Author Topic: Where to stash EF, or should I at all?  (Read 5412 times)

unccnick

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Where to stash EF, or should I at all?
« on: December 07, 2015, 11:39:52 AM »
Hi all -

I've been trying to figure out the best plan of action, and I keep ending up with no solution. Any insight you can provide would be great!

I have ~$20k that I've had lingering in a 0.25% interest savings account for a couple months and I've thought about slowly investing it (over 6 months or so) but I haven't pulled the trigger. Part of me likes the comfort of having this money in a safe place where the only value it is losing is tied to inflation, but I also hate not using these dollars in a more productive way. I have plenty of credit (probably $50k in credit, and carry no revolving debt on credit cards) and I know some who use this as their "emergency fund", but that isn't the same as having an actual reserve.

Any suggestions? Should I: 1) put the money into a higher interest savings/checking/CD (whatever was performing best)? Any suggestion on those would be great. The best I can find hover just north or 1% which nets just $200/year. I've looked for accounts that offer sign-up bonuses (as the bonus could be more valuable than the interest made over a 12 month period) but most of them have several annoying hoops to jump through or 2) go ahead and start funneling the money (spread out over a few months?) into some of my other investments.

I'm open to other ideas as well!

Thanks for the help.

BarkyardBQ

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Re: Where to stash EF, or should I at all?
« Reply #1 on: December 07, 2015, 11:48:49 AM »
How long would it take you to accumulate another 20k if you needed it?

We use a $0 emergency fund. Here's how we handle this. Any money we make gets either deferred to retirement plans or invested in taxable accounts as soon as possible (minus expenses). If/when an emergency happens, we can simply stop contributing to retirement or taxable accounts by reducing contributions (usually trying to be tax smart). A 20k emergency would mean lowering/stopping contributions for up to 3 months. Meanwhile, it's best to just invest every penny as soon as you can.

This strategy also depends on your job stability, if you have the potential for being laid off you may need to stash it somewhere more liquid.

We have very stable jobs, so our emergency fund is future income.

unccnick

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Re: Where to stash EF, or should I at all?
« Reply #2 on: December 07, 2015, 12:15:18 PM »
Thanks for the feedback -

Excluding contributions we're already making to investment accounts (including 401k) it would take ~5 months to get back to $20k, if we didn't cut other spending and just continued to live as we do.

If we keep the 20k in a "safe" account (CD, or higher interest savings) we're still contributing ~$4k/month to investment accounts. I guess the real question is, do we keep things the same, i.e. continue our contributions while keeping the 20k setback or go ahead and start investing that money too.

Jeremy E.

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Re: Where to stash EF, or should I at all?
« Reply #3 on: December 07, 2015, 12:18:16 PM »
http://www.mrmoneymustache.com/2011/06/07/where-should-i-invest-my-short-term-stash/
Also consider if you have a house, using a HELOC for your emergency fund.
Also look into netspend accounts, I hear they give high interest rates for a balance of up to $5,000, but there are some weird fees that you have to try to avoid.

AZDude

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Re: Where to stash EF, or should I at all?
« Reply #4 on: December 07, 2015, 02:25:43 PM »
You can find high interest accounts that are still insured online, but they probably pay 1% to 2% at most. Still better, but not great. $20K seems a little excessive for an emergency fund, since you have a taxable account you could tap into within 5 days if you had to(3 days to settle, two days to wire the money). Think of a situation where you need $20K in four days or less. Chances are there is no realistic situation like that. I would halve that number, which is still conservative, and put the rest in your taxable account.

Jeremy E.

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Re: Where to stash EF, or should I at all?
« Reply #5 on: December 07, 2015, 02:58:02 PM »
How long would it take you to accumulate another 20k if you needed it?

