Author Topic: Portion of Emergency Fund in Roth IRA  (Read 16778 times)

FastStache

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Portion of Emergency Fund in Roth IRA
« on: January 16, 2014, 05:33:54 PM »
I plan to have about 30K in my emergency fund in a couple of months, and it is mostly savings account with 0.9% interest.

I have not contributed to a Roth IRA in 2013. Can I put the last 5500 of my emergency fund in a Roth for 2013? When I do my taxes I see lots of advertisements for IRA contributions but didn't know if it only applies to traditional IRAs.

I figured most emergencies I can think of should be covered with the 24500 I have in a savings account.

Emilyngh

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Re: Portion of Emergency Fund in Roth IRA
« Reply #1 on: January 16, 2014, 05:39:27 PM »
I have about $25k of our emergency funds in Roths (and about $5k in cash).    Since I can withdraw contributions at any time without penalties it helps me to sleep at night knowing that I can get to this money if needed, but it's still in the market earning more than in savings.   

madage

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Re: Portion of Emergency Fund in Roth IRA
« Reply #2 on: January 16, 2014, 05:45:59 PM »
Can I put the last 5500 of my emergency fund in a Roth for 2013?

Of course you can. Definitely make your 2013 contribution before April 15. Reiterating what's already been mentioned, Roth IRA contributions can be withdrawn at any time with no penalty. I don't know if this will help you or not, but ALL of my emergency-lost-my-job-need-to-pay-my-mortgage money is in Roth IRAs.

Quote
When I do my taxes I see lots of advertisements for IRA contributions but didn't know if it only applies to traditional IRAs.

Contributions to Traditional IRAs are tax-deductible, but contributions cannot be withdrawn without penalty except in certain situations.

Eric

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Re: Portion of Emergency Fund in Roth IRA
« Reply #3 on: January 16, 2014, 05:48:22 PM »
Yes, you can contribute Roth IRA for the year 2013 until tax time 2014.  While you're doing that, you might as well contribute your $5500 for 2014 as well.  You can remove your contributions from a Roth IRA at anytime penalty free. (contributions, but not earnings)  So if it's a true emergency, and your $19K won't cover it, you still have penalty-free access to $11K (or less depending on market fluctuations)

FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #4 on: January 16, 2014, 10:05:44 PM »
I think I would be comfortable putting in just my 2013 at this time and waiting until later this year before putting in my 2014 amount.

Are there any benefits to opening an account with 11K versus 5.5K?

I plan on using one of Vanguard's target funds. Are there any ways to score deals when opening these accounts?

aj_yooper

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Re: Portion of Emergency Fund in Roth IRA
« Reply #5 on: January 17, 2014, 06:14:00 AM »
I think I would be comfortable putting in just my 2013 at this time and waiting until later this year before putting in my 2014 amount.

Are there any benefits to opening an account with 11K versus 5.5K?

I plan on using one of Vanguard's target funds. Are there any ways to score deals when opening these accounts?

No promotions at Vanguard.  Just low expenses and good service.

Money for investing that sits in cash does not grow with the market.  If you have imminent expenses, cash is good. 

It sounds like you should be hitting the library and reading some books on finance.  There are a lot of good books to read, like Burton Malkiel's The Elements of Investing or Larry Swedroe's The Only Guide You'll Ever Need for the Right Financial Plan.  You can also read Rick Ferri's articles in Forbes magazine on the web. 

oldtoyota

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Re: Portion of Emergency Fund in Roth IRA
« Reply #6 on: January 17, 2014, 06:26:58 AM »
I plan to have about 30K in my emergency fund in a couple of months, and it is mostly savings account with 0.9% interest.

I have not contributed to a Roth IRA in 2013. Can I put the last 5500 of my emergency fund in a Roth for 2013? When I do my taxes I see lots of advertisements for IRA contributions but didn't know if it only applies to traditional IRAs.

I figured most emergencies I can think of should be covered with the 24500 I have in a savings account.

Sure, you can. You have until April to put in your 2013 contribution. If you don't think you'll reach $5500 by then--while also putting in your contribution for 2014--I would take the $5500 from the existing emergency fund.

That's just me though. I don't know much about how much you have saved, how secure your job is, or how far along you are in the saving process.

=-)

oldtoyota

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Re: Portion of Emergency Fund in Roth IRA
« Reply #7 on: January 17, 2014, 06:28:05 AM »
I think I would be comfortable putting in just my 2013 at this time and waiting until later this year before putting in my 2014 amount.

Are there any benefits to opening an account with 11K versus 5.5K?

I plan on using one of Vanguard's target funds. Are there any ways to score deals when opening these accounts?

I suggest you read about "dollar cost averaging."

FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #8 on: January 17, 2014, 08:57:12 AM »
I didn't phrase my question correctly.  Are there any fees with a Vanguard account with investing 5500 that I wouldn't incur if I invested 11000? I get the dollar cost averaging, but I have a few purchases I plan on making that make me hesistant to put my 2014 Roth IRA contributions right now, unless I would avoid some fees from the investment company.

I will check out Burton Malkiel's book. Thanks!

FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #9 on: January 17, 2014, 01:57:19 PM »
It didn't occur to me that now that I'm married I can put in a contribution for my wife. She is a SAHM mom. This is making me thining about doing traditional for me and Roth for her.

I'm in the 25% bracket, would I get a tax refund in the amount of 5500 * .25 = 1375 if I did a traditional IRA contribution?

Zaga

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Re: Portion of Emergency Fund in Roth IRA
« Reply #10 on: January 17, 2014, 02:04:24 PM »
For some Vanguard funds, when you get over $10K you qualify for the Admiral funds, which have a lower expense ratio.  So yes, there is a slight advantage of contributing for both years right now.

But now that you mention your wife, I'd be more likely to recommend contributing for both of you for 2013, and looking into 2014 contributions as you can through the year.

wtjbatman

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Re: Portion of Emergency Fund in Roth IRA
« Reply #11 on: January 17, 2014, 08:23:19 PM »
It didn't occur to me that now that I'm married I can put in a contribution for my wife. She is a SAHM mom. This is making me thining about doing traditional for me and Roth for her.

I'm in the 25% bracket, would I get a tax refund in the amount of 5500 * .25 = 1375 if I did a traditional IRA contribution?

With a traditional IRA it reduces your taxable income by your contribution. So, depending on your income now and how close you are to a lower tax bracket, a contribution of $5500 may result in saving that amount in taxes.

