Author Topic: Emergency fund  (Read 5520 times)

69mach351

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Emergency fund
« on: September 27, 2016, 12:28:54 PM »
Question - What does everyone do with their "emergency fund"?  I know that it should be readily available in case of an emergency, but at the same time, it can be a fair amount of money - shouldn't there be a way to make it work for you?

I keep the bulk of it in a checking account (pays 2.5% on the first $15k), but there is a portion that just sits there getting no interest, and getting less and less valuable as the years go on.  My comfort level isn't to the point where I can invest this money real long term or in something that has a decent amount of volitility (I would hate to suddenly need it and it only be worth a fraction of what it was).

Any thoughts or ideas?

katsiki

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Re: Emergency fund
« Reply #1 on: September 27, 2016, 12:36:31 PM »
Best solution I have found is multiple 2-3% interest bearing accounts.  CDs are not helpful much.

69mach351

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Re: Emergency fund
« Reply #2 on: September 27, 2016, 12:43:44 PM »
Best solution I have found is multiple 2-3% interest bearing accounts.  CDs are not helpful much.
Not really an option, at least not where I am currently banking.  One high interest account per person.  I guess I can shop around and see what other ones are out there.

Bourbon

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Re: Emergency fund
« Reply #3 on: September 27, 2016, 12:46:22 PM »
Best solution I have found is multiple 2-3% interest bearing accounts.  CDs are not helpful much.
Not really an option, at least not where I am currently banking.  One high interest account per person.  I guess I can shop around and see what other ones are out there.

I've used this website in the past to find "higher" interest rate paying online accounts for idle cash - https://www.depositaccounts.com/

Retire-Canada

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Re: Emergency fund
« Reply #4 on: September 27, 2016, 12:50:24 PM »
Any thoughts or ideas?

I use a line of credit not tied to home equity as my EF. That way I keep 100% of my money invested and earning a return. Holding cash in the off chance I may need it at some point one day maybe perhaps is too expensive in my opinion.

MasterStache

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Re: Emergency fund
« Reply #5 on: September 27, 2016, 01:06:06 PM »
I keep about 1K in a savings account. We have taxable investment accounts, Roth principle, CC's, even HSA funds, etc. that we can tap into should something drastic happen. I believe MMM covered this in a springy debt vs cash cushion article? I've never really liked having loads of money just sitting in low interest bearing accounts for the "what ifs."

69mach351

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Re: Emergency fund
« Reply #6 on: September 27, 2016, 01:30:09 PM »
Bourbon - Thanks.  I will check out the site.

Retire - Canada - I like the idea.  I am not sure what my options would be on something like that (I am in the US).  I ran a quick search and only found a line tied to home equity. 

BeginnerStache - I am on the fence about that.  I would want to have more than $1k, but what makes me nervous would be to put $10k (for example) in a taxable account, only to have it drop to $9k when I actually need it.  Maybe that is something that I just need to get over.  Maybe if I build it up over time instead of doing a dump, I would feel better about it.

Retire-Canada

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Re: Emergency fund
« Reply #7 on: September 27, 2016, 01:30:58 PM »
I keep about 1K in a savings account. We have taxable investment accounts, Roth principle, CC's, even HSA funds, etc. that we can tap into should something drastic happen. I believe MMM covered this in a springy debt vs cash cushion article? I've never really liked having loads of money just sitting in low interest bearing accounts for the "what ifs."

Yes. Link for ease of reference: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

des999

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Re: Emergency fund
« Reply #8 on: September 27, 2016, 05:49:45 PM »
I actually posted something in a different area about my use of an emergency fund and how that might change as I transition into part time work.  I currently only keep 1-2 months of expenses at any given time.  I do have a pretty stable job at large mega corp, but I just hate the idea of putting money in something and getting 1-2% return.

As I transition into part time, I will need cash that I can get to incase of unforeseen expenses, so that I don't have to increase income to pay for them, and potentially go over the ACA subsidy cliff.  My plan is to use Roth contributions and then have some other savings, such as a brokerage account or something, I still don't plan to put it into a money market or savings account.