We use a $0 emergency fund. Here's how we handle this. Any money we make gets either deferred to retirement plans or invested in taxable accounts as soon as possible (minus expenses). If/when an emergency happens, we can simply stop contributing to retirement or taxable accounts by reducing contributions (usually trying to be tax smart). A 20k emergency would mean lowering/stopping contributions for up to 3 months. Meanwhile, it's best to just invest every penny as soon as you can.

This strategy also depends on your job stability, if you have the potential for being laid off you may need to stash it somewhere more liquid.

We have very stable jobs, so our emergency fund is future income.
Regardless of whether this works for you, in general I don't think it's advice that you should give out to other people about emergency funds, as a large reason for emergency funds is to hold someone over between jobs. In a crazy situation it's possible for 2 people to lose both of there jobs, and an emergency fund can help them until they find another job. One thing that makes no sense to me on these forums is that there are some people that have $0 emergency fund, yet they want to go for a 3% withdrawal rate in retirement, it is just very weird to me.

MoonShadow

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Re: Where to stash EF, or should I at all?
« Reply #6 on: December 07, 2015, 03:16:04 PM »
If you have a particular number for your emergency funds, you can invest 120% of that number and be 98%+ certain that your full e-fund number will be available even during the worst performing 6 month cycle in history.  And it's also questionable that you need an e-fund at all, if you have a well funded Roth IRA, since you can withdraw your contributions at any time without issues, if it really comes to that.  The whole e-fund thing has more to do with personal finance habits.  If a person/couple/household is too undisciplined to spend less than they earn, committing to setting aside a defined portion of whatever savings they can manage to scratch up as 'not available for a new boat' is a really good idea.  In practice, however, almost no one on this forum is that undisciplined.

BarkyardBQ

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Re: Where to stash EF, or should I at all?
« Reply #7 on: December 07, 2015, 03:36:16 PM »
How long would it take you to accumulate another 20k if you needed it?

We use a $0 emergency fund. Here's how we handle this. Any money we make gets either deferred to retirement plans or invested in taxable accounts as soon as possible (minus expenses). If/when an emergency happens, we can simply stop contributing to retirement or taxable accounts by reducing contributions (usually trying to be tax smart). A 20k emergency would mean lowering/stopping contributions for up to 3 months. Meanwhile, it's best to just invest every penny as soon as you can.

This strategy also depends on your job stability, if you have the potential for being laid off you may need to stash it somewhere more liquid.

We have very stable jobs, so our emergency fund is future income.
Regardless of whether this works for you, in general I don't think it's advice that you should give out to other people about emergency funds, as a large reason for emergency funds is to hold someone over between jobs. In a crazy situation it's possible for 2 people to lose both of there jobs, and an emergency fund can help them until they find another job. One thing that makes no sense to me on these forums is that there are some people that have $0 emergency fund, yet they want to go for a 3% withdrawal rate in retirement, it is just very weird to me.

If you have a particular number for your emergency funds, you can invest 120% of that number and be 98%+ certain that your full e-fund number will be available even during the worst performing 6 month cycle in history.  And it's also questionable that you need an e-fund at all, if you have a well funded Roth IRA, since you can withdraw your contributions at any time without issues, if it really comes to that.  The whole e-fund thing has more to do with personal finance habits.  If a person/couple/household is too undisciplined to spend less than they earn, committing to setting aside a defined portion of whatever savings they can manage to scratch up as 'not available for a new boat' is a really good idea.  In practice, however, almost no one on this forum is that undisciplined.

@JeremyE

I am not advising anyone not to have an emergency fund, I am trying to provide alternative thinking to labeling fungible assets, specifically cash, stocks, or near-term income. I think it's important for individuals to fully assess their risk when it comes to what they call 'emergency funds'.