Khan

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Re: Portion of Emergency Fund in Roth IRA
« Reply #12 on: January 17, 2014, 10:29:37 PM »
I haven't seen it said, so I'm going to stress this:
Once money is placed in a ROTH IRA, it is never taxed again.
never taxed again
never taxed again
NEVER TAXED AGAIN

So there is a huge benefit to filling up your ROTH stocking. It's easy enough to withdraw the money, but stock it up in a ROTH account, in a relatively conservative manner as this is your emergency fund, but get it in there. Fill up your ROTH gas tank.

And go read some financial books as others have said. Being financially literate is an incredibly powerful tool... one of the most powerful ones that you can have in your FI toolbox, and even outside of that, it makes you a more well rounded individual.

Poor people think that a mortgage is a savings plan. That a house is an investment. That fast food is ever "fast"(factor in the hour it took to earn that money). That understanding 401k, ROTH, IRA, and all the other stuff someone else's job. It is not unless you have money pouring out of so many holes that you can't spend it fast enough, and your time is better spent using your Midas Touch on things(Warren Buffett, Richard Branson, Elon Musk, etc.) than on it.  If you're a mortal like the rest of us, read up.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #13 on: January 18, 2014, 04:41:55 AM »
What reason do you have for holding so much money in an emergency fund?  I'm guessing the sum of ALL of your insurance deductibles is well under 25K?  You probably can get away with 1/5 of your current fund.  I would invest 11K in a roth and put the rest in taxable.

Granted I don't own a house and I'm single, but this is how my emergency fund works:
Keep $3-5K in cash, sometimes even less.  If the car breaks down, I can fix it or buy a new (old) one with cash.  I can even sell a small amount of investments if I need to in order to buy the new one.  If I get sick, I pay the $2500 deductible (I completely disagree with a deductible this low, but that's actually the highest deductible/lowest premium plan my work offers).  If I have to pay both, I'm looking at a net balance of an absolute maximum of -$5,000.  I have a $10,000 credit card limit.  I put the $5,000 on the credit card and I have two options.  1) Sell stock and pay it off or 2) Lower my 401K contributions to 8% and use the extra $600/month to pay it off in 3 months.

If I lose my job, I get 60 more days to spend 0 money and save my last little bits.  I cut expenses.  I prepare to sell stock if I have to.


never taxed again
NEVER TAXED AGAIN

So there is a huge benefit to filling up your ROTH stocking. It's easy enough to withdraw the money, but stock it up in a ROTH account, in a relatively conservative manner as this is your emergency fund, but get it in there. Fill up your ROTH gas tank.

Assuming they have a certain level of income.  Probably a fair assumption since they have a 30K emergency fund, but who knows, maybe they both just quit their jobs.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #14 on: January 18, 2014, 08:35:57 AM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #15 on: January 18, 2014, 09:19:55 AM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #16 on: January 18, 2014, 10:15:32 AM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.


It's either an emergency fund or it is not.  Calculate your expenses and build something to cover between 3-12 months of that based on your risk tolerance, anything above that is not an emergency fund and can be invested as you see fit, anything that is a part of your emergency fund should not be invested in anything more than a CD within that Roth.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #17 on: January 18, 2014, 02:24:17 PM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.


It's either an emergency fund or it is not.  Calculate your expenses and build something to cover between 3-12 months of that based on your risk tolerance, anything above that is not an emergency fund and can be invested as you see fit, anything that is a part of your emergency fund should not be invested in anything more than a CD within that Roth.
'

Why does one need 3-12 months worth of expenses?  Blanket rules like that are preposterous.

Besides, in my case 5K is about 4 months, but it'd become 6-8 months if I lost my job.

Further, I think it's a good idea to have a couple thousand off the market, but nothing more than that is helpful  No reason to have money sit around doing nothing.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #18 on: January 18, 2014, 06:14:32 PM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.


It's either an emergency fund or it is not.  Calculate your expenses and build something to cover between 3-12 months of that based on your risk tolerance, anything above that is not an emergency fund and can be invested as you see fit, anything that is a part of your emergency fund should not be invested in anything more than a CD within that Roth.
'

Why does one need 3-12 months worth of expenses?  Blanket rules like that are preposterous.

Besides, in my case 5K is about 4 months, but it'd become 6-8 months if I lost my job.

Further, I think it's a good idea to have a couple thousand off the market, but nothing more than that is helpful  No reason to have money sit around doing nothing.

An emergency fund is something that you can turn to in the event of an emergency to provide coverage for your expenses without needing to sell any assets below their principal value.  It has to be within a range suited to your risk profile, anything over 12 months stops being an emergency fund as other funding should kick in at this stage.

Could you explain your logic behind 5k being able to cover twice as long if you lose your job, that sounds unusual?


Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #19 on: January 18, 2014, 06:43:02 PM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

Betterment posted an interesting piece arguing you should invest 130% of your desired e-fund amount in a moderately aggressive stock portfolio. I haven't done this and they obviously exist to sell investments, but I thought it was interesting.

https://www.betterment.com/blog/2013/08/06/safety-net-funds-why-traditional-advice-is-wrong/

That's dumb on so many levels.  I had coffee with their CEO to discuss their product, which I generally like and told him his marketing was dangerous and misleading at times.  This is just another one of those.

Putting 100% + x into the market is the same as not having an EF at all.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #20 on: January 18, 2014, 10:09:13 PM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.


It's either an emergency fund or it is not.  Calculate your expenses and build something to cover between 3-12 months of that based on your risk tolerance, anything above that is not an emergency fund and can be invested as you see fit, anything that is a part of your emergency fund should not be invested in anything more than a CD within that Roth.
'

Why does one need 3-12 months worth of expenses?  Blanket rules like that are preposterous.

Besides, in my case 5K is about 4 months, but it'd become 6-8 months if I lost my job.

Further, I think it's a good idea to have a couple thousand off the market, but nothing more than that is helpful  No reason to have money sit around doing nothing.

An emergency fund is something that you can turn to in the event of an emergency to provide coverage for your expenses without needing to sell any assets below their principal value.  It has to be within a range suited to your risk profile, anything over 12 months stops being an emergency fund as other funding should kick in at this stage.

Could you explain your logic behind 5k being able to cover twice as long if you lose your job, that sounds unusual?

