18:43 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.
I believe the emergency fund as OP is using it, is not strictly for emergencies but also for routine and expected items as well.

I wouldn't call it dead money. There is value behind some peace of mind having immediate cash if things were to go awry.

The 10% earning in investments is not guaranteed over any specific period of time (it could be 15%, or it could be -5%), thus working against the concept of emergency money.  It's there for a specific purpose, and to put that into more aggressive investments defeats the idea of an "emergency" fund.

I think the OP is doing fine with his plan.  There are other, safer ways to decrease expenses and make more money than to play with emergency fund money this way, IMHO.
« Last Edit: April 10, 2015, 01:20:16 AM by Valhalla »

Mr Dorothy Dollar

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Re: What else should I be doing savings wise? And how?
« Reply #11 on: April 10, 2015, 08:04:23 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

If you have $15K emergency fund or less LMCU (Lake Michigan Credit Union)has a MAX checking account offering 3% with some monthly requirements.

ThatGuy701

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Re: What else should I be doing savings wise? And how?
« Reply #12 on: April 10, 2015, 08:30:31 AM »
IMO anything over 6 months of living expenses for an emergency fund is overkill. There is no need to have that much money in savings account unless you are saving for moving or a year long sabbatical.

As far as paying for car expenses and such you could pay with a credit card and pay that off at the end of the month with your excess money that you have.

I am confused about your questions of "random investment accounts that serve no purpose". If you take your extra $1,500/month and invest that in a taxable account it's purpose wouldn't be any different than your investments in your 401k account (funding retirement).

If you plan to retire early you can use your taxable accounts to fund your retirement until your IRA Roth ladder takes over.

You could also take your $1,500/month and save for a down payment on a rental property to generate more income.

IMO I would start investing in index funds in a taxable account or start saving for a down payment on an income property.

The worst thing to do is not do anything with it and spend it on random stuff since it is just laying around.

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Re: What else should I be doing savings wise? And how?
« Reply #13 on: April 10, 2015, 08:36:14 AM »
We have a brokerage account that we just call "for medium term expenses".  Its meant to cover new car, emergencies, new roof on house, etc.  I don't feel the need to sub-divide it into a bunch of little categories.  The hope is that we won't need to touch it (can just cash flow most things) but it isn't locked away until retirement either.  It currently has about 25K.

That said, we have the same concerns as you about investing it.  H especially is quite concerned that a market correction is coming.  We had it in s&P500 but sold it for peace of mind.  Its currently in cash and some company stock.  We aren't sure about bonds because if interest rates rise bonds might not do well.  We aren't really sure what else to do with it. 


zurich78

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Re: What else should I be doing savings wise? And how?
« Reply #14 on: April 10, 2015, 09:05:48 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

I actually agree.  EF money is dead money.  And even more so are funds that sit for any period of time in a checking account or a wallet.

(I don't agree that I could move it and get a 10% guaranteed rate of return though).

But EF money is intentionally "dead".  And even dead-er, is the money in my checking account and wallet and that's by design too.  That's why when one builds an EF fund, you typically cap it out at like 3, 6, or 8 months worth of expenses.  It's insurance that protects you from having to touch your long-term investments, sell assets at a loss and/or incur debt.  In my mind, it's part of a diversified investment plan.  Diversification doesn't give you the greatest possible upside.  It seeks to find a comfortable balance between a healthy ceiling and a manageable floor based on your risk tolerance.

The other piece, which I think gets left out at times, is the convenience and peace of mind factor.  Look, let's be realistic.  The money in your checking account does nothing for you.  So why even have one?  You could be earning 10% on that money!  For the sake of convenience, it makes sense to have a small sum in a checking account though right?  And for peace of mind, it makes sense to me to have a small/medium sum in a savings account for a rainy day.  There's value, perhaps not mathematically, but emotionally, in knowing that if I lose my job today, all of my assets are safe for at least 8 months.  Similarly, I have a set allocation of my investments in bond funds.  They aren't there because I'm thinking they'll get me the highest rate of return, but to some degree, it insures my other equity investments.

terran

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Re: What else should I be doing savings wise? And how?
« Reply #15 on: April 10, 2015, 09:30:11 AM »
I do similar things as the OP with a dedicated emergency fund plus lots of medium term spending funds. The dedicated emergency fund is at 6 months bare bones expenses, but all cash together is at right about a year of full expenses and it's just going to get "worse" as the medium term spending gets closer to happening. All of these would be raidable in a real emergency.