SpareChange

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Re: Emergency fund
« Reply #9 on: September 28, 2016, 10:15:20 AM »
I use a line of credit not tied to home equity as my EF. That way I keep 100% of my money invested and earning a return. Holding cash in the off chance I may need it at some point one day maybe perhaps is too expensive in my opinion.

This is largely how I approach it at this point. I use my brokerage account for checking, so I had margin added to my account. It acts as overdraft protection. I also have a CC available. Could sell etfs or take out a 401k loan (my administrator is very generous on terms). Just depends. Granted, I have no debt, don't own a home, have a fairly high savings rate, and a very stable job, so personal circumstances affect one's strategy.

 

k9

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Re: Emergency fund
« Reply #10 on: September 28, 2016, 04:31:40 PM »
I wouldn't want to overthink my emergency fund's implementation. Buy STT or T bills rather than staying in pure cash, or jump to CDs / saving accounts for a little more return if you can.

Yes, you'll earn less than inflation, which will erode your EF decade after decade. So what? We're talking about, what ? 6 months to 1 year worth of *basic* expenses. Even if you earn inflation - 1%, after 20 years you'll still have 80% of that sum, which means you'll have only lost the equivalent of 1.2 to 2.5 months worth of basic expenses (the equivalent of about 0.5% of your total stash). And that's only if you didn't have an emergency in that time frame, which is *highly* unlikely. And that's only if ZIRP continues for the next 20 years, which is plausible but not guaranteed. So don't think too hard about it, it won't change the course of your life.

Retire-Canada

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Re: Emergency fund
« Reply #11 on: September 28, 2016, 05:03:55 PM »
I wouldn't want to overthink my emergency fund's implementation. Buy STT or T bills rather than staying in pure cash, or jump to CDs / saving accounts for a little more return if you can.

Yes, you'll earn less than inflation, which will erode your EF decade after decade. So what? We're talking about, what ? 6 months to 1 year worth of *basic* expenses. Even if you earn inflation - 1%, after 20 years you'll still have 80% of that sum, which means you'll have only lost the equivalent of 1.2 to 2.5 months worth of basic expenses (the equivalent of about 0.5% of your total stash). And that's only if you didn't have an emergency in that time frame, which is *highly* unlikely. And that's only if ZIRP continues for the next 20 years, which is plausible but not guaranteed. So don't think too hard about it, it won't change the course of your life.

Say 6 months EF= 50% of $40K = $20K  losing 1% to inflation per year [equals $16.4K after 20yrs] vs. investing that $20K and getting a 6% return after inflation [equals $64.1K after 20yrs]. That's $64.1K - $16.4K = $47.7K or a year of living expenses. Certainly nothing to sneeze about.

« Last Edit: September 28, 2016, 05:05:43 PM by Retire-Canada »

Seppia

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Re: Emergency fund
« Reply #12 on: September 29, 2016, 03:39:05 AM »
I keep around two years expenses in cash. I personally do not care if it doesn't return any money, because today inflation is basically zero or even slightly negative (I'm in Italy).

Some of the reasons why one might have to tap into an emergency fund are correlated with lower access to credit (i.e. loss of job), so I feel safer with some old school cash.

If there was a dramatic drop in the markets (40%+) and I did not lose my job, I would probably throw some of that cash in the market.

Primm

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Re: Emergency fund
« Reply #13 on: September 29, 2016, 05:57:55 AM »
Mine is in my mortgage, which can be redrawn at any time. Means I don't pay any interest on the part that is in excess of the amount I have to pay, and because technically I don't earn interest it's not taxable.

So the equivalent of about 4% after tax or something like that. Not a bad rate of return.

2buttons

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Re: Emergency fund
« Reply #14 on: September 29, 2016, 01:11:36 PM »
I am at 4 months in cash in 1% return savings account and 2 months in taxable index funds. Once taxable grows significantly, I may start to move some from cash to index funds, but for now I like the cushion.

DrF

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Re: Emergency fund
« Reply #15 on: September 29, 2016, 01:38:54 PM »
Here're the best arguments I've come across to always have your emergency fund invested.