What is unusual about it?  Is it unreasonable to assume that I would have a spending profile that is different if I had a job vs. not having a job?  For example, I spent $25 at a bar in the last 4 hours.  If I didn't have a job, there's no way in hell that would have happened.  As it is, I had a pretty good night out for $25.

Now, the real question is why does someone need 12 months in an emergency fund?  What kind of emergencies do we see where 12 months savings is enough, but 3 months is not?

I reject the notion that an emergency fund should not be in the market.  Let's just look at a hypothetical and say I need $20K for my fund in case of a true emergency and I have $40K in savings.  I would invest this at roughly 7% per year.  You would let it sit at say 1% per year.  Sure, mine could drop 30% in one year, but yours is guaranteed to not go up 30% in that same year.  While your risk may be slightly lower, my fund does better in a vast majority of circumstances.  Assuming I have $40K invested, my investment will never drop below the $20K I need, so I'm obviously better off investing all $40K than holding $20K in a savings account in most cases.
Since I can afford to let the $40K fall to $28K I should invest all of it.

Khan

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Re: Portion of Emergency Fund in Roth IRA
« Reply #21 on: January 18, 2014, 10:25:09 PM »
To add to what mpbaker said, there is a payoff period at which point having the emergency fund in the market pays better then not.

What are the chances of having an emergency? Let's say it's 1/10 that I have an emergency that requires me to spend more then the ~2k I have in my bank account.

If it's not a job ending emergency, then I can pay it with credit and pay it off. I have access to a lot of credit. I could go on the margin for up to 30k. I have a credit card with access to 5k(could be more, but I like my limit). I pay for very good insurance coverage, so I'm not likely to even be out more then a couple thousand from that end.

So, in the meantime, we have a 1/10 chance per year of having an "emergency". But let's look at the 5 year return chart here:
http://valueinvestingcenter.com/wp-content/uploads/2012/08/Stock-Market-Value-of-GNP-vs-5-Year-Real-Returns.png

Hmm, if I've invested in the market my entire "emergency fund +", I from a 5 year standpoint the maximum loss return historically is somewhere around -7%. With somewhere around ~4 5 year periods returning that, over a 60 year period.

I wish I could shit out the algebra to prove that I'm happy with that risk, and what that risk is, but let's just say I'm happy with that risk.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #22 on: January 19, 2014, 06:21:03 AM »
It is a very bad idea to have your emergency fund in the market.  If you need the money in the event of an emergency you are at the mercy of the market and must sell a losing position.

Using a Roth to host your funds is good if you cannot otherwise afford to max out the Roth contribution for the year, but you must keep the emergency funds in cash or cash equivalents that can be liquidated without loss of principal.

I don't really see a situation where I would need 30K, so that is my thinking to keeping anything north of 24.5K in a Roth or even 20Kish.

The reason my emergency fund is so high is I'm considering having my current home as a rental, so I'd like to keep quite a few months of rent in the bank and any unforeseen issues.


It's either an emergency fund or it is not.  Calculate your expenses and build something to cover between 3-12 months of that based on your risk tolerance, anything above that is not an emergency fund and can be invested as you see fit, anything that is a part of your emergency fund should not be invested in anything more than a CD within that Roth.
'

Why does one need 3-12 months worth of expenses?  Blanket rules like that are preposterous.

Besides, in my case 5K is about 4 months, but it'd become 6-8 months if I lost my job.

Further, I think it's a good idea to have a couple thousand off the market, but nothing more than that is helpful  No reason to have money sit around doing nothing.

An emergency fund is something that you can turn to in the event of an emergency to provide coverage for your expenses without needing to sell any assets below their principal value.  It has to be within a range suited to your risk profile, anything over 12 months stops being an emergency fund as other funding should kick in at this stage.

Could you explain your logic behind 5k being able to cover twice as long if you lose your job, that sounds unusual?

What is unusual about it?  Is it unreasonable to assume that I would have a spending profile that is different if I had a job vs. not having a job?  For example, I spent $25 at a bar in the last 4 hours.  If I didn't have a job, there's no way in hell that would have happened.  As it is, I had a pretty good night out for $25.

Now, the real question is why does someone need 12 months in an emergency fund?  What kind of emergencies do we see where 12 months savings is enough, but 3 months is not?

I reject the notion that an emergency fund should not be in the market.  Let's just look at a hypothetical and say I need $20K for my fund in case of a true emergency and I have $40K in savings.  I would invest this at roughly 7% per year.  You would let it sit at say 1% per year.  Sure, mine could drop 30% in one year, but yours is guaranteed to not go up 30% in that same year.  While your risk may be slightly lower, my fund does better in a vast majority of circumstances.  Assuming I have $40K invested, my investment will never drop below the $20K I need, so I'm obviously better off investing all $40K than holding $20K in a savings account in most cases.
Since I can afford to let the $40K fall to $28K I should invest all of it.

I think the difference of opinion is that in my world a $25 bar tab is not an essential item and therefore should not be included in the original EF size calculation, so if I was living your life (of expenses and income) my EF would be smaller than yours, and therefore should I lose my job it would last for the length of time I designed it for, rather than double in size because it had provisions for non emergency items.

It is true that most people wouldn't want a 12 month EF, most people aim for something around 3-6months, but it is a risk tolerance measure.  A reason why someone might opt for a 12 month fund would be if using self insurance strategies.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #23 on: January 19, 2014, 06:22:26 AM »
To add to what mpbaker said, there is a payoff period at which point having the emergency fund in the market pays better then not.

What are the chances of having an emergency? Let's say it's 1/10 that I have an emergency that requires me to spend more then the ~2k I have in my bank account.

If it's not a job ending emergency, then I can pay it with credit and pay it off. I have access to a lot of credit. I could go on the margin for up to 30k. I have a credit card with access to 5k(could be more, but I like my limit). I pay for very good insurance coverage, so I'm not likely to even be out more then a couple thousand from that end.

So, in the meantime, we have a 1/10 chance per year of having an "emergency". But let's look at the 5 year return chart here:
http://valueinvestingcenter.com/wp-content/uploads/2012/08/Stock-Market-Value-of-GNP-vs-5-Year-Real-Returns.png

Hmm, if I've invested in the market my entire "emergency fund +", I from a 5 year standpoint the maximum loss return historically is somewhere around -7%. With somewhere around ~4 5 year periods returning that, over a 60 year period.

I wish I could shit out the algebra to prove that I'm happy with that risk, and what that risk is, but let's just say I'm happy with that risk.