Lately I've been thinking of maybe shooting for more like 6-9 months cash total and investing the rest. Maybe one way of thinking about it would be that investing the money is fine when the spending goal is flexible. Take a car for example: unless you like to buy junkers (which is fine, but then the cash requirements probably aren't worth worrying as much about), then you can probably put off the purchase by a year or two if the markets are down and you really don't feel comfortable taking money out. Would that be a helpful way of thinking about is Zurich78?

MetalCap

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Re: What else should I be doing savings wise? And how?
« Reply #16 on: April 10, 2015, 09:41:19 AM »

I like the idea of investing extra, but, for some reason, I feel like I need to know what I'm investing the money for. 


I think that's your key.  You're fine on the logic part.  Your next focus should be a plan for the future.  Write down your values, dreams and put together an investment statement.  It will help organize your thoughts, get excited about investment and keep you on that track.

Time for more touchy feely stuff as the logical aspect is wrapped up.

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Re: What else should I be doing savings wise? And how?
« Reply #17 on: April 10, 2015, 09:45:59 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

I actually agree.  EF money is dead money.  And even more so are funds that sit for any period of time in a checking account or a wallet.

(I don't agree that I could move it and get a 10% guaranteed rate of return though).

But EF money is intentionally "dead".  And even dead-er, is the money in my checking account and wallet and that's by design too.  That's why when one builds an EF fund, you typically cap it out at like 3, 6, or 8 months worth of expenses.  It's insurance that protects you from having to touch your long-term investments, sell assets at a loss and/or incur debt.  In my mind, it's part of a diversified investment plan.  Diversification doesn't give you the greatest possible upside.  It seeks to find a comfortable balance between a healthy ceiling and a manageable floor based on your risk tolerance

I agree with much this, and don't subscribe to the almost universal hate for safe emergency funds here. Yes you "could" earn an extra $800/year, but $10k or even $20k in reserve when you start to get a $500,000+ portfolio doesn't seem like so much. And IMO is worth if for small and large emergencies. Racking up credit card and HELOC debt when I've lost my source of income just doesn't appeal to me.

edit: that being said, if you don't have a partner at the moment (?) I think saving for a wedding is a bit unnecessary. You could save up for a pretty decent one in <1 year, and it takes that long to get one together anyway.
« Last Edit: April 10, 2015, 09:48:04 AM by Scandium »

engineerjourney

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Re: What else should I be doing savings wise? And how?
« Reply #18 on: April 10, 2015, 09:47:39 AM »
Max out an HSA if you have a high deductible health care plan, especially if it can be deducted directly from your paycheck.

Look into your 401K plan and see if you are allowed after-tax contributions and in-service withdrawls.  Then you can do the mega backdoor Roth, which is what I plan to do when I have enough money left over in my paychecks after maxing 401K, Roth IRA, and HSA. 
See here for more discussion on this (Bogleheads also has some really good threads on it in their forum):
http://forum.mrmoneymustache.com/investor-alley/mega-roth-how-do-we-contribute-36k/msg544085/#msg544085
http://forum.mrmoneymustache.com/investor-alley/mega-backdoor-roth-implementation-question/msg456126/#msg456126
http://forum.mrmoneymustache.com/investor-alley/mega-backdoor-roth/msg332373/#msg332373

zurich78

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Re: What else should I be doing savings wise? And how?
« Reply #19 on: April 10, 2015, 11:52:06 AM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

I actually agree.  EF money is dead money.  And even more so are funds that sit for any period of time in a checking account or a wallet.

