Author Topic: Why do people keep emergency fund in a bank account versus an I-Bond or similar?  (Read 8750 times)

Aggie1999

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As the title says, why do people keep thousands of dollars of emergency funding in a savings account versus I-Bonds? You can withdraw I-Bonds after a year with only a 3 month interest penalty. People say they want money in a savings account for immediate access. I would imagine most people here have plenty of credit card credit they could use to ride on for the short processing time it takes to redeem an I-Bond. I realize that at first you might need to keep some money in a savings account until you can grow enough in I-Bonds since they are limited to $10k per year per SSN.

Thoughts? Any downsides to I-Bonds? Anything better than I-Bonds that is safe and linked to inflation that could still be used as an emergency fund?

Drifterrider

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As the title says, why do people keep thousands of dollars of emergency funding in a savings account versus I-Bonds? You can withdraw I-Bonds after a year with only a 3 month interest penalty. People say they want money in a savings account for immediate access. I would imagine most people here have plenty of credit card credit they could use to ride on for the short processing time it takes to redeem an I-Bond. I realize that at first you might need to keep some money in a savings account until you can grow enough in I-Bonds since they are limited to $10k per year per SSN.

Thoughts? Any downsides to I-Bonds? Anything better than I-Bonds that is safe and linked to inflation that could still be used as an emergency fund?

Most people don't plan their emergencies one year in advance.  I can put my money in the bank today and take it out tomorrow, penalty free. 

Emergencies mean right now

marielle

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Not everything can be paid with a credit card. Rent, mortgage, property taxes, etc. if you lose your job. If you need to buy a car off Craigslist, same thing. You need cash and you need it now.

caracarn

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Also, if you redeem an I-Bond within the first 5 years you forgo some of the interest.  Not something that I would consider prudent for emergency funds.

Tiger Stache

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Liquidity. Is it hard to understand?

Aggie1999

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

prognastat

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The amount needed can vary a lot. Covering 6 months of base expenses for a frugal single in a LCOL area could be just 4k, however if you have a 4 person family in a HCOL area covering the same amount of expenses could require over 20k.

Aggie1999

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The amount needed can vary a lot. Covering 6 months of base expenses for a frugal single in a LCOL area could be just 4k, however if you have a 4 person family in a HCOL area covering the same amount of expenses could require over 20k.

Why does one need 6 months of expenses (whatever the number is) in cash/bank account? Take the $20k example. Build up your emergency fund in cash. Then put another $10k in an I-Bond in year one. Year two transfer $10k from the emergency fund to the I-Bond. Year three keep a few thousand in the savings account (whatever you truly need for same day emergencies) and transfer the rest to an investment account. After the two years your $20k is no longer loosing money every year and the I-Bond value is almost just as liquid as the savings account.

ZiziPB

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I think I Bonds make a lot of sense for a portion of your emergency fund but dealing with the Treasury Direct interface is an awful pain in the neck.  My EF is in a variety of places: I have minimal funds in my local bank (checking account where I keep $1K minimum), a few thousand in an easily accessible Ally savings account that pays 1%, a bit more in a short term Ally CD (I think it pays 1.3%) and still a bit more in I Bonds.

Aggie1999

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I think I Bonds make a lot of sense for a portion of your emergency fund but dealing with the Treasury Direct interface is an awful pain in the neck.  My EF is in a variety of places: I have minimal funds in my local bank (checking account where I keep $1K minimum), a few thousand in an easily accessible Ally savings account that pays 1%, a bit more in a short term Ally CD (I think it pays 1.3%) and still a bit more in I Bonds.

Thanks for the post. Can you expand on the issues with the Treasury Direct interface? What's the delay from selling the I-Bonds to getting the funds transferred to your bank account?

Tiger Stache

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

Aggie1999

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

I do agree with that. In the purest definition a true emergency fund is cash in hand. With that said every other post in this forum concerning an emergency fund seems to say the money is kept in a local checking account or in an online savings account, etc. What if your emergency happens on a Saturday and the person receiving the funds won't take a check? If it's in a non-checking account it will probably take a few days to get the funds to you. How are these considered emergency funds then?

Aunt Petunia

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My emergency fund is in taxable ETFs, and I keep no more than 2k in checking/savings unless I am going to need it in the next month. Yes, it is a slight gamble because it is possible that the value could go down before I need to withdraw it. It just seems unlikely that the market will crash right before I need to replace my car or something.  I also can't see it being a problem to wait 3-4 days for funds to clear. Meanwhile I would be losing out on a lot of gains if I just left it in a savings account.

prognastat

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

I do agree with that. In the purest definition a true emergency fund is cash in hand. With that said every other post in this forum concerning an emergency fund seems to say the money is kept in a local checking account or in an online savings account, etc. What if your emergency happens on a Saturday and the person receiving the funds won't take a check? If it's in a non-checking account it will probably take a few days to get the funds to you. How are these considered emergency funds then?