I don't see how this contradicts my point. If anything, you're providing evidence for it. You'd rather lock-in a loss, to avoid an admittedly small chance of an equal loss. If the opportunity cost seems nil, then so should the risk you're trying to mitigate.
Whether these "losses" are equal depends on when the emergency takes place and where the market is at that time - both unknowable.  I would rather give up a small return each year for the confidence that I'm not forced to liquidate positions when it isn't favorable to do so.  Half of my emergency fund is in VFSTX and included in my bond allocation.  It's not in a savings account, it yields 1.75%, and it also serves to mitigate sequence of returns risk - i can spend it for regular expenses if I don't want to sell equities.

The consideration the OP needs to make is what happens if the market tanks next year and an emergency requiring $10K arises.  This is the basic rationale for maintaining an emergency fund.  Weigh that against opportunity cost, not projected returns for >10 years.

Seriously, it's just math. I choose 10 years to keep the math easy, but here's the year 2000-current. A historically bad time for stocks. Left side is 100% stocks, right side is a 1% savings account:



Scenario A: We put $100 in our Emergency Fund, and have a $50 emergency in 2008.
Balance during emergency: $26 for stocks, $59 for savings account. A relative difference of $33 in favor of the savings account.
Balance today: $70 for stocks, $64 for savings account. A relative difference of $6 in favor of stocks.



Scenario B: We put $100 in our Emergency Fund, and have no emergencies.
Balance today: $207 for stocks, $117 for savings account. A relative difference of $90 in favor of stocks.



Scenario C: We put $100 in our Emergency Fund, and have a $50 emergency in 2002, and another $50 emergency in 2008.
Balance during 2002 emergency: $13 for stocks, $53 for savings account. A relative difference of $40 in favor of the savings account.
Balance during 2008 emergency: -$34 for stocks, $6 for savings account. A relative difference of $40 in favor of the savings account.
We remove $100 from our portfolio to replenish the Emergency Fund.
Balance today: $118 for stocks, $113 for savings account. A relative difference of $5 in favor of stocks.

"You'd rather lock-in a 50% loss (by going with the savings account in the almost-certain Scenario B), to avoid an admittedly small chance of only earning 5% (worst-case scenario C with stocks)?"

Even if we only look at the balance during an emergency, the savings account is only up $40. So you're locking in an almost certain loss of $90, so you can avoid the temporary loss of $40? There is no mathematical justification I can see. Only an emotional one.



And here's another one he posted.



I keep just enough in the bank to pay next month's bills. After that, everything is invested. Here's a fun chart I made in another thread to explain why I'm 100% stocks:

Emergency fund - break even calculation

After 7 years, you hit the break-even point. After that point, even if stocks crash 50%, you'll still be ahead by investing it vs keeping it in cash. In that sense, a cash emergency fund really has a limited shelf-life of usefulness:



(Green means you were better off investing the money, even after the crash)

TheViking

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Re: Emergency fund
« Reply #16 on: September 29, 2016, 01:49:23 PM »
Nice post, makes sense to me. :)

k9

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Re: Emergency fund
« Reply #17 on: September 30, 2016, 03:26:43 AM »
Say 6 months EF= 50% of $40K = $20K  losing 1% to inflation per year [equals $16.4K after 20yrs] vs. investing that $20K and getting a 6% return after inflation [equals $64.1K after 20yrs]. That's $64.1K - $16.4K = $47.7K or a year of living expenses. Certainly nothing to sneeze about.
Apples-to-orange spotted ;)! We're talking about money that has to be readily available at anytime. If somebody offerred me a guaranteed return of 6% after inflation with money readily available at any time, I'd be very suspicious.

Maybe OP doesn't need an EF at all, and investing the whole money is a better option, but then we're not answering "where can I put my emergency money" anymore, but, rather, "do I need emergency money at all". But remember even the most talentuous stock bug ever (Buffett) advises for a 10% bonds / 90% stocks allocation, so maybe the "no-EF at all" school-of-thought is a little too hardcore for most human beings.

Le Poisson

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Re: Emergency fund
« Reply #18 on: September 30, 2016, 05:13:43 AM »
We have $120K available space in lines of credit. We do not consider that an EF.

We also have about $13,000 invested in TFSA's (Roth).