Whether 20k is 6 months expenses or 12, doesn't change the fact that it's more advantageous to invest any money as soon as possible. An individual should assess the likeness of any event causing them to need emergency funds. We had an emergency fund in cash until July this year, we invested it along with other cash into a taxable account, for the long term this is better. In the event we were to both lose our jobs, we could live off the assets in the taxable account for over a year. As we continue to invest in that account it becomes a more stable emergency fund. It's about assessing individual risk. What is the likelihood of an emergency happening in 1,2,3,4,5 years, how much can a household stash before it happens, and then what are the alternative options for dealing with and ultimately paying for the event.

Alternatively, in scenarios excluding job loss, Moonshadow hits it perfectly. If you are spending considerably less than you earn there is no reason to hold cash in low interest vehicles.

What does an emergency fund have to do with 3% withdrawal rate?
« Last Edit: December 07, 2015, 03:46:22 PM by BackyarBQ »

TravelJunkyQC

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Re: Where to stash EF, or should I at all?
« Reply #8 on: December 08, 2015, 06:55:16 AM »
I keep 2,500$ cash in my bank account because anything less and I have to pay a 9,50$ monthly fee (grrr). I also have a 5,000$ line of credit (that I keep at 0$, obviously). Those are the makings of my emergency fund. Everything else is funneled into investments. I figured that the interest I make in my investments should, over time, be more than any bank account can net me, and the line of credit basically covers me until I can retrieve cash from my investments.

AlwaysLearningToSave

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Re: Where to stash EF, or should I at all?
« Reply #9 on: December 08, 2015, 07:37:04 AM »
How long would it take you to accumulate another 20k if you needed it?

We use a $0 emergency fund. Here's how we handle this. Any money we make gets either deferred to retirement plans or invested in taxable accounts as soon as possible (minus expenses). If/when an emergency happens, we can simply stop contributing to retirement or taxable accounts by reducing contributions (usually trying to be tax smart). A 20k emergency would mean lowering/stopping contributions for up to 3 months. Meanwhile, it's best to just invest every penny as soon as you can.

This strategy also depends on your job stability, if you have the potential for being laid off you may need to stash it somewhere more liquid.

We have very stable jobs, so our emergency fund is future income.
Regardless of whether this works for you, in general I don't think it's advice that you should give out to other people about emergency funds, as a large reason for emergency funds is to hold someone over between jobs. In a crazy situation it's possible for 2 people to lose both of there jobs, and an emergency fund can help them until they find another job. One thing that makes no sense to me on these forums is that there are some people that have $0 emergency fund, yet they want to go for a 3% withdrawal rate in retirement, it is just very weird to me.

If you have a particular number for your emergency funds, you can invest 120% of that number and be 98%+ certain that your full e-fund number will be available even during the worst performing 6 month cycle in history.  And it's also questionable that you need an e-fund at all, if you have a well funded Roth IRA, since you can withdraw your contributions at any time without issues, if it really comes to that.  The whole e-fund thing has more to do with personal finance habits.  If a person/couple/household is too undisciplined to spend less than they earn, committing to setting aside a defined portion of whatever savings they can manage to scratch up as 'not available for a new boat' is a really good idea.  In practice, however, almost no one on this forum is that undisciplined.

@JeremyE

I am not advising anyone not to have an emergency fund, I am trying to provide alternative thinking to labeling fungible assets, specifically cash, stocks, or near-term income. I think it's important for individuals to fully assess their risk when it comes to what they call 'emergency funds'.

Whether 20k is 6 months expenses or 12, doesn't change the fact that it's more advantageous to invest any money as soon as possible. An individual should assess the likeness of any event causing them to need emergency funds. We had an emergency fund in cash until July this year, we invested it along with other cash into a taxable account, for the long term this is better. In the event we were to both lose our jobs, we could live off the assets in the taxable account for over a year. As we continue to invest in that account it becomes a more stable emergency fund. It's about assessing individual risk. What is the likelihood of an emergency happening in 1,2,3,4,5 years, how much can a household stash before it happens, and then what are the alternative options for dealing with and ultimately paying for the event.