I don't know what your location is and what your life is like, but any kind of emergency I had would be solvable by money in my bank account. I carry around $20 in my wallet for cash in case I need a taxi or something to get somewhere in an emergency, however for almost anything else I can use my debit card.

Also getting money out of my savings account takes literally seconds not days.

Your questions are making me wonder more about your location and if that is influencing your opinions on this.

frugaliknowit

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I can get a checking account yielding 2.5% (no guarantee on the rate).  Why go through the trouble of laddering I-Bonds with a variable yield of 2.75% for an emergency fund?

Aggie1999

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

I do agree with that. In the purest definition a true emergency fund is cash in hand. With that said every other post in this forum concerning an emergency fund seems to say the money is kept in a local checking account or in an online savings account, etc. What if your emergency happens on a Saturday and the person receiving the funds won't take a check? If it's in a non-checking account it will probably take a few days to get the funds to you. How are these considered emergency funds then?

I don't know what your location is and what your life is like, but any kind of emergency I had would be solvable by money in my bank account. I carry around $20 in my wallet for cash in case I need a taxi or something to get somewhere in an emergency, however for almost anything else I can use my debit card.

Also getting money out of my savings account takes literally seconds not days.

Your questions are making me wonder more about your location and if that is influencing your opinions on this.

99.9% of the things that can be used to pay by debit card can also be used to pay by credit card without a fee. If they don't take debit or a check and it's a weekend you would be SOL for a couple days if you depended on withdrawing from a bank account. IMO most anything that can wait a couple days can probably wait a few more to get the funds from a non-bank account. If it can't then it probably wasn't appropriate to consider a bank account as an appropriate place to fund said emergency. Under the mattress seems like the appropriate place.

Location, family size, etc really shouldn't influence this. Only thing that should influence it is being honest with yourself and determining what is really a emergency versus what things you might need money for in say a week. IMO, there are very, very few things where one needs money on hand in cash. At least for the demographic of this forum. Of course this doesn't apply to the non-average person (i.e. someone flipping cars on Craigslist, etc). Even then that's not an emergency fund but a business fund.

Ann

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Is the OP asking why "people" keep emergency funds in a bank account, or why would "Mustachians" keep their emergency fund in a bank account?

I think Mustachians -- well, at least those close to FI -- aim to optimize returns and have enough of a net worth that they can just sell off investments to handle unexpected expenses / emergencies (and use a credit card to bridge the few days it takes for trading and money transfers to occur).  There have been many threads wondering why a Mustachian would have an emergency fund at all.

I think the  more typical approach of keeping it in a savings account is because it is accessible and secure.  If I have a $1,000 in an I-Bond, exactly how much interest am I loosing in a year by keeping it in a savings account?  And how much would I loose if I withdraw early?

I think people DO have "emergencies" every year.  For some people having transmission problems or a broken AC is an emergency because they don't have the liquid funds to pay for it.  It's scary that many people have to use available unsecured credit for these events and just pay them off at high interest rates slowly over the next few months (or years!).

So, I think that is your answer.  Dave Ramsey is doing his best to convince people to save just $1,000 for these events.   He has to convince them it is possible.  That is the segment of population who should keep emergency funds in a savings account and not less liquid investments.

Aggie1999

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I can get a checking account yielding 2.5% (no guarantee on the rate).  Why go through the trouble of laddering I-Bonds with a variable yield of 2.75% for an emergency fund?

In the US where can one get that now days? I still see a few reward checking accounts in the 2% - 3% range for balances of around $10k or so. Of course they have their own annoyances with having to do X number of debit transactions per month. Then you are losing on the 2% cash back on those debit purchases you could get with a credit card. These type of reward accounts also seem to drop their interest rates frequently. Basically get people sucked in then drop the rate. More hassle setting up and transferring to another bank to chase the rate.

prognastat

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

I do agree with that. In the purest definition a true emergency fund is cash in hand. With that said every other post in this forum concerning an emergency fund seems to say the money is kept in a local checking account or in an online savings account, etc. What if your emergency happens on a Saturday and the person receiving the funds won't take a check? If it's in a non-checking account it will probably take a few days to get the funds to you. How are these considered emergency funds then?

I don't know what your location is and what your life is like, but any kind of emergency I had would be solvable by money in my bank account. I carry around $20 in my wallet for cash in case I need a taxi or something to get somewhere in an emergency, however for almost anything else I can use my debit card.

Also getting money out of my savings account takes literally seconds not days.

Your questions are making me wonder more about your location and if that is influencing your opinions on this.