Our EF strategy is that if we need the funds, we peel off the needed cash from the Lines of credit, then transfer from the TFSA to avoid interest charges. This way we have instant access to cash, but the money is earning at market rates while it sits. If we ever need the cash, we can top up the TFSA in the following calendar year without penalty.

So far good budgeting (not great, just good - we kinda suck at it) has avoided a need to dip into the fund.

markbike528CBX

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Re: Emergency fund
« Reply #19 on: September 30, 2016, 06:33:49 AM »
Past:  25k CD/savings.   + 30K physical gold

Now: 30K physical gold, using the rest for DW student loans (shhh..  Birthday present )

While the gold is a drag on returns, I expect it to be less of a drag than CD/cash, over what hopefully will be a long emergency-free time span.

NorthernDreamer

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Re: Emergency fund
« Reply #20 on: October 04, 2016, 10:53:01 AM »
I used to feel I "needed" $10,000-15,000 sitting in our "high interest" (1.25%) savings account just in case. My husband tried for years to convince me I was wasting the potential investment returns. Thankfully I finally woke up. Now we usually keep around $2,000-4,000 in our savings and chequing accounts (fluctuates depending on the time of the month). We have a $30,000 line of credit (not tied to our home equity) that we have never had to dip into but is there, just in case. And we have a combined total of $26,000 in our TFSAs that would be our last resort, but we could withdraw without penalty. Plus our credit cards each have a limit of $10,000 - we pay them off each month, and never spend close to that amount, but they would be a quick way to access credit fast if needed.

Telecaster

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Re: Emergency fund
« Reply #21 on: October 04, 2016, 11:18:43 AM »
Maybe OP doesn't need an EF at all, and investing the whole money is a better option, but then we're not answering "where can I put my emergency money" anymore, but, rather, "do I need emergency money at all". But remember even the most talentuous stock bug ever (Buffett) advises for a 10% bonds / 90% stocks allocation, so maybe the "no-EF at all" school-of-thought is a little too hardcore for most human beings.

The answer to the question "where should I put my emergency money?" is no where.   The explanation to the answer is "because you don't need one."

Here's a thought experiment:  Let's say your e-fund is $10,000 and you have a $10,000 emergency.  Great!  Everything worked out perfectly.   Now what do you do?     Do you sell stocks to replentish the e-fund?  If that's the case, then stocks *are* functionally your e-fund anyway.  Or do you slowly save up and replentish the e-fund over time?  If that's the case, then you are going without an e-fund for a period of time, which implies you don't really need one.   

 An e-fund is an example of a common investor mistake, namely exchanging a low probability risk for a high probability risk.  Interest Compound laid it out really well (as usual).   Even if you have an emergency at the worst possible time, the vast majority of the time you are still better off in stocks. 

69mach351

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Re: Emergency fund
« Reply #22 on: October 04, 2016, 12:47:58 PM »
I really appreciate all of the discussion on the topic.

I have been sticking a little more into investments while trying to lower the threshold of what I am comfortable with.  The HELOC is an option that I may look at as there are some local institutions that I deal with that have great rates if I should ever need it.


zephyr911

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Re: Emergency fund
« Reply #23 on: October 04, 2016, 01:11:21 PM »
I don't have one. Not even an extra buffer in checking.

Credit card with <20K limit for emergencies = 30-60 days of float at 0%. If I can't cash-flow it out of paychecks, then: refi (promo 0%, etc) or liquidate an investment.

Yes, this means I pay some interest, but it's a tiny fraction of the increased investment returns on the equivalent amount. Plus, I find having less cash on hand enhances my spending discipline.

Djeayzonne

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Re: Emergency fund
« Reply #24 on: October 04, 2016, 01:45:55 PM »
I agree with not having nearly zero emergency fund, but I am curious what you guys say about those of us without escrow accounts.

I have no escrow and high property taxes. I just set aside 800 to 1000 a month in a separate savings account, which basically functions as my self-managed escrow I guess.
I hate just having that money just sit there, but can't really think of anything else to do with it.

Laserjet3051

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Re: Emergency fund
« Reply #25 on: October 05, 2016, 02:11:45 PM »
Maybe OP doesn't need an EF at all, and investing the whole money is a better option, but then we're not answering "where can I put my emergency money" anymore, but, rather, "do I need emergency money at all". But remember even the most talentuous stock bug ever (Buffett) advises for a 10% bonds / 90% stocks allocation, so maybe the "no-EF at all" school-of-thought is a little too hardcore for most human beings.