Alternatively, in scenarios excluding job loss, Moonshadow hits it perfectly. If you are spending considerably less than you earn there is no reason to hold cash in low interest vehicles.

What does an emergency fund have to do with 3% withdrawal rate?

I agree that "emergency fund does not necessarily need to mean small amount of funds in an FDIC-insured account" but people need to be careful to have enough to cover the most significant risks. 

I consider the two most significant risks to be (1) medical emergencies; and (2) job loss.  Job loss results in loss of non-passive income but the effect of this can often be mitigated by slashing expenses to "hair-on-fire emergency" levels.  Medical emergencies have the potential to combine lost non-passive income with skyrocketing expenses.  The expense risk of medical emergencies can be mitigated with health insurance, but there is still risk you will incur (1) out of network expenses, (2) non-covered medical expenses, and/or (3) significant non-medical expenses associated with the emergency.

Thus, factors you should consider when trying to determine how much of a cash emergency fund include job stability (odds of you, your spouse/significant other, or both losing a job); availability of passive income; likelihood of an emergency coinciding with a period of little or no passive income; how much room there is in your budget to slash expenses; availability of credit at non-usurious interest rates; availability of Roth IRA or taxable account investments; availability of other forms of support (family, friends, social security disability income, church community, etc.); and the amount of time it will take to access your assets. 

I don't think it is unreasonable to have no FDIC-insured emergency fund if you assess the risks and determine you are comfortable with the risks.  The closer you are to FI, the less of a cash emergency fund you will likely need.  But for someone like me who is closer to the start than the finish line, the risks are greater.  I am more dependent on wage income than many people in this forum so I need to ensure there are readily-available assets to cover living expenses should one of these true emergencies occur. 

But even for me, I can't imagine a reasonably-likely scenario when I would need more than a few thousand dollars in less than a week.  And catastrophic scenarios are probably unlikely enough that I am better off investing the top end of my "emergency fund" for the long term knowing they are available if a dire emergency were to occur. 

AlwaysLearningToSave

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Re: Where to stash EF, or should I at all?
« Reply #10 on: December 08, 2015, 07:39:16 AM »
If you have a particular number for your emergency funds, you can invest 120% of that number and be 98%+ certain that your full e-fund number will be available even during the worst performing 6 month cycle in history. 

Interesting statement.  I believe you but would like to see for myself.  Do you have links to something that can show how that works out? 

MoonShadow

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Re: Where to stash EF, or should I at all?
« Reply #11 on: December 08, 2015, 09:14:55 AM »
If you have a particular number for your emergency funds, you can invest 120% of that number and be 98%+ certain that your full e-fund number will be available even during the worst performing 6 month cycle in history. 

Interesting statement.  I believe you but would like to see for myself.  Do you have links to something that can show how that works out?

Well, apparently 130% actually...

http://www.cnbc.com/2015/10/01/how-to-invest-yes-invest-your-emergency-fund.html

https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/

BarkyardBQ

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Re: Where to stash EF, or should I at all?
« Reply #12 on: December 08, 2015, 10:21:49 AM »
Also know that we are not cashless. We front load our retirement accounts, use 0% cashback credit cards for all non-cash expenses and stash all reserves in 1+% savings accounts, which go to fill up our IRA funds for the following year. After front loading, we get our full paychecks to pay off the cards. Excluding January and February we have cash IF we actually had to use it.
« Last Edit: December 08, 2015, 11:36:52 AM by BackyarBQ »

tarheeldan

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Re: Where to stash EF, or should I at all?
« Reply #13 on: December 08, 2015, 10:34:36 AM »

Well, apparently 130% actually...

http://www.cnbc.com/2015/10/01/how-to-invest-yes-invest-your-emergency-fund.html

https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/

Just convinced me to move my 10k in cash to a 60/40 (bond/equity) allocation in taxable

OP: The cash is not only losing value against inflation but we must also look at the opportunity cost of not having those funds invested in higher-return assets.