99.9% of the things that can be used to pay by debit card can also be used to pay by credit card without a fee. If they don't take debit or a check and it's a weekend you would be SOL for a couple days if you depended on withdrawing from a bank account. IMO most anything that can wait a couple days can probably wait a few more to get the funds from a non-bank account. If it can't then it probably wasn't appropriate to consider a bank account as an appropriate place to fund said emergency. Under the mattress seems like the appropriate place.

Location, family size, etc really shouldn't influence this. Only thing that should influence it is being honest with yourself and determining what is really a emergency versus what things you might need money for in say a week. IMO, there are very, very few things where one needs money on hand in cash. At least for the demographic of this forum. Of course this doesn't apply to the non-average person (i.e. someone flipping cars on Craigslist, etc). Even then that's not an emergency fund but a business fund.

In my whole life I have yet to run in to an emergency that required more than $20 in cash that couldn't be taken care of with a debit card and even for that these days most things like a taxi would take a debit card now. Any real emergency would be covered by my debit card. If my car breaks down I can guarantee you the towing company and garage will take my card. If a medical emergency occurs I can guarantee you the hospital or doctor will accept it. If an appliance breaks down and for some reason I can't fix it myself the repairman accepts my card.

In my life my debit card has proven to be just about as liquid as cash and I don't have to carry a huge wad of cash around which is at risk of being lost or stolen. I just don't know these emergencies you are talking about where it is high enough to require significant funds, yet they don't accept my card.

As for an emergency where you can't just put it on a card, what if you lose your job for an extended period of time? If you are without a job for a few months that credit card will start charging interest.
« Last Edit: March 08, 2017, 02:12:23 PM by prognastat »

Aggie1999

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Is the OP asking why "people" keep emergency funds in a bank account, or why would "Mustachians" keep their emergency fund in a bank account?

I think Mustachians -- well, at least those close to FI -- aim to optimize returns and have enough of a net worth that they can just sell off investments to handle unexpected expenses / emergencies (and use a credit card to bridge the few days it takes for trading and money transfers to occur).  There have been many threads wondering why a Mustachian would have an emergency fund at all.

I think the  more typical approach of keeping it in a savings account is because it is accessible and secure.  If I have a $1,000 in an I-Bond, exactly how much interest am I loosing in a year by keeping it in a savings account?  And how much would I loose if I withdraw early?

I think people DO have "emergencies" every year.  For some people having transmission problems or a broken AC is an emergency because they don't have the liquid funds to pay for it.  It's scary that many people have to use available unsecured credit for these events and just pay them off at high interest rates slowly over the next few months (or years!).

So, I think that is your answer.  Dave Ramsey is doing his best to convince people to save just $1,000 for these events.   He has to convince them it is possible.  That is the segment of population who should keep emergency funds in a savings account and not less liquid investments.

Definitely asking why Mustachians (whether they know they are or not), both FI and those in any stage of the accumulation phase, would keep substantial emergency fund money in a bank account. I alluded to that in the first post when I talked about the $10k a year limit on I-Bonds. Could have been more clear though.

What non-Mustachians do doesn't really apply. They have bigger concerns than where to keep money they don't have. :)

Aggie1999

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Liquidity. Is it hard to understand?

No need to be insulting/sarcastic.

My basic thinking is you don't have an emergency every year. At least the majority of people. Build up your emergency fund in cash and I-bonds. As you get more in the I-bonds and as time progresses the less you will need in hard cash. After a few years you need very little in cash for truly "that day" emergencies. I guess this post is mostly about those I see saying they leave tens of thousands, etc in a bank account as an emergency fund. Of course what you need in a cash emergency fund will vary by individual.

On forgoing the 3 month interest when redeeming an I-bond before 5 years, that seems way better to me than loosing ~2% of your money every year in a savings account because of inflation.

The point of an emergency fund is to get to the entire amount in an emergency, that's it. There's not a concern about maximizing return. Emergency expenses last a lifetime, they don't decrease over a period of time. Your life situation may allow you to lower the amount, but it's still a good idea to have cash ready to go at a moment's notice.

What you're talking about is not completely an emergency fund, it's extra cash.

I do agree with that. In the purest definition a true emergency fund is cash in hand. With that said every other post in this forum concerning an emergency fund seems to say the money is kept in a local checking account or in an online savings account, etc. What if your emergency happens on a Saturday and the person receiving the funds won't take a check? If it's in a non-checking account it will probably take a few days to get the funds to you. How are these considered emergency funds then?

I don't know what your location is and what your life is like, but any kind of emergency I had would be solvable by money in my bank account. I carry around $20 in my wallet for cash in case I need a taxi or something to get somewhere in an emergency, however for almost anything else I can use my debit card.

Also getting money out of my savings account takes literally seconds not days.

Your questions are making me wonder more about your location and if that is influencing your opinions on this.