The answer to the question "where should I put my emergency money?" is no where.   The explanation to the answer is "because you don't need one."

Here's a thought experiment:  Let's say your e-fund is $10,000 and you have a $10,000 emergency.  Great!  Everything worked out perfectly.   Now what do you do?     Do you sell stocks to replentish the e-fund?  If that's the case, then stocks *are* functionally your e-fund anyway.  Or do you slowly save up and replentish the e-fund over time?  If that's the case, then you are going without an e-fund for a period of time, which implies you don't really need one.   

 An e-fund is an example of a common investor mistake, namely exchanging a low probability risk for a high probability risk.  Interest Compound laid it out really well (as usual).   Even if you have an emergency at the worst possible time, the vast majority of the time you are still better off in stocks.

Really? The hubris here is quite striking. Good luck.

Gin1984

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Re: Emergency fund
« Reply #26 on: October 05, 2016, 02:17:32 PM »
I agree with not having nearly zero emergency fund, but I am curious what you guys say about those of us without escrow accounts.

I have no escrow and high property taxes. I just set aside 800 to 1000 a month in a separate savings account, which basically functions as my self-managed escrow I guess.
I hate just having that money just sit there, but can't really think of anything else to do with it.
Put aside money monthly for any annual expenses, UNLESS you can pay all of your annual expenses out of one month, even then I'd still put money aside monthly.

k9

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Re: Emergency fund
« Reply #27 on: October 05, 2016, 02:40:55 PM »
The answer to the question "where should I put my emergency money?" is no where.   The explanation to the answer is "because you don't need one."

Here's a thought experiment:  Let's say your e-fund is $10,000 and you have a $10,000 emergency.  Great!  Everything worked out perfectly.   Now what do you do?     Do you sell stocks to replentish the e-fund?  If that's the case, then stocks *are* functionally your e-fund anyway.  Or do you slowly save up and replentish the e-fund over time?  If that's the case, then you are going without an e-fund for a period of time, which implies you don't really need one.   
You're overthinking it. We're talking about 3% of your overall wealth (6 to 12 months, let's say 9, which is 3% of your 25 years of expenses). I'm pretty sure a 97/3 stocks/cash AA won't have a very different return as a 100/0 one, no matter what happens.

I didn't take the time to include an excel screenshot, sorry about that, but I ran CI's numbers, with two allocations :

  • one 100% stock allocation, with a 1,5% emergency (i.e half of my 3% emergency fund) at the worse possible time, in 2008
  • one 97/3% stock/cash allocation, with a 1,5% emergency in 2008 again

Here are the amazing results :

With a 100% AA, you end up in 2016 with 203% of your 2000's original stash.
With a 97/3% AA, you end up in 2016 with 203% of your 2000's original stash.

Wow, sure, you convinced me: the no-EF solution is clearly better ;)

Telecaster

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Re: Emergency fund
« Reply #28 on: October 05, 2016, 05:46:49 PM »

Here are the amazing results :

With a 100% AA, you end up in 2016 with 203% of your 2000's original stash.
With a 97/3% AA, you end up in 2016 with 203% of your 2000's original stash.

Wow, sure, you convinced me: the no-EF solution is clearly better ;)

Well, there you go.   Even if you have an emergency at the worst possible time--that is, the time when the e-fund provides maximum protection--the e-fund does absolutely nothing for you.   Now you've established the e-fund does nothing, the argument in favor of having one is....what, exactly?   

If the e-fund provides no benefit in the times they are supposed to help the most, when exactly do they help?   A good guess based on your example is "pretty much never." 

Don't get me wrong.  It is your money.  You can put it in gold bars or Arabian stallions if you like.  But  maintaining an e-fund is common financial advice, and it is bad financial advice most of the time.  And many (most?) people don't realize that it is bad advice, and maintain an e-fund because they think they are supposed to and believe it provides some benefit.     I can see that an e-fund could make sense for a younger investor just starting out, and some  other special circumstances, but as general advice?  No.  As general financial advice, no you don't need an e-fund, and no, they don't provide a benefit, as your post illustrates.   

