Author Topic: Emergency Fund Or Savings in IRA ???  (Read 4477 times)

heybro

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Emergency Fund Or Savings in IRA ???
« on: October 07, 2014, 01:34:24 AM »
So, if one wanted to put their emergency fund, or just their savings in to their IRA, what is a good "cash" vehicle that is GUARANTEED or nearly GUARANTEED to be "safe" ?

GGNoob

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Re: Emergency Fund Or Savings in IRA ???
« Reply #1 on: October 07, 2014, 07:17:49 AM »
You could open an IRA at Vanguard and simply leave money in the money market fund. Then it's available to invest when you are ready.

You've been asking a lot of questions, but it may be more helpful for you to create one post with your entire financial situation (income, assets, debts, savings) and your future plan/allocation with lists of current investments and available funds. That way we can help provide advice that may be more tailored specifically to you.

nereo

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Re: Emergency Fund Or Savings in IRA ???
« Reply #2 on: October 07, 2014, 08:33:32 AM »
So, if one wanted to put their emergency fund, or just their savings in to their IRA, what is a good "cash" vehicle that is GUARANTEED or nearly GUARANTEED to be "safe" ?

I'll add, it's a good idea to think about what "safe" really means, and under what timeframe.  For example, you can put up to $250k into a regular bank account earning 0.1% interest, and that money will be insured by the US federal government.  However, it will loose value every single year at the rate of inflation.  After 10 years about a quarter of your money will be effectively gone.  It's like a bucket with a small hole drilled into the bottom.  Drip-drip-drip.

US Treasury bonds are also frequently referred to as the most "safe" place to put your money, but at current yields they aren't much better than the what you get from the bank account mentioned above. 

unfortunately, if you are asking "where can I store my money where I can be certain it won't loose any of its value" there aren't many options in today's day and age.  That isn't to say you shouldn't keep an EF - most people should  But understand that keeping very large amounts in cash (or cash equivalents) will cost you because of inflation. 

Bob W

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Re: Emergency Fund Or Savings in IRA ???
« Reply #3 on: October 07, 2014, 08:54:57 AM »
Are you in debt?  Do you have credit cards?  What is the amount you owe and what is your current limit on the cards?

heybro

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Re: Emergency Fund Or Savings in IRA ???
« Reply #4 on: October 07, 2014, 05:05:26 PM »
Oh my, I may not have my beard yet but this stubble has no credit cards, thank you Sir!

Bob W

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Re: Emergency Fund Or Savings in IRA ???
« Reply #5 on: October 08, 2014, 10:15:21 AM »
Oh my, I may not have my beard yet but this stubble has no credit cards, thank you Sir!

Good for you/bad for you.  Get you some high limit high payout credit cards (see various posts on this).  You can scam the banks while they act as your backstop in case of emergency.   Then put all your cash into Vanguard 500 funds.   Yes markets will go down this year or next or the year after.  So just figure that into your perceived emergency fund need and add 25-25% extra.   Label it "emergency fund" and call it good.

Here's the math.   Having 10,000 in a near zero emergency fund will be worth close to 10K in 50 years.   Putting the 10K into a 500 fund should come to well over 500K in 50 years.   So your real choice is do I want 500K or 10K in 50 years?

True emergencies are so rare after all.   Most things are known or planned for.  Furnaces go out,  cars are wrecked,  jobs are lost,  people are injured.  These are known future events.  You won't know when of course and I guess this is why the "emergency" concept hangs on them.   Better to consider them likely to happen and keep on investing with the knowledge you have plenty of credit lines to draw on immediately and lots of investment stache if needed.

The main thing is to save/invest like a mad man.  Don't even keep money in a bank checking account.  Use the float on your cards and transfer money to your checking once a month to pay bills.

Cheddar Stacker

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Re: Emergency Fund Or Savings in IRA ???
« Reply #6 on: October 08, 2014, 10:21:52 AM »
For what purpose? Is it still acting as an EF, because if so an IRA is a bad place to put it. If you want to save for retirement, use an IRA and invest it properly. If you want access to safe funds for an emergency, hold some cash in savings or CD's.

Gin1984

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Re: Emergency Fund Or Savings in IRA ???
« Reply #7 on: October 08, 2014, 10:56:22 AM »
For what purpose? Is it still acting as an EF, because if so an IRA is a bad place to put it. If you want to save for retirement, use an IRA and invest it properly. If you want access to safe funds for an emergency, hold some cash in savings or CD's.
I am not so sure about that.  I can't see an argument against putting my EF in my Roth, since I have room.  I'd like to hear one though.