99.9% of the things that can be used to pay by debit card can also be used to pay by credit card without a fee. If they don't take debit or a check and it's a weekend you would be SOL for a couple days if you depended on withdrawing from a bank account. IMO most anything that can wait a couple days can probably wait a few more to get the funds from a non-bank account. If it can't then it probably wasn't appropriate to consider a bank account as an appropriate place to fund said emergency. Under the mattress seems like the appropriate place.

Location, family size, etc really shouldn't influence this. Only thing that should influence it is being honest with yourself and determining what is really a emergency versus what things you might need money for in say a week. IMO, there are very, very few things where one needs money on hand in cash. At least for the demographic of this forum. Of course this doesn't apply to the non-average person (i.e. someone flipping cars on Craigslist, etc). Even then that's not an emergency fund but a business fund.

In my whole life I have yet to run in to an emergency that required more than $20 in cash that couldn't be taken care of with a debit card and even for that these days most things like a taxi would take a debit card now. Any real emergency would be covered by my debit card. If my car breaks down I can guarantee you the towing company and garage will take my card. If a medical emergency occurs I can guarantee you the hospital or doctor will accept it. If an appliance breaks down and for some reason I can't fix it myself the repairman accepts my card.

In my life my debit card has proven to be just about as liquid as cash and I don't have to carry a huge wad of cash around which is at risk of being lost or stolen. I just don't know these emergencies you are talking about where it is high enough to require significant funds, yet they don't accept my card.

As for an emergency where you can't just put it on a card, what if you lose your job for an extended period of time? If you are without a job for a few months that credit card will start charging interest.

I am not arguing that there are true emergencies that will not take your debit card nor am I saying that there are any, or practically any, high expense true emergencies that don't take a debit card (people talking about liquidity implied that). What I am saying is if your emergency situation can take a debit card then 99.9% of the time it can take a credit card. I would challenge you to list one true emergency in the last 5 years that took a debit card but would not accept a credit card.

For your layoff/credit card example you would simply move funds from your I-Bonds to your bank to pay off the credit card. No carrying a balance needed. I've been pretty clear in this thread that you ladder into the I-Bonds for a couple years.

Hell, if I was laid off I would still charge everything to credit cards. I never understood people that use debit cards when they can use a credit card, not counting things like debits needed for a bank account, etc. Anyone following this forum should feel the same.

Patches

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Something I and a lot of others do is use your Roth IRA for emergency funds.  After 5 years you can withdraw the principal penalty/tax free.  I also have an unsecured line of credit with my bank.  Thus I maintain $150 in my savings and minimum $1,000 in my checking.

 

Laserjet3051

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Something I and a lot of others do is use your Roth IRA for emergency funds.  After 5 years you can withdraw the principal penalty/tax free.  I also have an unsecured line of credit with my bank.  Thus I maintain $150 in my savings and minimum $1,000 in my checking.

What happens if your emergency arises BEFORE the 5 year threshold? OR what happens if you need the cash for an emergency AFTER the 5 year threshold but are in a severe protracted bear market, where selling would incur substantial capital losses? Both of these situations have a non zero probability of occurring; I might add, substantially more than non-zero.

The small ~1-2% annual depreciation of my EF is a small price to pay for the liquidity necessary to manage a true large emergency. I look at it as an inexpensive insurance policy. Having been through a few TRUE emergencies in my life, I will never chase yield with my EF though anything other than an easily accesible FDIC insured account/product or cold hard bills in the safe.

To each his own; I can certainly live, and sleep well, with my decision.

dleavitt

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Something I and a lot of others do is use your Roth IRA for emergency funds.  After 5 years you can withdraw the principal penalty/tax free.  I also have an unsecured line of credit with my bank.  Thus I maintain $150 in my savings and minimum $1,000 in my checking.

What happens if your emergency arises BEFORE the 5 year threshold? OR what happens if you need the cash for an emergency AFTER the 5 year threshold but are in a severe protracted bear market, where selling would incur substantial capital losses? Both of these situations have a non zero probability of occurring; I might add, substantially more than non-zero.

The small ~1-2% annual depreciation of my EF is a small price to pay for the liquidity necessary to manage a true large emergency. I look at it as an inexpensive insurance policy. Having been through a few TRUE emergencies in my life, I will never chase yield with my EF though anything other than an easily accesible FDIC insured account/product or cold hard bills in the safe.

To each his own; I can certainly live, and sleep well, with my decision.
The 5-year waiting period only applies to rollovers.  Regular contributions can be withdrawn at any time with no penalty.

khangaroo

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I think of my emergency fund as insurance. You don't make money on insurance, you lose money by using it to minimize your risk. It saves you from going to the pay day lender if you end up losing your job. Or putting your broken transmission on a credit card.

Everybody's situation is different but $10k in a savings account will have me covered for a sold, comfortable 6+ months of expenses.