Happy with the risk is the key, it is always a decision, and always an opportunity cost choice.  However, the real purpose of an EF is asset protection, which it cannot do in the market.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #24 on: January 19, 2014, 06:46:49 AM »
I think the difference of opinion is that in my world a $25 bar tab is not an essential item and therefore should not be included in the original EF size calculation, so if I was living your life (of expenses and income) my EF would be smaller than yours, and therefore should I lose my job it would last for the length of time I designed it for, rather than double in size because it had provisions for non emergency items.

It is true that most people wouldn't want a 12 month EF, most people aim for something around 3-6months, but it is a risk tolerance measure.  A reason why someone might opt for a 12 month fund would be if using self insurance strategies.

But I don't see that as a real response ... self insurance against what?  I think fear of losing job is probably the only scenario where one should have several months in an EF.  Any other 'catastrophic' else should be covered by job income.  I just think this is a situation where financial planners advice results in a net negative for their customers.

To your first paragraph, that is probably the most valid way to calculate x months expenses for an emergency fund ... cover what your expenses will actually be.  I have a feeling that is what people on here do, but most financial planners will have you saving 6 times current expenses.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #25 on: January 19, 2014, 07:32:09 AM »
I think the difference of opinion is that in my world a $25 bar tab is not an essential item and therefore should not be included in the original EF size calculation, so if I was living your life (of expenses and income) my EF would be smaller than yours, and therefore should I lose my job it would last for the length of time I designed it for, rather than double in size because it had provisions for non emergency items.

It is true that most people wouldn't want a 12 month EF, most people aim for something around 3-6months, but it is a risk tolerance measure.  A reason why someone might opt for a 12 month fund would be if using self insurance strategies.

But I don't see that as a real response ... self insurance against what?  I think fear of losing job is probably the only scenario where one should have several months in an EF.  Any other 'catastrophic' else should be covered by job income.  I just think this is a situation where financial planners advice results in a net negative for their customers.

To your first paragraph, that is probably the most valid way to calculate x months expenses for an emergency fund ... cover what your expenses will actually be.  I have a feeling that is what people on here do, but most financial planners will have you saving 6 times current expenses.

The way I was taught to calculate EF in planner school was as I am saying here.  That is the leanest for of EF which is essential for people on this board as they are racing towards FIRE as quickly as possibly.  People of high net worth I would plan differently and allow lifestyle maintenance within the fund because the opportunity cost impact of the large EF would have less overall impact.

The self insurance option comes in to my belief that there is a duality within an EF - the primary purpose is asset protection, so you don't have to sell up at pennies on the dollar to release monies to live on, the secondary purpose is things like force majeure.  So you have a core EF that protects your monthly costs, and then you bolt onto that a further amount that brings the value of the fund upwards towards the 12 month level.

The self insurance situation would be where you own your home in a storm risk area. If you had a mortgage you would be forced to have storm/flood insurance measures in place, but if you owned outright that would be optional and you could make the election to self insure, perhaps keeping enough money for a new roof or whatnot additional to the core fund so if something happened you.

Say a new roof would cost $10,000 and your EF needs for 6 months were $5000, you could then make your EF '12 months' by adding on enough emergency money to cover the roof, should that blow off in a hurricane, at a time where you still had your job.  Or you could feel that you wanted $15,000 in there in case both things happened at the same time.  Or you could say $12.5K or $7.5K based upon your risk tolerance and opportunity cost calculations.

As such, your fund could be a lot more than 6 months of expenses when you consider the duality of emergency situations.


FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #26 on: January 20, 2014, 11:30:23 AM »
One thing I have noticed is people, myself included, want to categorize things.... good, bad, right, wrong, etc. This is no different with what constitutes an emergency fund. To me thinking of things in a sliding scale is a much better way of going about it.

Savings account < 100K - very easily accessible, no penalty
CD - easily accessible, possible interest penalty
Roth - easily accessible, could pull money out in down market
401K - can be withdrawn, could be in a down market and penalty
House - huge transaction fees, could be a down market, etc
Etc -

So, I don't have a hard set definition on where my emergency fund is, but I do want the money accessible and the risk of having to tap my Roth in a down market is ok for me given what I will have in my savings account and my current savings rate.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #27 on: January 20, 2014, 01:56:09 PM »
One thing I have noticed is people, myself included, want to categorize things.... good, bad, right, wrong, etc. This is no different with what constitutes an emergency fund. To me thinking of things in a sliding scale is a much better way of going about it.

Savings account < 100K - very easily accessible, no penalty
CD - easily accessible, possible interest penalty
Roth - easily accessible, could pull money out in down market
401K - can be withdrawn, could be in a down market and penalty
House - huge transaction fees, could be a down market, etc
Etc -

So, I don't have a hard set definition on where my emergency fund is, but I do want the money accessible and the risk of having to tap my Roth in a down market is ok for me given what I will have in my savings account and my current savings rate.

The way I do it is:

Cashflow
EF in cash/equiv
taxable brokerage/roths
Trad IRA/401k
house

The cashflow should cover your regular expenses, if it doesn't you need to earn more/spend less.  It should suffice so that you never need to touch the emergency fund on a regular month.  The EF is the next barrier, because it is in cash/equiv its amount will be fixed and can protect you from needing to sell in a down market.  Next up are Roths/taxable accounts since they wouldn't penalize, then the penalized accounts, then the home.

This firewall series provides the most protection, but should you be in bad shape in a good market you could consider swapping the strategy and selling stocks/bonds if it makes sense to do so, but that you have enough that isn't in the market means you are not forced to do this in a bad market.

FastStache

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Re: Portion of Emergency Fund in Roth IRA
« Reply #28 on: January 20, 2014, 02:44:16 PM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #29 on: January 20, 2014, 02:51:14 PM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

Basically, my approach is get it nailed down conceptually, then bolt on all the sophistication, such as storing it in a ROTH, or finding ways to cash out credit cards with no fee - all that stuff is great in an emergency, but I think the key is wrapping our heads around what the fund is for, and then we won't make mistakes in the pursuit of gains.