I find this somewhat similar to the pay down the mortgage debate. Many people believe paying extra on the mortgage  is to their financial advantage, but in reality is almost never is.   It is a just a belief.  But there's nothing wrong with paying down the mortgage, as long as you understand that's a sub-optimal financial strategy.  And many people recognize it as  suboptimal, but say they don't simply want to have a mortgage, so they are paying it off.  In that case, more power to ya!  Same thing here.  If you want to have three months or thirty years expenses in cash, then knock yourself out.   But it is prudent to make a decision like that from a position of knowledge, not because "everyone says so." 





k9

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Re: Emergency fund
« Reply #29 on: October 06, 2016, 03:22:51 AM »

Here are the amazing results :

With a 100% AA, you end up in 2016 with 203% of your 2000's original stash.
With a 97/3% AA, you end up in 2016 with 203% of your 2000's original stash.

Wow, sure, you convinced me: the no-EF solution is clearly better ;)

Well, there you go.   Even if you have an emergency at the worst possible time--that is, the time when the e-fund provides maximum protection--the e-fund does absolutely nothing for you.   Now you've established the e-fund does nothing, the argument in favor of having one is....what, exactly?   

If the e-fund provides no benefit in the times they are supposed to help the most, when exactly do they help?   A good guess based on your example is "pretty much never." 

It's not plain useless: it's equivalent. I can ask you the same: now I've established the e-fund does not hurt the least, the argument in favor of not having one is....what, exactly?

Now it's up to you (or anyone), and each's situation will differ. For instance, is it tax efficient to pull money from your investments? For me, it's not. Every time I sell stocks, I have to pay a fee to my broker, a fee to the ETF provider, then pay taxes on my (potential) gain, while my savings account is tax free and has no fee. Plus, if I need the cash on a week-end, well... I have the cash on the week-end. You won't be able to do that with stocks.

But, sure, YMMV. That's my point: to each his own, but having an emergency fund won't make you richer or poorer. It is neither a good not a bad financial decision.

Quote
I find this somewhat similar to the pay down the mortgage debate. Many people believe paying extra on the mortgage  is to their financial advantage, but in reality is almost never is.
Now this is just plain wrong IMO. Why would the bank lend me money at a rate of x% if it could get a better return on the markets? When you borrow money to your bank to invest in stocks, you're betting you're better than them at evaluating the risk/return ratio of stock markets. You're litterally trying to outsmart the markets and professional investors. Hint: you won't.

So this is the same, really : a matter of personal taste. Except in specific cases, paying back your mortgage won't make you richer or poorer, on average. If it did, it would be arbitraged by the markets (your bank, primarily). Now personal situations may have an influence (e.g a very low or very high fixed-rate mortgage), but you cannot say it is always better to pay back/not pay back a mortgage.

gggggg

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Re: Emergency fund
« Reply #30 on: October 06, 2016, 08:24:43 AM »
I just keep mine simple after playing with different ideas, 10k in the bank, $500 cash at home. Every month, after paying bills, anything above the 10k in the bank, gets put into vanguard. 

DrF

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zephyr911

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Re: Emergency fund
« Reply #32 on: October 06, 2016, 08:33:41 AM »
The hubris here is quite striking.

As is the dogmatism, and the odd insistence on ignoring context and situational factors. Rate environment can, and should, affect this decision. So should relative job security, SR%, and other financial factors.

If you have a stable job, high SR, and good credit, you generally don't need an e-fund. I can't be fired except for grave malfeasance and I only spend 30-40% of my pay, so I know I can cash-flow the equivalent of several months' worth of normal expenses before incurring enough interest to offset the investment returns I'm earning on that cash. For someone in a less secure job with a low SR, and a smaller Stash, an e-fund is probably a very good idea, despite the lower returns, because of the higher risk of insolvency due to job loss or disability.

You could add a lot of other factors too. I don't question the validity of my approach for me and DW, because I've factored in these things and more, but I'd never deign to prescribe for others what should or shouldn't be done, as long as they've accurately determined their own priorities and used math to implement said priorities.