Author Topic: Emergency fund question  (Read 1132 times)

MikeO

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Emergency fund question
« on: April 28, 2019, 02:16:01 PM »
ok, I've looked around on the web and even on this forum, I found numerous  discussions on this topic "should I invest my emergency fund or keep it in cash" most topics on here are from years ago, and mostly reference 1% or less interest.


so here's my situation:

$590,000 invested in retirement accounts  (83% stocks, 8% bonds, 7% reits, 2% cash) plus $50,000 in a taxable brokerage account (with similar allocations).

$28,900 in cash, in two high interest FDIC savings accounts.  One pays ($18,400) 2.48% the other ($10,500) 2%. (the reason for two, the latter was offering me $500 to open it with 10k, so I took the free money at 2% and I've now held it long enough to close the account and keep my money)

I have 2 credit cards with a combined $45,000 credit. I use one card almost exclusively to pay for everything and get 2% cash back, the other card i use only for my cell phone bill just to keep a revolving credit on it each month, all bills are paid at the end of each month, I never pay interest. the rate is ridiculous @ 24% despite my 820 credit score.

We try to live off of about $50,000 per year, of that $34,000 is for basics (mortgage, car payment, utilities, food, etc)  We hold about $5,000 in our checking from month to month.  paychecks go in, bills come out and anything above 5K at the end of each month I move to my brokerage account to be invested.

and lastly our goals:  I am 46, wife is 43, investing like crazy to FIRE by 55.  new car paid off by 50, house paid off by 55. 

Now that that is out of the way....my idea is simply, why do I need to hold the $28k in cash?  If I invest it into my taxable brokerage, it'll grow faster than the 2.48% (which is a great percent for an FDIC savings account to be quite honest) and I'll still have access to a lot of money in case of an emergency.  If need be I can always charge the expense to my credit card and then liquidate some funds from the taxable account to pay the credit card bill.

In my Roth's (mine and my wife's) we have a combined $100,000  in contributions that we could take out if necessary. 


we have life insurance, we have disability insurance through my employer.

anyone have an opinion on basically deleting my high interest savings "emergency fund" to put it in my taxable brokerage account?


socalrider

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Re: Emergency fund question
« Reply #1 on: April 28, 2019, 03:30:04 PM »
Where are you getting that FDIC rate?  That's much better than anything I've seen. 

First post, so I'll humbly defer to others on offering actual advice! 

MikeO

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Re: Emergency fund question
« Reply #2 on: April 28, 2019, 03:47:05 PM »
Banesco USA bank, pays 2.48%

Capitol one pays 2.0.


Telecaster

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Re: Emergency fund question
« Reply #3 on: April 28, 2019, 03:51:37 PM »
Now that that is out of the way....my idea is simply, why do I need to hold the $28k in cash?

You don't.   The reason why people say to keep your e-fund in cash is that the stock market could drop 20-50% at any time, and therefore, you e-fund could be reduced by 20-50%.  Which is true.   

But in your case, who cares?   In case of a stock market drop you'd have a $14K e-fund, which provides a good amount of security by itself, plus your brokerage, then all the Roth contributions, and if that not enough, you could tap the HELOC or something. 

So, put the money to work in the market. 

mtnrider

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Re: Emergency fund question
« Reply #4 on: April 28, 2019, 05:06:14 PM »

I'd read this https://www.bogleheads.org/wiki/Tax-efficient_fund_placement.

Considering how much you have invested already, it might be a reasonable risk to hold mostly stocks in your taxable emergency fund.  You might also consider I Bonds, although you probably only have until the end of April until the low fixed rates are back.

MikeO

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Re: Emergency fund question
« Reply #5 on: April 28, 2019, 05:33:06 PM »
I've read a few articles about fund placement for tax efficiency....

My reits are held in our Roth IRAs and i was thinking of buying a vanguard total market index fund with this 28k. 