(I don't agree that I could move it and get a 10% guaranteed rate of return though).

But EF money is intentionally "dead".  And even dead-er, is the money in my checking account and wallet and that's by design too.  That's why when one builds an EF fund, you typically cap it out at like 3, 6, or 8 months worth of expenses.  It's insurance that protects you from having to touch your long-term investments, sell assets at a loss and/or incur debt.  In my mind, it's part of a diversified investment plan.  Diversification doesn't give you the greatest possible upside.  It seeks to find a comfortable balance between a healthy ceiling and a manageable floor based on your risk tolerance

I agree with much this, and don't subscribe to the almost universal hate for safe emergency funds here. Yes you "could" earn an extra $800/year, but $10k or even $20k in reserve when you start to get a $500,000+ portfolio doesn't seem like so much. And IMO is worth if for small and large emergencies. Racking up credit card and HELOC debt when I've lost my source of income just doesn't appeal to me.

edit: that being said, if you don't have a partner at the moment (?) I think saving for a wedding is a bit unnecessary. You could save up for a pretty decent one in <1 year, and it takes that long to get one together anyway.

Thanks Scandium.  And you're probably right about saving for wedding/ring when I don't even have anyone I believe I'll be proposing to.  I guess the thing is, I see a lot of people around me borrow money or cash out retirement investments to pay for a wedding and it makes me paranoid so I just throw a little bit in to a savings sub-account.  Truth be told, there is only $1,500 in there.  Hahaha.  I don't even regularly contribute to it -- I just throw $50 or $100 in there once in a while and if I never end up tying the knot, I guess I'll go shopping =P

JLee

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Re: What else should I be doing savings wise? And how?
« Reply #20 on: April 10, 2015, 12:44:10 PM »
Emergency fund is dead money.

If you have say 10k sitting there earning 2% interest and you could be earning 10% in investments, you have given up $800 per year in lost investment returns.

Say if you really got stuck, you should set up your mortgage to a revolving credit facility and withdraw from that. Otherwise a cash advance on a credit card even if it takes you several months to pay it back will still save you money in the long run.

I actually agree.  EF money is dead money.  And even more so are funds that sit for any period of time in a checking account or a wallet.

(I don't agree that I could move it and get a 10% guaranteed rate of return though).

But EF money is intentionally "dead".  And even dead-er, is the money in my checking account and wallet and that's by design too.  That's why when one builds an EF fund, you typically cap it out at like 3, 6, or 8 months worth of expenses.  It's insurance that protects you from having to touch your long-term investments, sell assets at a loss and/or incur debt.  In my mind, it's part of a diversified investment plan.  Diversification doesn't give you the greatest possible upside.  It seeks to find a comfortable balance between a healthy ceiling and a manageable floor based on your risk tolerance

I agree with much this, and don't subscribe to the almost universal hate for safe emergency funds here. Yes you "could" earn an extra $800/year, but $10k or even $20k in reserve when you start to get a $500,000+ portfolio doesn't seem like so much. And IMO is worth if for small and large emergencies. Racking up credit card and HELOC debt when I've lost my source of income just doesn't appeal to me.

edit: that being said, if you don't have a partner at the moment (?) I think saving for a wedding is a bit unnecessary. You could save up for a pretty decent one in <1 year, and it takes that long to get one together anyway.

Thanks Scandium.  And you're probably right about saving for wedding/ring when I don't even have anyone I believe I'll be proposing to.  I guess the thing is, I see a lot of people around me borrow money or cash out retirement investments to pay for a wedding and it makes me paranoid so I just throw a little bit in to a savings sub-account.  Truth be told, there is only $1,500 in there.  Hahaha.  I don't even regularly contribute to it -- I just throw $50 or $100 in there once in a while and if I never end up tying the knot, I guess I'll go shopping =P
Weddings also don't have to be expensive - especially if you are following the MMM philosophy, you can do one FAR cheaper than most people would expect.