I'm fine with paying a few hundred dollars in lost interest for the peace of mind.

lhamo

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We bought a fairly large amount of I bonds about 15 years ago (before the 10k annual purchase limit and when you could use credit cards to buy them--those were the days!).    I had originally intended for them to be part of the backup plan for kids college financing, since you can use the interest tax free on higher education expenses if your income is low enough.    But in the end, they ended up being an emergency fund of sorts.   Enough in the 529s to cover kids college at this point, and last year we suddenly went to no income before selling the asset that makes us FIREd.  I decided to cash them in when the interest rate went to 0% in fall 2015.   Used the money to buy a car and cover living expenses.   

We had paper bonds, and some had issues that took some time to resolve.  The ones without issues I cashed in at our credit union.  The others I had to mail in, and it took about 5 months for the Treasury to cash them out.   Which meant we got fewer tax credits this year, but oh well. 

Personally, having had the Ibonds and used them in this way, I don't think I would bother with them again unless the base interest rate goes back up to the 2-3% rate.  It just isn't worth the hassle compared to more liquid forms of savings.   YMMV.

Tetsuya Hondo

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I'll stick up for you, Aggie1999. I don't think it's a bad idea if you're someone like me who keeps a high (by Mustachian standards) level of cash-ish savings on hand. Here's why:
  • They pay a higher rate than you can find from most savings accounts and CDs. If you can find a checking account paying 2.75% that works for you, then great. But, I haven't seen one.
  • They are inflation protected. If inflation shoots up to 10%, so will your iBonds, providing an inflation hedge.
  • Money from TreasuryDirect hits my checking account faster than transfers from my actual savings account.
  • TreasuryDirect isn't that bad to use. A little bit clunky, but hardly an impediment.
  • The 3 month penalty also isn't a big deal as you still come out well ahead of other savings accounts and CDs.

I've toyed with the idea of keeping all my savings in iBonds, but you're limited to $10k a year.

That said, if you need somewhere to stash $1000, don't bother. But, if you're someone that keeps a fair amount of safe money on hand and you have other funds accessible within the first year, then it's a pretty good deal.

SwordGuy

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Quote
Why don't I keep some of our emergency funds in an I-Bond?


'Cause I don't know anything about I-Bonds.   


Tell me more! :)


As for most other folks, because they don't have an emergency fund.

Paul der Krake

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The I-bond rate is 2.76% now. It was 0.26% 6 months ago and around that for the last couple years.

High yield savings account have been around 1% for a while now. It will be interesting to see if they go up.

SimpleCycle

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Some of us are not pure Mustachians in every aspect of financial planning.  To me the point of an efund in a savings account is to mitigate risk and ease of use.  Sure, I could use credit and sell taxable investments to cover emergency expenses, but it's much, much easier to use my cash efund, and it mitigates the risk of needing to sell investments at unfavorable prices to cover an emergency.  Think about people who got laid off in the financial crisis.

Why not Ibonds is easy - they're kind of a pain and the rate until recently was worse than my savings account.

Ynari

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Something I and a lot of others do is use your Roth IRA for emergency funds.  After 5 years you can withdraw the principal penalty/tax free.  I also have an unsecured line of credit with my bank.  Thus I maintain $150 in my savings and minimum $1,000 in my checking.

What happens if your emergency arises BEFORE the 5 year threshold? OR what happens if you need the cash for an emergency AFTER the 5 year threshold but are in a severe protracted bear market, where selling would incur substantial capital losses? Both of these situations have a non zero probability of occurring; I might add, substantially more than non-zero.

The small ~1-2% annual depreciation of my EF is a small price to pay for the liquidity necessary to manage a true large emergency. I look at it as an inexpensive insurance policy. Having been through a few TRUE emergencies in my life, I will never chase yield with my EF though anything other than an easily accesible FDIC insured account/product or cold hard bills in the safe.

To each his own; I can certainly live, and sleep well, with my decision.
The 5-year waiting period only applies to rollovers.  Regular contributions can be withdrawn at any time with no penalty.

I have this setup, unintentionally, and have used it as said emergency fund (withdrew a portion of principal 2 years later, with no penalty). The only thing is that you still have to pick stocks vs. bonds vs. cash - the IRA is just the place where you put it. It's an easier headache to liquidate than taxable funds, IMO, whatever you choose.

Mezzie

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As far as examples of emergencies that don't take credit cards go: helping pay for medical expenses for relatives overseas is one that applies to my family.

I've got a CD account getting 3.5% interest right now, so I'm feeling pretty good about my emergency fund largely being in there. Like someone else said, though, the emergency fund is like insurance to me; there is a cost associated with having it liquid, but I am happy to pay that cost in exchange for peace of mind and convenience in a true emergency.