As my portfolio gets bigger  my methodology changes. I've had the emergency fund for years, but now I'm looking at my holdings and started thinking, "hey I've got accessable cash within my portfolio" that's what made me start looking at whether or not keeping the cash in a savings account was still a good decision.  It does make decent interest but obviously not as much as it will in stocks.  And as was stated even if i got hit with a crash at the same time as a job loss, there would still be plenty of accessable money to help out, just means I'd have to take the loss and work longer.  There's obvious risk there but i don't think it's that's bad. 

Telecaster

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Re: Emergency fund question
« Reply #6 on: April 28, 2019, 05:52:34 PM »
I've read a few articles about fund placement for tax efficiency....

My reits are held in our Roth IRAs and i was thinking of buying a vanguard total market index fund with this 28k. 

As my portfolio gets bigger  my methodology changes. I've had the emergency fund for years, but now I'm looking at my holdings and started thinking, "hey I've got accessable cash within my portfolio" that's what made me start looking at whether or not keeping the cash in a savings account was still a good decision.  It does make decent interest but obviously not as much as it will in stocks.  And as was stated even if i got hit with a crash at the same time as a job loss, there would still be plenty of accessable money to help out, just means I'd have to take the loss and work longer.  There's obvious risk there but i don't think it's that's bad.

Here's a other risk you're taking by not moving to stocks:  You have to work longer.  VTSAX has gone up 2.5 times in the last seven years.    That $28,000 would have become $73,000 or something.    So you actually got safer because you had more liquid asserts. 

You won't always get that kind of performance, obviously but you can see why there is  benefit to moving away from holding large amounts of cash as soon as you feel comfortable. 

Enigma

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Re: Emergency fund question
« Reply #7 on: April 30, 2019, 09:08:28 AM »
If the mortgage or car payment is above 5% interest I would pay those off first and increase your income monthly in the process.  Other than that I also do not keep a high EF.  Mostly because my monthly income allows me the ability to just stop investing and thus create funds needed to cover emergencies.

Your credit cards that are paid in full every month help leverage the time needed and the time it takes to cover expenses.  (so do mine)

doingfine

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Re: Emergency fund question
« Reply #8 on: April 30, 2019, 09:17:06 AM »
I tend to hold enough in cash in order to meet most obligations due in the next 6 months or so (taxes, insurance, etc.), which for us tends to work out to about $20k give or take. Mostly this is to just have an operating cushion which slightly simplifies transactions for me, and the fact that it just works better with my budgeting system to have cash needed in the short-term not fluctuating in value. Everything over and above that gets invested which is a second tier of emergency fund.

Honestly, I don't think it makes any material difference one way or the other. $20k isn't going to be much of a drag on a portfolio over the long term.

SaucyAussie

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Re: Emergency fund question
« Reply #9 on: April 30, 2019, 10:05:55 AM »
I hope I'm allowed to post YouTube links.  This came out just a couple of weeks ago.
https://www.youtube.com/watch?v=tFpJrqp0l_4

MikeO

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Re: Emergency fund question
« Reply #10 on: April 30, 2019, 10:10:07 AM »
If the mortgage or car payment is above 5% interest I would pay those off first

both are low interest, my house is 3.75% and my truck is 3.5%.  I figure both of those are good numbers to just keep making the payment.  by my own estimation, the truck payoff will coincide with me being FI and I don't plan on quitting once I am FI because I enjoy my job.  I figured I'd cut  back to no overtime (I work about 800 hours per year of overtime), give up the supervisor position (a small pay cut) and take as much time off as I want while putting extra towards the house.    FI would allow me to continue to make the payments but if I own it outright that's just reduces my required monthly income.  Unless tax laws change I don't get any real benefit from keeping the mortgage right now (no write offs, no itemization). 

MikeO

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Re: Emergency fund question
« Reply #11 on: April 30, 2019, 10:23:20 AM »
I hope I'm allowed to post YouTube links.  This came out just a couple of weeks ago.
https://www.youtube.com/watch?v=tFpJrqp0l_4

Thanks for sharing!