Also, within the cash/equivs of the ROTH it is not hard to earn 3-5% on a savings/CD if you hunt around enough, which makes the opportunity cost easier to swallow.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #30 on: January 21, 2014, 08:07:36 AM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

I think the point was you can use your credit card as the emergency fund, right?  That's sort of what I do. 
Even in the worst 2-month period I can have (in terms of paycheck timing and rent payment timing), I cash flow a minimum of $3,075.  If I did have an emergency that was $10,000, I'd first use the $5,000 in my checking account.  Put the other $3,075 on the credit card and pay it off over two months.  It's likely that I would not see a cent of interest in that time frame, but it does depend on the timing.  That leaves, $1,925 left to pay from selling stocks.  That's such a small portion of my portfolio, I wouldn't even feel the hit.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #31 on: January 21, 2014, 08:58:13 AM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

I think the point was you can use your credit card as the emergency fund, right?  That's sort of what I do. 
Even in the worst 2-month period I can have (in terms of paycheck timing and rent payment timing), I cash flow a minimum of $3,075.  If I did have an emergency that was $10,000, I'd first use the $5,000 in my checking account.  Put the other $3,075 on the credit card and pay it off over two months.  It's likely that I would not see a cent of interest in that time frame, but it does depend on the timing.  That leaves, $1,925 left to pay from selling stocks.  That's such a small portion of my portfolio, I wouldn't even feel the hit.

But that takes only the force majure emergency into account, the emergency fund should cover cash flow should inflows cease also.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #32 on: January 21, 2014, 11:05:55 AM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

I think the point was you can use your credit card as the emergency fund, right?  That's sort of what I do. 
Even in the worst 2-month period I can have (in terms of paycheck timing and rent payment timing), I cash flow a minimum of $3,075.  If I did have an emergency that was $10,000, I'd first use the $5,000 in my checking account.  Put the other $3,075 on the credit card and pay it off over two months.  It's likely that I would not see a cent of interest in that time frame, but it does depend on the timing.  That leaves, $1,925 left to pay from selling stocks.  That's such a small portion of my portfolio, I wouldn't even feel the hit.

But that takes only the force majure emergency into account, the emergency fund should cover cash flow should inflows cease also.

Why?  What is the likelihood that cash in-flows cease at the exact same time that cash-outflows balloon to such heights?  I think two separate events have a likelihood near zero of happening.  That would leave a scenario where are both are the result of the same cause.  I suppose some people are in positions where that could happen.  I know I personally have a form of disability insurance (paid by work) so if something occurs where I cannot work, I'm already covered.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #33 on: January 22, 2014, 05:29:23 AM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

I think the point was you can use your credit card as the emergency fund, right?  That's sort of what I do. 
Even in the worst 2-month period I can have (in terms of paycheck timing and rent payment timing), I cash flow a minimum of $3,075.  If I did have an emergency that was $10,000, I'd first use the $5,000 in my checking account.  Put the other $3,075 on the credit card and pay it off over two months.  It's likely that I would not see a cent of interest in that time frame, but it does depend on the timing.  That leaves, $1,925 left to pay from selling stocks.  That's such a small portion of my portfolio, I wouldn't even feel the hit.

But that takes only the force majure emergency into account, the emergency fund should cover cash flow should inflows cease also.

Why?  What is the likelihood that cash in-flows cease at the exact same time that cash-outflows balloon to such heights?  I think two separate events have a likelihood near zero of happening.  That would leave a scenario where are both are the result of the same cause.  I suppose some people are in positions where that could happen.  I know I personally have a form of disability insurance (paid by work) so if something occurs where I cannot work, I'm already covered.

I don't think it is very likely to either, but I think you are still undercovered for just cash inflow ceasing (from what little I can gather from the post) never minding the cash outflows ballooning, that was my point.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #34 on: January 22, 2014, 09:34:43 AM »
I would even add credit cards in the mix if your cash flow was high to avoid interest. Another good option is to get an interest free credit card in a crunch or have one with little to no balance. I pretty much agree with your list though. I like this a lot more than hard set rules.

I pay for as much as humanly possible with a credit card, probably over 90% of my monthly outflows, but with monthly repayments that is just a tool, and not one that would work without the cashflow to pay it down.  I also have a decent 6 figure credit line on those cards, but the problem is that the interest free on them rarely works other than for the first 12-20 months, and it would be risky to wait for the emergency to apply, if it is a core part of your plan.

I think the point was you can use your credit card as the emergency fund, right?  That's sort of what I do. 
Even in the worst 2-month period I can have (in terms of paycheck timing and rent payment timing), I cash flow a minimum of $3,075.  If I did have an emergency that was $10,000, I'd first use the $5,000 in my checking account.  Put the other $3,075 on the credit card and pay it off over two months.  It's likely that I would not see a cent of interest in that time frame, but it does depend on the timing.  That leaves, $1,925 left to pay from selling stocks.  That's such a small portion of my portfolio, I wouldn't even feel the hit.

But that takes only the force majure emergency into account, the emergency fund should cover cash flow should inflows cease also.

Why?  What is the likelihood that cash in-flows cease at the exact same time that cash-outflows balloon to such heights?  I think two separate events have a likelihood near zero of happening.  That would leave a scenario where are both are the result of the same cause.  I suppose some people are in positions where that could happen.  I know I personally have a form of disability insurance (paid by work) so if something occurs where I cannot work, I'm already covered.

I don't think it is very likely to either, but I think you are still undercovered for just cash inflow ceasing (from what little I can gather from the post) never minding the cash outflows ballooning, that was my point.

As I've said 100 times, I disagree.  But you are yet to provide a scenario where both would happen at the same time.  And I haven't even made the argument that it's better to sell stocks for a loss, in that low-risk scenario since there's a much higher chance that I would come out ahead.  I.E. there's a small chance I'd take a loss on the stocks I sell because of a freak, dual-accident scenario.  The most likely thing to happen is I never have to touch those stocks, and I make a fortune of money on it.

In fact, as a result of this discussion, I just decreased my emergency fund by $3,000.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #35 on: January 22, 2014, 01:17:27 PM »
I don't think you are reading what I wrote. I didn't say both would happen at once I said you don't have a lot of protection if inflows cease.  But it's your life and as long as you are happy that is all that matters.

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Re: Portion of Emergency Fund in Roth IRA
« Reply #36 on: January 22, 2014, 09:25:04 PM »
I don't think you are reading what I wrote. I didn't say both would happen at once I said you don't have a lot of protection if inflows cease.  But it's your life and as long as you are happy that is all that matters.

And I clearly showed I did not have protection if inflows cease ... I showed that I have somewhere between 6 and 12 months expenses in my 'emergency fund.'