Cheddar Stacker

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Re: Emergency Fund Or Savings in IRA ???
« Reply #8 on: October 08, 2014, 11:48:00 AM »
For what purpose? Is it still acting as an EF, because if so an IRA is a bad place to put it. If you want to save for retirement, use an IRA and invest it properly. If you want access to safe funds for an emergency, hold some cash in savings or CD's.
I am not so sure about that.  I can't see an argument against putting my EF in my Roth, since I have room.  I'd like to hear one though.

Good point Gin1984. A few thoughts:

1) OP wrote IRA. I assumed T.IRA, but I did briefly consider R.IRA. I should've clarified in my reply, but I was being lazy.
2) I prefer to invest and not carry much at all in EF, so maybe I'm not the person to properly answer this question.
3) The only argument I've heard against using Roth for EF is you "lose" that annual contribution space. It's an opportunity cost. You are limited to the annual contribution each year. When you draw out Roth funds you are essentially depleting the Roth principal which decreases your future eligible funds pre 59.5, and it also decreases your future earning potential within the Roth.

If I used a Roth, and carried a large EF, I would consider putting the EF in the Roth. But if in that situation I actually had an emergency, I would likely just put it on a credit card, then pay off that credit card with my HELOC, so I wouldn't actually use the Roth funds anyway.

Bob W

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Re: Emergency Fund Or Savings in IRA ???
« Reply #9 on: October 13, 2014, 07:59:19 AM »
Many financial gurus suggest emergency funds.  They often state to have 6 months worth of income in an EF.  For many people that would equal 50K or more.  That is a huge amount of money to have sitting around doing no work for you.   

Whether you invest the money via an IRA, 401K or just buy some damn good stocks matters little to me.   Just don't have it sitting around doing no work for you.

I think the concept of an EF is more relevant to someone with substantial credit card or other debt.  Debt free not so much.   

The important concept is to reduce expenses and to increase investments like crazy.  Let's not get too hung up on the details until we are at the 50% savings on income level.  At that point an EF is completely unneeded. 


NP

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Re: Emergency Fund Or Savings in IRA ???
« Reply #10 on: October 13, 2014, 11:07:25 AM »
Here's what we do, which I'm sure isn't suitable for everyone's situation, but it's some food for thought at least:

For convenience and easy access we have one third of our emergency funds (2 months' living expenses) in a combination of bank accounts and physical cash. (Cash is cheap considering current interest rates and it's available even during a power outage.) We have no debt so we could substitute credit cards for this portion of our EF but we've chosen peace of mind: cash and bank accounts are less likely to be canceled or blocked due to fraud etc.

The remaining two thirds is in cheap balanced funds of moderate allocation (~ 65% stock) in taxable accounts. However, I doubled the value of these funds because I expect they might lose up to 50% of their value due to market fluctuations. This allocation is split between two reputable financial providers, just in case one has temporary difficulties (IT infrastructure hacked, for example) and we'd be delayed accessing our emergency funds at the worst moment.

The rest of our investments (taxable and tax-advantaged) is in a complicated and aggressive portfolio that I expect will outperform the mentioned balanced funds by a small to moderate amount in the very long term. By increasing our EF allocation to compensate for the expected 50% drawdown, we forgo the extra gain of the aggressive portfolio on that amount, but it still seems better than using very conservative, low yield investments in the current environment. If interest rates of conservative options (CDs, short term bonds etc.) rise significantly, we'll rethink our EF policy.

With an even higher safety margin (because the maximum likely drawdown of our aggressive portfolio is higher than 50%) it would be possible to fold the investment part of our EF into our regular investments. However, the simplicity of the two balanced funds gives peace of mind: If I'm incapacitated during an emergency, my wife, who's less experienced in managing an investment portfolio, won't have the extra stress of figuring out how much money to withdraw from which of the many funds.

Long story short: I think it's a good idea to find a way to use some of your investments as part of your emergency fund because risky investments are the only thing that provides a reasonable return these days.

I wouldn't say that an EF is unneeded: it really depends on how much and what sort of risk you're comfortable with. We don't mind having a very aggressive, well diversified long term portfolio as the risk can be relatively well understood, but we want to reduce our exposure to non-financial risks, like infrastructure etc. If you save like crazy, as has been suggested and I second that recommendation, your EF will soon be tiny compared to your investments, therefore you can easily afford to have an EF and lose just a little bit on returns.