I'm myself moving from the "basic" to the I don't want to say expert so I'll just say "not basic" saver/investor etc.  so as my savings has grown, I am seeing a need to re-evaluate this emergency fund.  by the video, I'm thinking the exact same way he explained it.
« Last Edit: April 30, 2019, 10:24:54 AM by MikeO »

Dare2Dream

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Re: Emergency fund question
« Reply #12 on: May 01, 2019, 12:11:31 PM »

IMHO emergency funds are not needed for a dual earning household that is fiscally responsible.  If one person becomes unemployed (unlikely in the current economy) you can postpone retirement savings and live off a single salary.  If both people become unemployed (highly unlikely) you can use credit, family, savings, borrow from 401k, HELOC, etc.  There are tons of options.  Putting $20K in a 2% MM, CD or low risk investment can add up over time.

I'm a red panda

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Re: Emergency fund question
« Reply #13 on: May 01, 2019, 12:31:28 PM »
IMO, an emergency fund is a tool for someone who is just beginning to save.

If you hold your money in a taxable account, it can be accessed in an emergency in just a few days.

appleshampooid

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Re: Emergency fund question
« Reply #14 on: May 01, 2019, 12:46:20 PM »
IMO, an emergency fund is a tool for someone who is just beginning to save.

If you hold your money in a taxable account, it can be accessed in an emergency in just a few days.
This access will come with tax consequences, or selling right in the middle of a crash (which is likely to happen right when both spouses become unemployed). Neither of which are desirable.

When we were dual-income, I still kept about 3 months expenses in a MM fund. Now that my wife works out of the home, I've increased it a bit.

But I definitely wouldn't keep a set percentage of assets in cash. That seems weird, as your assets keep growing your spending should remain flat, adjusted for inflation (this is MMM after all). So I base it off of real expenses, not a percentage of net worth.

ysette9

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Re: Emergency fund question
« Reply #15 on: May 01, 2019, 01:39:12 PM »
For the emergency fund question I like to do a mental exercise and think through what are reasonable emergency scenarios and how would I respond.

A job loss is an easy one. We are dual income so we would just adjust our savings downward.

A major expense* like house repair or helping someone out or heavens-even-knows-what: we would probably cash-flow by diverting savings temporarily or put it on the CC and pay it off in the same manner quickly.

Iím tired so my creativity is failing me. If whatever emergency popped up we would first fund from diverting current savings flow, then we could put something on the credit card, then we could use up the 2-3 months cash we carry in checking, then we could start selling some taxable investments after tapping all of the other levers.

But really, if you are dual income with a high savings rate you have a ton of buffer built in already.




* what would be a major unexpected expense? An earthquake flattens our house and we have to pay the high deductible before insurance kicks in is a possibility. For most other large things we are insured through life, disability, homeowners, umbrella, or car insurance.


Telecaster

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Re: Emergency fund question
« Reply #16 on: May 01, 2019, 01:55:41 PM »

This access will come with tax consequences, or selling right in the middle of a crash (which is likely to happen right when both spouses become unemployed). Neither of which are desirable.

Tax consequences are awesome.   That's proof you made money on your e-fund, right?   If you paid tax you did something right.  The other part is true enough but only if the crash is big enough that it drops your available funds below your comfort level.  In the example I used above,  if the $28K e-fund had been invested in VTSAX, it would have become $73,000 or something.   Now let's say there is a crash, stocks fall by half, both of you lose your jobs, and that $73,000 just became $36,500.   You are still better off having been in stocks.  And in fact are even more secure. 

That's why @I'm a red panda and I said that e-funds are for new investors, who don't yet have enough cushion for a stock market drop.   Once you do, then there is no real reason to have one.   I do keep about a month or so expenses in cash to handle irregular expenses (car needs a new set of tires, water heater goes out), but those aren't emergencies.