Khaetra

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Easy access to cash in an emergency is important to me.  Back in 2004 when the hurricanes hit Florida, I debated whether to grab some cash or not and my now ex said it was silly (we actually argued over this).  I took out $500 and boy was I glad I did.  We lost power for two weeks and no power means no CC, banking or ATM machines.  That cash enabled us to buy things we needed when the stores opened, like tarps for the roof, buckets, cleaning supplies, etc. that we normally don't keep on hand.  I make it a point now during hurricane season to always have cash on hand because no power means your cards will not work.

NoStacheOhio

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I keep mine in an online savings account, and I have a checking account that can receive transfers instantly (and also has a $500 LOC). If I desperately need cash on a Saturday, I'll transfer and go to an ATM. I can't think of a single instance where I would need over $300-400 cash immediately on a Saturday. The plumber and HVAC people I've used in the last two or three years have all taken checks or had iPhone card readers. Auto mechanics all take checks, and my insurance has roadside assistance.

Obviously, if you live in hurricane country like Khaetra, the calculus is slightly different, and cash-on-hand is prudent, but we don't get many hurricanes in Ohio.

Gin1984

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My problem is that the fixed rate on ibonds is zero right now.  I'll buy them again when rates go up.

Sent from my SPH-L710 using Tapatalk


kpd905

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I move my $10-15,000 emergency fund between savings accounts for sign up bonuses.  Most of them pay $200 to keep the money there for 3 months.  So it ends up being a 5.3% return, better than just leaving it in even a high yield savings account. 

Tetsuya Hondo

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My problem is that the fixed rate on ibonds is zero right now.  I'll buy them again when rates go up.

Sent from my SPH-L710 using Tapatalk

Although the composite rate (fixed + inflation rate = composite, for the uninitiated) is 2.76% right now.

While I was cheer-leading for iBonds above, the past few years have not been the best for them. I actually dumped a bunch of mine last year when they were returning 0%. However, I'm tempted to pick up some now for some of my "savings" stash.

Tetsuya Hondo

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I move my $10-15,000 emergency fund between savings accounts for sign up bonuses.  Most of them pay $200 to keep the money there for 3 months.  So it ends up being a 5.3% return, better than just leaving it in even a high yield savings account.

Nice. How's your experience been with moving things around? Has it been a hassle? Any downsides? I get nervous about moving my savings around given that I keep a fair amount in the kitty due to the volatility of my work, but would consider it for that kind of return. How do you find out about good offers? Any particular source (e.g., Bankrate, etc.)?

trollwithamustache

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How risky do you want to get with your emergency fund? OP's idea to tie up a chunk of money a little bit for a higher return but still have good access to it basically makes sense the more secure you think your employment is.

what about Muni bond funds? that's a higher return also tax free. They could be liquidated in a day. In a more extreme, why not have a second vanguard account and put some of the "emergency money" in VTSAX? Or, use a broker that will give you a margin account and then you can borrow against your VTSAX without a taxable event if an emergency came up!

Systems101

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I have 6 mo of expenses in I-bonds, but I think the answer is "it depends". 

To @Khatera's point, it matters what is meant by "emergency".  I fully respect pulling out $$ when storms threaten, I've done the same when ice storms are predicted and that was also very useful.  A few hundred for towing, et al, I would suspect people would have in checking/demand savings accounts... or at least I do.  I don't want to mess with selling investments just because the budget was off $400 in some given month.

The "layoff type" scenarios of how to handle 6 months of expenses then can allow for a week or two to access the money, IMHO. 

Then we have when someone made the decision, as well as needing to understand how interest rates work.

So let's back up and give a framework for @SwordGuy to get a handle on I-bonds.

If we look at the impact of inflation over time, then we find that "cash" investments (think CDs), tend to return very little after inflation (on a "real" basis).  There are periods where they are negative real return, some periods with small positive return. 

Let's tell a story for a moment with a 3% CD rate for 5 years.  We can actually separate that 3% nominal rate into two pieces: Assumed inflation and the assumed real return.  If we think inflation will be 2%, then this will be a real return of just under 1%.  However, the CD purchaser bears the risk that the 2% assumption is wrong.

Now let's look at the I-bond.  There are 2 forms of return to I-bonds, a fixed rate and the "variable rate" for inflation.  The fixed rate is a "guaranteed" real return (two additional points on this guarantee).  The variable rate is based on actual inflation. 

Therefore, buy purchasing an I-bond rather than a CD, we have transferred the risk of the inflation assumption being wrong to the seller of the I-bond (because the I-bond purchaser gets return based on actual inflation).  What we have then taken on is that our own personal rate of cost increases is different than the CPI-U (urban CPI) used as the basis for the I-bond.  That's fairly nominal for an average urban individual, but does have some quirks for Mustachian folks and rural folks.  To know what that is requires you know your own personal rate of cost increase :)

To me, the risk transfer is key to evaluating a CD vs an I-bond for an "emergency fund".  A purchaser of the I-bond has transferred risk to someone else.  To me this matters, because the point of an emergency fund is to minimize risk...