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Re: Portion of Emergency Fund in Roth IRA
« Reply #37 on: January 23, 2014, 06:07:36 AM »
I don't think you are reading what I wrote. I didn't say both would happen at once I said you don't have a lot of protection if inflows cease.  But it's your life and as long as you are happy that is all that matters.

And I clearly showed I did not have protection if inflows cease ... I showed that I have somewhere between 6 and 12 months expenses in my 'emergency fund.'

I really don't care what you do with your money, I was simply pointing out that you do not have an emergency fund, you have 'some cash' some credit and some money in the market.  That is not the same.  But if you are happy with it that is all that matters.

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #38 on: January 23, 2014, 08:28:31 AM »
I don't think you are reading what I wrote. I didn't say both would happen at once I said you don't have a lot of protection if inflows cease.  But it's your life and as long as you are happy that is all that matters.

And I clearly showed I did not have protection if inflows cease ... I showed that I have somewhere between 6 and 12 months expenses in my 'emergency fund.'

I really don't care what you do with your money, I was simply pointing out that you do not have an emergency fund, you have 'some cash' some credit and some money in the market.  That is not the same.  But if you are happy with it that is all that matters.

So, you don't think I have funds that can cover an emergency?  But you haven't shown how I wouldn't be able to cover an emergency.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #39 on: January 23, 2014, 09:18:50 AM »
hmm I thought we went over this already?  Let's recap.

An Emergency Fund is designed to protect your assets, so that in the event of an emergency you do not need to liquidate assets at a price dictated by the market.

It can have two aspects, funds to cover lack of inflows (such as losing your job and whatnot) and increased outflows - such as fixing a problem with a property that you own.  In your case you mentioned that you rent, so the outflow side risk is lower than a home owner.

Your assets are held in equities, in the market, gaining appreciation ideally.  Your Emergency Fund therefore should be to protect against the forced liquidation of those assets.  Therefore, you should have a fund in Cash or Cash Equivalents that will protect you should there be an issue on the inflow side (and to a lesser degree the outflow side, such as a family emergency).

Could you remind me of the amount of your monthly outflows and your EF amount?  I saw some stuff about $5K in checking, and a reduction of $3K from your EF so I am not sure where you are with it, it appeared low (and that the $5K was the extent of it) since you were talking of swapping to a Credit Card after $5K.

Also, if your assets in the market are really low, then I can see the desire to play a higher risk game, so that is relevant too.
« Last Edit: January 23, 2014, 09:24:21 AM by Saverocity »

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #40 on: January 23, 2014, 10:13:49 AM »
hmm I thought we went over this already?  Let's recap.

An Emergency Fund is designed to protect your assets, so that in the event of an emergency you do not need to liquidate assets at a price dictated by the market.

It can have two aspects, funds to cover lack of inflows (such as losing your job and whatnot) and increased outflows - such as fixing a problem with a property that you own.  In your case you mentioned that you rent, so the outflow side risk is lower than a home owner.

Your assets are held in equities, in the market, gaining appreciation ideally.  Your Emergency Fund therefore should be to protect against the forced liquidation of those assets.  Therefore, you should have a fund in Cash or Cash Equivalents that will protect you should there be an issue on the inflow side (and to a lesser degree the outflow side, such as a family emergency).

Could you remind me of the amount of your monthly outflows and your EF amount?  I saw some stuff about $5K in checking, and a reduction of $3K from your EF so I am not sure where you are with it, it appeared low (and that the $5K was the extent of it) since you were talking of swapping to a Credit Card after $5K.

Also, if your assets in the market are really low, then I can see the desire to play a higher risk game, so that is relevant too.

Bi-Monthly outflows average 2500 (rent is every 2 months).  So average of 1250/month, but some of those are luxury expenses.  Right now, my EF is at 2K precisely because I've determined that I would rather make money on that money than have it sit earning .1% interest.  I've bolded the cash equivalent part because I'm challenging the need to have cash equivalents.  Why is it not worth the risk of selling investments for a loss, should an emergency occur?

I'm asserting that worrying about the 1% of times you'll need the money is holding everyone back from making money the other 99% of the time.  Unless an emergency will force you to pay high interest rates on credit cards, there's no reason for the emergency fund.

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Re: Portion of Emergency Fund in Roth IRA
« Reply #41 on: January 23, 2014, 10:16:47 AM »

Saverocity, how will you pull off FI? How much money do you intend to have in actual cash at that time?

When I reach FI, I intend to move my cash amount from 1-2 months to ~6-12 months. I am not going to stop at FI, but do you intend to have > 1 year in FI cash or cash equivalents? >3 years?

Because anything shorter then that, and you may have to pull your money out to fill your cash stash in a down market.

The same can be said of the emergency fund. Why should I have arbitrary amount, or arbitrary months worth of money in cash or cash equivalents to protect myself from arbitrary emergency reason -x-?

And moving assets from your investments to cash equivalents when you feel the market is "high" to support x further years is timing the market to boot. Pulling money out because the market is low and you think it's going to go lower suffers the same problem.

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Re: Portion of Emergency Fund in Roth IRA
« Reply #42 on: January 23, 2014, 10:56:05 AM »
An Emergency Fund is designed to protect your assets, so that in the event of an emergency you do not need to liquidate assets at a price dictated by the market.

I personally disagree with this definition, and I think mpbaker22 does as well, which is why there's disagreement here.  We're starting from different perspectives.  I view an Emergency Fund as money I can access to cover emergency expenses.  Full stop.  Whether I have to sell stock a less than I bought it for is irrelevant.  As long as the money is available for use in an emergency, it's an emergency fund.

I think it's much more important to have an actual savings account emergency fund when you're first starting out, but after you've accumulated significant assets, it seems inefficient to me to keep so much money sitting on the sidelines when you have plenty of other money you can access.  The upside is greater than the downside, especially because I think the chance of having an actual emergency is pretty rare.  Unemployment insurance, homeowners/renters insurance, car insurance, and health insurance all keep the risk of needing lots of money for an extended period to be pretty darn small.

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Re: Portion of Emergency Fund in Roth IRA
« Reply #43 on: January 23, 2014, 02:29:51 PM »
hmm I thought we went over this already?  Let's recap.

An Emergency Fund is designed to protect your assets, so that in the event of an emergency you do not need to liquidate assets at a price dictated by the market.

It can have two aspects, funds to cover lack of inflows (such as losing your job and whatnot) and increased outflows - such as fixing a problem with a property that you own.  In your case you mentioned that you rent, so the outflow side risk is lower than a home owner.