At the same time, we have to consider risk.

Importantly, the worst-case scenario of job loss is more likely to occur when stocks are taking the hardest hit.

Scandium

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Re: Where to stash EF, or should I at all?
« Reply #14 on: December 08, 2015, 10:52:55 AM »
How do people differentiate between EF and "repair & replacement fund"? We have $10-20k in a savings account that we use for home and car costs. In the past few years we've used it to replace HVAC system, hardwood floors and now a car (cash of course). Once we use the account down we try to replace it back up to around $15k, but sometimes it drops to a few thousand. I'm comfortable having this amount in cash and has proven very handy for these purchases. Yes it could earn more, but if this was in investments it would be a bigger pain to take money out, and more volatile.

tarheeldan

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Re: Where to stash EF, or should I at all?
« Reply #15 on: December 08, 2015, 10:56:43 AM »
How do people differentiate between EF and "repair & replacement fund"?

I'm not sure what most people do, but for me the E means Emergency so it's really for unplanned emergencies.

For repair & replacement, I would estimate how much I need to put away each week/month/whatever in order to meet those foreseeable expenses, so that would be a separate bucket. I have that for my dog's annual vet visit, boarding for vacations, and car repairs and replacement.

Scandium

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Re: Where to stash EF, or should I at all?
« Reply #16 on: December 08, 2015, 11:12:55 AM »
How do people differentiate between EF and "repair & replacement fund"?

I'm not sure what most people do, but for me the E means Emergency so it's really for unplanned emergencies.

For repair & replacement, I would estimate how much I need to put away each week/month/whatever in order to meet those foreseeable expenses, so that would be a separate bucket. I have that for my dog's annual vet visit, boarding for vacations, and car repairs and replacement.

Sure, but it's not always planned, and can be expensive. Like when our AC broke during a heatwave and cost $8k to replace. Then I was glad we kept some in cash at all times. It wouldn't have been an emergency, we could have financed and found other options but I think the opportunity cost of $15k is worth it for that freedom. IMO obviously.

Maybe I'm just not hardcore mustacian enough, but when our stash is approaching $500k (and beyond!), keeping $15k in the bank seems like a rather minor thing.

BarkyardBQ

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Re: Where to stash EF, or should I at all?
« Reply #17 on: December 08, 2015, 11:50:33 AM »
How do people differentiate between EF and "repair & replacement fund"?

We just call it Cash Reserves, it is unassigned, non-budgeted, unlabeled for whatever purpose we may need.

Basically, 3k that has no defined bucket. It doesn't materialize until the last few months of the year, and if used is OK. If not most likely gets dumped into taxable accounts, vacations, or purchases we otherwise put off and finally decide we want.
« Last Edit: December 08, 2015, 11:55:32 AM by BackyarBQ »

AlwaysLearningToSave

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Re: Where to stash EF, or should I at all?
« Reply #18 on: December 08, 2015, 02:52:48 PM »
How do people differentiate between EF and "repair & replacement fund"?

We just call it Cash Reserves, it is unassigned, non-budgeted, unlabeled for whatever purpose we may need.

Basically, 3k that has no defined bucket. It doesn't materialize until the last few months of the year, and if used is OK. If not most likely gets dumped into taxable accounts, vacations, or purchases we otherwise put off and finally decide we want.

I also don't differentiate between emergency fund and repair/replace fund. 

I tend to see it as a spectrum of possible responses to unexpected expenses or expected expenses that occur at unpredictable times.  The greater the expense or emergency, the further you move up the level of response: 

First, use cash flow from current income to cover the smaller-but-still-significant unexpected expenses.  It may mean that I save less this month than I would otherwise save but it does not decrease the value of my savings account.  The beauty of a mustachian lifestyle is that this first line of defense will cover quite a lot more than the average spendypants' current cashflow even without tightening your belt. 

