Investing your emergency fund

[El Gringo]

I'm curious what people think about this article from Betterment on investing 130% of your emergency fund: https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/?utm_content=2296

[matchewed]

I'm curious what people think about this article from Betterment on investing 130% of your emergency fund: https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/?utm_content=2296

Overly simplistic advice and may not apply to everyone everywhere (what advice wouldn't fall under that category? Don't forget to breathe?).

I don't entirely disagree but it will always depend on your various goals. As your 'stache grows I think this advice becomes easier to implement. When you have a smaller 'stache and don't have access to all the options offered by having money then having it a safe savings account makes sense IMO.

[Cyrano]

Depends on the kind of emergencies you would tap into the emergency fund for. If you will probably tap the emergency fund in the next 10 years, consider what happens if your emergency happens during a down market, forcing you to realize the loss on your investment. If you lose your job during a recession, are you OK with that?

On the other hand, if your total stash is large enough that you can invest it in something like an 80 stocks / 20% bonds allocation, and call the conservative end of that portfolio your emergency fund, that could work as long as you have ready access to the funds.

[Michread]

Been doing it for 20 years!  Read my post here: https://forum.mrmoneymustache.com/investor-alley/emergency-fund-10127/

Vanguard Wellesley would be a good place to invest your emergency fund.

[schimt]

I was wondering if the chart they presented for the results of this strategy, for every 5 year period from 1955 on, is inflation adjusted or actual value of the fund. In other words, at the end of the 5 year period, if you had a flat result with $23,337 invested and $23,337 final value, this would be erroded value due to inflation simular to holding cash in hand or does that result mean it has same purchasing power that it had when the investment was made (inflation adjusted)

I'm assuming it is not inflation adjusted, to support their strategy/argument better.

[Another Reader]

Ummmm...there's a reason it's called an "emergency" fund.  Cash, down the street at the ATM or with a debit card or check book is what you need for emergencies.  Short term reserves?  Laddered CD's work for this.  Mix a severe recession, a stock and bond market decline of 50 percent, and a job loss and see how you like having that 130 percent in Betterment's hands.

[thepokercab]

I also agree that it depends on what you think you would need an emergency fund for.  Personally, I feel like I would need to tap into my emergency fund in the event of a job loss.  We are a one income family, so I feel its important to have at least 3 months of expenses in cash to fund any type of temporary job set back.  (at least I hope it would be temporary)

It also seems to me that the market spiraling downward would correlate with a higher chance of me losing my job.  Hence, why I wouldn't want my EF fund in the market. 

I'm pretty new to the whole investing side of the things, but one concept that sticks out at me the most is diversification and having 'uncorrelated' assets.  I just view my EF as an uncorrelated asset and a part of my overall portfolio that I will tap into in the event of an emergency.  Sure, I lose potential gains on that money, but its sort of like insurance.  I'm insuring myself against a future emergency and the cost of that insurance is the market gains I'm not making on the money. 

[schimt]

Sure, I lose potential gains on that money, but its sort of like insurance.  I'm insuring myself against a future emergency and the cost of that insurance is the market gains I'm not making on the money.

I like the way you put that, some people actually insure themselves for job loss to cover their mortgage. Having an emergency fund and lossing on the gains is probably cheaper then paying for an actual insurance policy

[yahui168]

Having emotional control is probably the first rule of investing. Having my emergency fund in the market will severely ratchet up my emotional involvement. It may work for some that have very good self control. I personally like to keep 4 months expenses in cash. I sleep well no matter what happens in the market.

[Khao]

Why not both? If you think your emergency fund should be 20k for example, why not put 10k in a savings account and 10k invested? You can hit the first 10k easily and if you need more than that you have access to another 10k that might go up with the markets. In the event of a job loss for example, you would have a few weeks/months to burn through that first easily accessible 10k so even if the invested half isn't as readily accessible it doesn't matter. In the event of a one-time huge emergency of over 10k, then it might be problematic to get that part of your emergency fund quickly, but it seems less likely to happen.

[thepokercab]

Why not both? If you think your emergency fund should be 20k for example, why not put 10k in a savings account and 10k invested? You can hit the first 10k easily and if you need more than that you have access to another 10k that might go up with the markets. In the event of a job loss for example, you would have a few weeks/months to burn through that first easily accessible 10k so even if the invested half isn't as readily accessible it doesn't matter. In the event of a one-time huge emergency of over 10k, then it might be problematic to get that part of your emergency fund quickly, but it seems less likely to happen.

Well- that's not really much different than saying that I have 10K in cash for an emergency, but then I'll dip into my taxable account and/or my Roth IRA if I need more.  The question here is how much cash do you need to have at the ready to help you sleep at night.  For me- I sleep ok with three months of it.   

[foobar]

This interesting because betterment is pretty much right.  Now they might be a bit aggressive by recommending 30% but that is just a detail.  If you  have 2 or 3 years of savings, you don't need an emergency fund.  Keep enough cash for monthly needs and invest the rest.

At worst think about sticking some in something like an ibond (yeah right now they aren't super appealing). The 1 year min holding is a bit of a pain but you can work your way in over a couple of years. Your money is safe and you don't have to worry about inflation.

Why not both? If you think your emergency fund should be 20k for example, why not put 10k in a savings account and 10k invested? You can hit the first 10k easily and if you need more than that you have access to another 10k that might go up with the markets. In the event of a job loss for example, you would have a few weeks/months to burn through that first easily accessible 10k so even if the invested half isn't as readily accessible it doesn't matter. In the event of a one-time huge emergency of over 10k, then it might be problematic to get that part of your emergency fund quickly, but it seems less likely to happen.

Well- that's not really much different than saying that I have 10K in cash for an emergency, but then I'll dip into my taxable account and/or my Roth IRA if I need more.  The question here is how much cash do you need to have at the ready to help you sleep at night.  For me- I sleep ok with three months of it.

[LuckyMe]

How about funding both an EF and a taxable investment account until your investments grow to give you a large enough cushion that you can eventually roll your EF into it?

That's the situation I'm facing now.  I started a cash EF and a taxable account with modest sums about 6 years ago.  The latter has grown considerably since then to about 4 times the size of my EF which collects less than 1% sitting in an online savings account.  Investing the EF would prevent inflation from eating into it and bolster my other account to boot. 

Of course the feasibility of all this depends on your own risk tolerance and job stability.

You could conceivably do something similar with a Roth IRA provided that your principal contributions are sufficient.  Obviously this would be a last resort as your investments would take a hit.

[Thegoblinchief]

Ummmm...there's a reason it's called an "emergency" fund.  Cash, down the street at the ATM or with a debit card or check book is what you need for emergencies.  Short term reserves?  Laddered CD's work for this.  Mix a severe recession, a stock and bond market decline of 50 percent, and a job loss and see how you like having that 130 percent in Betterment's hands.

Credit cards give you ~30 days of breathing room. Plenty of time to tap assets to pay them off.

Yes, you can find yourself needing funds in a downturn, but what are you missing in the up markets?