So it's time to ask what we mean by "emergency fund".  We all know CDs and I-bonds are rarely good for the long term.  That's why we see folks pointing at VSTAX for long term investment.  But an "emergency fund" is working to deal with the "tail events" (when things go really bad for us _personally_), not a statistically analyzed long term return.  Note that I'm not saying here we can predict CD/bond returns or that we even care to, but it's about transferring risks to others, so we have less factors of variability when things go wrong.

Given that, we should think about when "tail events" are likely to happen - and I would assert they tend to be correlated - meaning when the economy goes bad, we are more likely to see layoffs (see 2001, 2008).  So for an emergency fund, the more stability we can have and the more risk we can transfer to someone else, the better.

If we assert the emergency fund is trying to minimize risk factors, then it follows that taking principal risk is off the table, so you're stuck with federally backed instruments: I-bonds, very short term treasury notes, or insured CDs and the like. 

If you don't have that assertion, then yes, some folks choose to be all investment (VSTAX and the like) and just assume they can use HELOC, credit card or whatever for emergencies.  That is a risk analysis for each individual (and not putting the key assumptions on the table is why folks end up talking past each other on this topic).  To my point above on risk and in response to @trollwithamustache, I'd note that Muni bonds are an investment, not a place for emergency funds unless you are just as happy putting it in VSTAX.  They can vary widely in value, so while they are somewhat liquid, you can't guarantee anything close to good returns when things "go bad".  I picked up some crazy values during the '08 events when folks were dumping them.  They are also not default-free, see LA, Detroit, Jefferson County Alabama, and others. So it's not that you *can't* do it, it's that you should understand the risks you are bearing.

Given all that, and thinking about risks, we can then evaluate cash vs savings accounts vs I-bonds.  All are effectively equivalent guarantees.  Cash is clearly resilient to power outages, et al, but comes with higher theft risk.  I-bonds have some startup risks (the first year withdrawal restriction and 3 months of lost interest), but have transferred off the inflation risk.  There is at least two other steps (sell, then transfer to bank account) beyond a savings account.  Whether that is worth it depends on the immediacy of the emergency one is planning for and the risks an individual is willing to take.

Now back to I-bonds.  IMHO, the fixed rate matters a lot to whether they are worth it.  If there is no [or nominal] fixed rate (the situation for some years now), then it is likely that fully nominal interest items (CDs, etc) are better net return over time (because they will have an "assumed inflation" as a component of the nominal rate whereas the I-bonds are *guaranteed* to have zero).  For my I-bonds, the fixed rate is 1.4%.  I would not personally advise anyone to get them now when the fixed rate is 0%.  (Hat Tip to @Gin1984).  IMHO, there are better options... but if they go back to a higher fixed rate, then they are something to consider because it allows you to offload the actual inflation risk.

TomTX

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So, we have had an I-bond as PART of our emergency fund since 2008. It's currently earning me 3.98% interest. Overall, it's done better than any normal savings account and most CD strategies since then. It's also effortless once it's setup (versus cycling CDs or chasing high-interest savings accounts)

The rest of our emergency fund is in high-interest savings, plus a modest amount of actual cash. It's not an "all or nothing" game - having a tiered emergency fund makes a lot of sense to me.

1) Credit cards. Got plenty of them. I can float 50+ days interest-free, just pick one with the furthest closing date.
2) Cash on hand. Used it once to bail a friend out of jail when PD did an unpaid ticket roundup on a Saturday.
3) High interest savings
4) i-Bond
5) Craigslist off more junk from the house

If I have time on my hands as well as funding needed - Craigslist moves up in the sequence ;)

Not everything can be paid with a credit card. Rent, mortgage, property taxes, etc. if you lose your job. If you need to buy a car off Craigslist, same thing. You need cash and you need it now.

You can pay rent, mortgages, property taxes, etc with a credit card for a mild fee, typically 2-2.5%. Plastiq if nothing else. PM if you want a referral ;)

...we bought our most recent car with the cash we had sitting around the house from Craigslist sales and I hadn't gotten around to putting in the bank.

Also, if you redeem an I-Bond within the first 5 years you forgo some of the interest.  Not something that I would consider prudent for emergency funds.

Ridiculous attitude. You only lose 3 months of interest. You still come out ahead versus any normal savings account. 9 months of interest at 3% is better than 12 months of interest at 1.1%. And that's the worst-case scenario (unless you need it before the 12 months is up)

I've toyed with the idea of keeping all my savings in iBonds, but you're limited to $10k a year.