Second, maintain cash reserves in an amount appropriate for your circumstances to pay for the larger unexpected expenses.  I used mine this summer to replace our home's air conditioner.  I would also put car repair / replacement in this category.  This line of defense is particularly important for emergencies that include a loss of income.  The closer you get to FI, the less money you need here because you can rely more on passive income. 

Third, responsibly use credit to buy time.  A HELOC, a low-interest car loan, or low/no interest credit cards could be enough to spread out a larger expense to pay it off with current income or to liquidate other assets.  This response is less appropriate for emergencies accompanied by loss of income.  Use the time you buy to look for alternative means of support, including disability insurance claims, social security disability income, help from family or friends, etc. 

Fourth, liquidate investments that generate little or no tax consequence.  Realizing a loss in a taxable account is best.  Next is appreciated assets in taxable accounts or contributions to a Roth IRA (prior to age 59 and a half).  When you are in this territory, it is a pretty significant emergency. 

Fifth, if you are truly desperate, you can liquidate assets that create bad tax consequences.  You don't want to go here if at all possible. 

Of course, you should also be prepared to slash expenses in proportion to the severity of your emergency. 

GorgeousSteak

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Re: Where to stash EF, or should I at all?
« Reply #19 on: December 08, 2015, 06:01:42 PM »
Yeah, I'm in the camp of investing the emergency fund.  If your MMM journey hasn't gotten you to the point where you have alot of money piling up in taxable accounts maybe this isn't a great way to do it though.  But once you accumulate a decent stache (particularly in highly liquid accounts), I don't see what the point of having a really safely invested emergency fund is.  Maybe its just a terminology issue at this point some people are hung up on, I don't know.  I've been doing it like this for ~10 years (~50K), and have have naturally acquired quite a bit of money with this approach that I wouldn't have otherwise.

seattlecyclone

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Re: Where to stash EF, or should I at all?
« Reply #20 on: December 08, 2015, 06:21:53 PM »
How do people differentiate between EF and "repair & replacement fund"? We have $10-20k in a savings account that we use for home and car costs. In the past few years we've used it to replace HVAC system, hardwood floors and now a car (cash of course). Once we use the account down we try to replace it back up to around $15k, but sometimes it drops to a few thousand. I'm comfortable having this amount in cash and has proven very handy for these purchases. Yes it could earn more, but if this was in investments it would be a bigger pain to take money out, and more volatile.

I don't differentiate or have a separate account for "emergency" versus "repair/replace" money. Our paychecks go into our checking account. We try to keep a $5-10k cushion in there. If the balance goes above that, we send some money to Vanguard. We have never really had a need for any more cash than this on short notice. Home repairs, when they are needed, almost always either cost much less than this or can be deferred for a few weeks until we have earned a couple more paychecks.

unccnick

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Re: Where to stash EF, or should I at all?
« Reply #21 on: December 09, 2015, 09:51:33 AM »
Thanks for all the helpful feedback.

Couple of  notes -

I think terminology is a bit confusing. When I refer to an EF, I don't mean just an "emergency" fund, I guess it would be more apt to describe this money as a "safety net". For example, in the event of a job loss.

I think a lot of you are correct, and I think I will at least halve what I'm holding back in this "saftey net". When it comes down to it, I also routinely have 2 months worth of expenses in a checking account, so keeping that much money on hand, essentially losing value to inflation (not to mention the lost opportunity cost), it is not the best route.


Jeremy E.

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Re: Where to stash EF, or should I at all?
« Reply #22 on: December 09, 2015, 09:58:18 AM »
I've only used my emergency fund for house repairs, which can count as emergencies in my book. House upgrades no, house maintenance no, house repairs yes. Many people have car repair as an emergency, but I don't think car replacement should come out of an emergency fund. They are also for health, holding you over between jobs, and other emergencies. This is just generally what I've come to understand, however you don't have to follow this, and can do things your own way if it makes more sense to you.