Your assets are held in equities, in the market, gaining appreciation ideally.  Your Emergency Fund therefore should be to protect against the forced liquidation of those assets.  Therefore, you should have a fund in Cash or Cash Equivalents that will protect you should there be an issue on the inflow side (and to a lesser degree the outflow side, such as a family emergency).

Could you remind me of the amount of your monthly outflows and your EF amount?  I saw some stuff about $5K in checking, and a reduction of $3K from your EF so I am not sure where you are with it, it appeared low (and that the $5K was the extent of it) since you were talking of swapping to a Credit Card after $5K.

Also, if your assets in the market are really low, then I can see the desire to play a higher risk game, so that is relevant too.

Bi-Monthly outflows average 2500 (rent is every 2 months).  So average of 1250/month, but some of those are luxury expenses.  Right now, my EF is at 2K precisely because I've determined that I would rather make money on that money than have it sit earning .1% interest.  I've bolded the cash equivalent part because I'm challenging the need to have cash equivalents.  Why is it not worth the risk of selling investments for a loss, should an emergency occur?

I'm asserting that worrying about the 1% of times you'll need the money is holding everyone back from making money the other 99% of the time.  Unless an emergency will force you to pay high interest rates on credit cards, there's no reason for the emergency fund.

I guess the conversation is going to continue down a somewhat confrontational path if I keep telling you what to do, so let's try to keep in mind I am just sharing some perspective with the intent of trying to help.

If you don't want an emergency fund that is fine, like everything, it is a choice.

Now, I don't know how much detail you want to get into your finances here, but even with these numbers they seem too fuzzy, partly my fault as I asked for your outflows, but when it comes to EF calculation we look only at Fixed, Necessary costs.  No luxury items should be included as it is obvious that all would be ceased in the event of a cash flow emergency.

Can we confirm what is actually in an EF for you - you mentioned Checking, Credit Cards and Stocks - is that it, or is your $2K EF additional to checking? In other words, on the day after you need to pay out the circa $2.5K has the EF been touched, or is it full and intact?

Also, why do you cite 0.1% interest, that is creating a biased argument, when there are lots of savings vehicles that offer 3-5%?

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Re: Portion of Emergency Fund in Roth IRA
« Reply #44 on: January 23, 2014, 02:38:09 PM »
An Emergency Fund is designed to protect your assets, so that in the event of an emergency you do not need to liquidate assets at a price dictated by the market.

I personally disagree with this definition, and I think mpbaker22 does as well, which is why there's disagreement here.  We're starting from different perspectives.  I view an Emergency Fund as money I can access to cover emergency expenses.  Full stop.  Whether I have to sell stock a less than I bought it for is irrelevant.  As long as the money is available for use in an emergency, it's an emergency fund.

I think it's much more important to have an actual savings account emergency fund when you're first starting out, but after you've accumulated significant assets, it seems inefficient to me to keep so much money sitting on the sidelines when you have plenty of other money you can access.  The upside is greater than the downside, especially because I think the chance of having an actual emergency is pretty rare.  Unemployment insurance, homeowners/renters insurance, car insurance, and health insurance all keep the risk of needing lots of money for an extended period to be pretty darn small.

I think you should reconsider the nature of the EF, even if you have to give it a special name in order to not change your notions of what an EF is, consider it from my perspective when calculating opportunity costs.

Now, I completely disagree about it being fine to sell for less than you would like because you are forced to do so by poor planning, that isn't good at all.

I do like your point about the insurances kicking in, but that then makes the EF easier to calculate, you just look at all the scenarios that could happen, and say it is a disability, and your premium starts paying after X days, you need the money to tide you over til the X date.

As for who needs one, I look at it as being akin to Insurance in that:

Lower Class (poor) don't need it, they have nothing to protect and should be putting all their money to paying off debt and building a nest egg.
Middle Class (upper/lower) do need it, they have built assets over time and they need to protect them.
Upper Class (HNW) doesn't really matter, they could choose to have one, or not, and if their equities tank it is fine up to a point.

The people who have achieved the FIRE Nut might well need one since the impact of doubling your withdrawal rate could be devastating, or if they have enough where it really doesn't matter to them since they can afford to lose 50% of their portfolio value and still have enough money, they wouldn't need one.

 

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Re: Portion of Emergency Fund in Roth IRA
« Reply #45 on: January 23, 2014, 02:44:44 PM »

Saverocity, how will you pull off FI? How much money do you intend to have in actual cash at that time?

When I reach FI, I intend to move my cash amount from 1-2 months to ~6-12 months. I am not going to stop at FI, but do you intend to have > 1 year in FI cash or cash equivalents? >3 years?

Because anything shorter then that, and you may have to pull your money out to fill your cash stash in a down market.

The same can be said of the emergency fund. Why should I have arbitrary amount, or arbitrary months worth of money in cash or cash equivalents to protect myself from arbitrary emergency reason -x-?

And moving assets from your investments to cash equivalents when you feel the market is "high" to support x further years is timing the market to boot. Pulling money out because the market is low and you think it's going to go lower suffers the same problem.

I can't really answer the first part, I'm having too much fun working right now, though if I had my perfect asset allocation I would certainly have 5 years of cash in 12 month CD ladders at say 5%, X in cash for acts of god (depending on my housing costs and choices) and a balance of other equities in taxable and non taxable accounts.

I'd also want investment property, and would bake in personal EFs to a number of businesses in order to allow them to be self contained and self sustaining.

And as far as I am concerned, selling an appreciated asset when I decide it is a good idea is not timing the market.  However, being forced to sell a depreciated asset due to poor planning is in fact timing the market really badly.

 

mpbaker22

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Re: Portion of Emergency Fund in Roth IRA
« Reply #46 on: January 23, 2014, 03:02:19 PM »

Saverocity, how will you pull off FI? How much money do you intend to have in actual cash at that time?

When I reach FI, I intend to move my cash amount from 1-2 months to ~6-12 months. I am not going to stop at FI, but do you intend to have > 1 year in FI cash or cash equivalents? >3 years?

Because anything shorter then that, and you may have to pull your money out to fill your cash stash in a down market.

The same can be said of the emergency fund. Why should I have arbitrary amount, or arbitrary months worth of money in cash or cash equivalents to protect myself from arbitrary emergency reason -x-?

And moving assets from your investments to cash equivalents when you feel the market is "high" to support x further years is timing the market to boot. Pulling money out because the market is low and you think it's going to go lower suffers the same problem.