Actually, you are limited to $10k electronic, plus $5k on paper via income tax refund. Just dump in an extra $5k tax payment and specify you want a $5k i-Bond when you do your taxes.

Tetsuya Hondo

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I've toyed with the idea of keeping all my savings in iBonds, but you're limited to $10k a year.

Actually, you are limited to $10k electronic, plus $5k on paper via income tax refund. Just dump in an extra $5k tax payment and specify you want a $5k i-Bond when you do your taxes.

No kidding? Thanks for the tip! (This is why I hang around here, I'm always learning something.)

TomTX

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I've toyed with the idea of keeping all my savings in iBonds, but you're limited to $10k a year.

Actually, you are limited to $10k electronic, plus $5k on paper via income tax refund. Just dump in an extra $5k tax payment and specify you want a $5k i-Bond when you do your taxes.

No kidding? Thanks for the tip! (This is why I hang around here, I'm always learning something.)

No kidding. Form 8888, Part II

https://www.irs.gov/pub/irs-pdf/f8888.pdf

SeattleStache

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I'm comfortable with keeping $3k in a high interest savings account which is accessible via an ATM and around 4 months of living expenses invested in the Vanguard Target Retirement 2010 fund (VTENX). This is a lower risk fund but is still invested in the market. I view my Roth as my truly insane emergency backup fund.

LAGuy

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To be honest, I kind of feel like we're talking about chump change here. $10k in Ibonds at 2.76% vs $10k in a high yield savings at 1% is like a difference of $180 for the entire year. And that's assuming the bond even stays at 2.76%. I'm not sure if 180 bucks is worth the hassle of setting up a treasury direct account and losing immediate access to my cash. To me, if I've got "excess" cash it's going in the stock market. If I'm not comfortable with that (because I may need access to it), then it's in my high yield savings account. I don't see much point in a middle ground at current interest rates.

Paul der Krake

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Yeah, at 10k it's probably not worth your time.

But setting up a Treasury Direct account is a one time time expense that you are likely to reuse in different rate environments- the US Treasury isn't going away.

Laserjet3051

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So, we have had an I-bond as PART of our emergency fund since 2008. It's currently earning me 3.98% interest. Overall, it's done better than any normal savings account and most CD strategies since then. It's also effortless once it's setup (versus cycling CDs or chasing high-interest savings accounts)


Not everything can be paid with a credit card. Rent, mortgage, property taxes, etc. if you lose your job. If you need to buy a car off Craigslist, same thing. You need cash and you need it now.

You can pay rent, mortgages, property taxes, etc with a credit card for a mild fee, typically 2-2.5%. Plastiq if nothing else. PM if you want a referral ;)

...we bought our most recent car with the cash we had sitting around the house from Craigslist sales and I hadn't gotten around to putting in the bank.

Also, if you redeem an I-Bond within the first 5 years you forgo some of the interest.  Not something that I would consider prudent for emergency funds.

Ridiculous attitude. You only lose 3 months of interest. You still come out ahead versus any normal savings account. 9 months of interest at 3% is better than 12 months of interest at 1.1%. And that's the worst-case scenario (unless you need it before the 12 months is up)

I've toyed with the idea of keeping all my savings in iBonds, but you're limited to $10k a year.

Actually, you are limited to $10k electronic, plus $5k on paper via income tax refund. Just dump in an extra $5k tax payment and specify you want a $5k i-Bond when you do your taxes.

Actually, NO. Maybe YOU can pay rent with a credit card, but for the last 9 years, NONE of my landlords would take a credit card for rent payment under any circumstance. and i am certainly not the ONLY American for which this is true.

Paul der Krake

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Individual landlords usually don't.

Virtually every large property management company does.

LAGuy

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Yeah, at 10k it's probably not worth your time.

But setting up a Treasury Direct account is a one time time expense that you are likely to reuse in different rate environments- the US Treasury isn't going away.

But, how much do you need at TD? Over the years I've toyed with opening an account. Or setting up CD ladders. But really, it always comes back to the fact that we're talking about chump change. But when we start talking about real money, then the question becomes, "Why am I keeping this in cash/cash equivalents and not putting it in the stock market?" See my point?

TomTX

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Actually, NO. Maybe YOU can pay rent with a credit card, but for the last 9 years, NONE of my landlords would take a credit card for rent payment under any circumstance. and i am certainly not the ONLY American for which this is true.

Actually YES. You should have kept reading. I should have given more detail: There is a service called Plastiq. You pay them with your credit card, plus a 2-2.5% fee and they send a check for your rent. I have done this for my mortgage with no issues.

If you use a referral code (mine is 592445) - you can send up to $400 for free. Plastiq.com
« Last Edit: March 15, 2017, 06:37:46 PM by TomTX »