I can't really answer the first part, I'm having too much fun working right now, though if I had my perfect asset allocation I would certainly have 5 years of cash in 12 month CD ladders at say 5%, X in cash for acts of god (depending on my housing costs and choices) and a balance of other equities in taxable and non taxable accounts.

I'd also want investment property, and would bake in personal EFs to a number of businesses in order to allow them to be self contained and self sustaining.

And as far as I am concerned, selling an appreciated asset when I decide it is a good idea is not timing the market.  However, being forced to sell a depreciated asset due to poor planning is in fact timing the market really badly.

These comments confirm my feeling in the rest of your posts ... you haven't a clue what you are talking about.

That is the very definition of timing the market.  And selling a depreciated asset because you need the money is not even close to the definition of market timing.

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #47 on: January 23, 2014, 03:18:52 PM »

Saverocity, how will you pull off FI? How much money do you intend to have in actual cash at that time?

When I reach FI, I intend to move my cash amount from 1-2 months to ~6-12 months. I am not going to stop at FI, but do you intend to have > 1 year in FI cash or cash equivalents? >3 years?

Because anything shorter then that, and you may have to pull your money out to fill your cash stash in a down market.

The same can be said of the emergency fund. Why should I have arbitrary amount, or arbitrary months worth of money in cash or cash equivalents to protect myself from arbitrary emergency reason -x-?

And moving assets from your investments to cash equivalents when you feel the market is "high" to support x further years is timing the market to boot. Pulling money out because the market is low and you think it's going to go lower suffers the same problem.

I can't really answer the first part, I'm having too much fun working right now, though if I had my perfect asset allocation I would certainly have 5 years of cash in 12 month CD ladders at say 5%, X in cash for acts of god (depending on my housing costs and choices) and a balance of other equities in taxable and non taxable accounts.

I'd also want investment property, and would bake in personal EFs to a number of businesses in order to allow them to be self contained and self sustaining.

And as far as I am concerned, selling an appreciated asset when I decide it is a good idea is not timing the market.  However, being forced to sell a depreciated asset due to poor planning is in fact timing the market really badly.

These comments confirm my feeling in the rest of your posts ... you haven't a clue what you are talking about.

That is the very definition of timing the market.  And selling a depreciated asset because you need the money is not even close to the definition of market timing.

OK then feel free to ignore everything I say :)

Eric

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Re: Portion of Emergency Fund in Roth IRA
« Reply #48 on: January 23, 2014, 03:21:07 PM »
I think you should reconsider the nature of the EF, even if you have to give it a special name in order to not change your notions of what an EF is, consider it from my perspective when calculating opportunity costs.

Now, I completely disagree about it being fine to sell for less than you would like because you are forced to do so by poor planning, that isn't good at all.

I have no idea how you can say that selling for a loss would be poor planning.  At the worst, it would be bad timing, but poor planning is kind of insulting.  I've given this a lot of thought.  It may not apply to your particular situation or risk tolerance, but just because it's different doesn't mean it's coming from a place of ignorance. 

What's the chance that a real emergency happens?  Something so bad that I've used up all of my cash inflows, all of my savings account (yes, I keep a couple of grand in my savings), all of my CC limit, and now I have to sell stocks at a loss (of which I can offset $3K worth of future gains).  Here's what would have to happen within a short time frame -- economy tanks, lose job for cause (i.e. no unemployment), wife loses job for cause, get injured in car or bike crash, unable to find a new job after a few months.  I'm putting the odds of all of those coming together at about .01%.  If only one or two of those happen, all at a low risk, then I'm fine.  And even if the worst luck in the world happens, the worst that I'm looking at is having to sell stock at a loss over a period of time?  I like those odds.

In exchange I get $20K+ in the market earning returns.  Since I did this a couple of years back, I can already stand to take about a 40% hit to the market and still break even.  And again, I never expect to need this because the chance of all of those bad things happening is remote and it's a risk I'm willing to take.

« Last Edit: January 23, 2014, 03:23:34 PM by Eric »

Saverocity

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Re: Portion of Emergency Fund in Roth IRA
« Reply #49 on: January 23, 2014, 03:29:53 PM »
I think you should reconsider the nature of the EF, even if you have to give it a special name in order to not change your notions of what an EF is, consider it from my perspective when calculating opportunity costs.

Now, I completely disagree about it being fine to sell for less than you would like because you are forced to do so by poor planning, that isn't good at all.

I have no idea how you can say that selling for a loss would be poor planning.  At the worst, it would be bad timing, but poor planning is kind of insulting.  I've given this a lot of thought.  It may not apply to your particular situation or risk tolerance, but just because it's different doesn't mean it's coming from a place of ignorance. 

What's the chance that a real emergency happens?  Something so bad that I've used up all of my cash inflows, all of my savings account (yes, I keep a couple of grand in my savings), all of my CC limit, and now I have to sell stocks at a loss (of which I can offset $3K worth of future gains).  Here's what would have to happen within a short time frame -- economy tanks, lose job for cause (i.e. no unemployment), wife loses job for cause, get injured in car or bike crash, unable to find a new job after a few months.  I'm putting the odds of all of those coming together at about .01%.  If only one or two of those happen, all at a low risk, then I'm fine.  And even if the worst luck in the world happens, the worst that I'm looking at is having to sell stock at a loss over a period of time?  I like those odds.

In exchange I get $20K+ in the market earning returns.  Since I did this a couple of years back, I can already stand to take about a 40% hit to the market and still break even.  And again, I never expect to need this because the chance of all of those bad things happening is remote and it's a risk I'm willing to take.  Poor planning my ass.

I use the word 'planning' in reference to 'financial planning' if you don't plan in the EF in the manner I suggested, which I might add is hardly revolutionary in terms of financial planning then you will be forced to sell low.

Therefore if the event happens that you sold low, it was due to poor planning, whereas good planning would have baked in the EF buffer and protected your assets.  I am talking about planning concepts being poor or good, not you personally, so it shouldn't be insulting.

And yes, you can make your whopping returns in the market, but if that is the case do you intend to be 100% allocated into stocks, or do you diversify for risk management?

An EF is a risk management tool, that has some opportunity costs - I would say about 5-6% per year for the amount of the fund (which should be rather small in comparison, to your assets).  If you don't have the assets to protect, or feel the need to protect them then don't do it - it really is no different from insurance.