Author Topic: Suggestions for Emergency Fund Investment  (Read 6511 times)

Chaplin

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Suggestions for Emergency Fund Investment
« on: June 24, 2014, 09:55:29 PM »
This question has a some Canadian specifics but is somewhat universal.

In addition to a line of credit, I keep a cash emergency fund. Right now it's in a money-market savings account. I have set up a TFSA (closest US parallel is a Roth IRA, but TFSA is more flexible) to hold the emergency fund instead so even if I just put it back into a money-market account, the TFSA would at least shelter the interest unlike my current account.

The question is this, what other options beyond a money-market account might be a good option to invest what's intended to be an emergency fund? Low volatility so there's little issue with the timing of a withdrawal seems to be key.

I would consider something like Nassim-Taleb's approach of 80% super low-volatility and 20% shoot-for-the-moon, but am looking for ideas and thoughts.

My wife and I are in a good situation so this emergency fund isn't the only thing standing being us and disaster which is why I don't want to just leave this cash doing essentially nothing.

matchewed

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Re: Suggestions for Emergency Fund Investment
« Reply #1 on: June 25, 2014, 05:24:23 AM »
I'm an optimism person personally. If you're in debt and working to get out (not including low interest rate debt for the sake of this sentence) then having your e-fund in a super safe place is important IMO. As your assets rise I think if you're okay with the risk you can become more aggressive with your e-fund.

I personally had moved my e-fund into my Roth IRA once I had plenty in the account. Even if I took a 50% bath on the account it would still have been more than my e-fund if things if I needed it when things went south. But that's my personal take and I'm comfortable with that level of risk and understand the downsides to it (primarily selling when the market is low).

But I can understand if you have a family to support or are more risk averse that you may view it differently.

Bob W

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Re: Suggestions for Emergency Fund Investment
« Reply #2 on: June 25, 2014, 09:05:34 AM »
Many financial gurus encourage emergency funds.   They often note 6 months of expenses as a magic number.   So let's say you spend 6 K per month.  That would be 36 K in the fund.   

I like to look at investments over 60 years. (I call this the grandkid fund)  So at a stock market average of 10% over 60 years your 36K would end up being worth about 3 -6 million adjusted for inflation.    A zero percent money market would be worth about $1,500.   That is a substantial difference to me.    And it keeps your cash from doing "essentially nothing."

If your worried about a 40% bump down in the market just when you have an emergency,  simply put 9 months into the stock fund.    I assume your high interest debts are all paid down?

So it is your choice  ---  Which would you rather your grandkids have?  Enough money for a spring break trip or enough money to live on for their entire lives?


Frankies Girl

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Re: Suggestions for Emergency Fund Investment
« Reply #3 on: June 25, 2014, 09:18:48 AM »
Many financial gurus encourage emergency funds.   They often note 6 months of expenses as a magic number.  So let's say you spend 6 K per month.  That would be 36 K in the fund.   

I like to look at investments over 60 years. (I call this the grandkid fund)  So at a stock market average of 10% over 60 years your 36K would end up being worth about 3 -6 million adjusted for inflation.    A zero percent money market would be worth about $1,500.   That is a substantial difference to me.    And it keeps your cash from doing "essentially nothing."

If your worried about a 40% bump down in the market just when you have an emergency,  simply put 9 months into the stock fund.    I assume your high interest debts are all paid down?

So it is your choice  ---  Which would you rather your grandkids have?  Enough money for a spring break trip or enough money to live on for their entire lives?

Holy mother of dog - who would be spending 6K a month on a FIRE site? That's crazypants.

I like matchewed's suggestion. I'm considering this move myself as even with a huge drop, we'd still have plenty to pull out in an emergency, and we have an insane amount of credit available to us in the event of a real emergency. We do still plan on keeping a few thousand in a savings account just for easy access (and because my husband prefers it that way) but I'd probably be closer to like 1% of my total assets in cash if I had my way... it all depends on your comfort levels with a cash cushion vs. investing.

AJDZee

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Re: Suggestions for Emergency Fund Investment
« Reply #4 on: June 25, 2014, 09:19:50 AM »
Ok, if you're spending 6k per month I'd say an emergency fund isn't your priority... it's sitting down and cutting your spending in half! It will be far more powerful than stocking money away into different investments. Earning between 0.5% or 10% is nothing compared to the benefit of cutting spending.

I don't think OP has a budget like that, I think the $6k/month scenario was picked so you could show a massive difference down the road... but still my point stands regardless.

My $5,000 e-fund is in a "high-interest" TFSA, enough for 2 months... on top of my regular chequing account, EI... and worst case, I could sell some ETFs in my TFSA. With all of those in mind, I could live for a few years before I'd have to borrow a penny.

YoungInvestor

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Re: Suggestions for Emergency Fund Investment
« Reply #5 on: June 25, 2014, 09:23:17 AM »
I'd put my investments with the largest expected return in the TFSA, if I were you. In the long run, you're better off not paying taxes on a 7% return than on a 1-2% interest.

This is a mistake many people do with the marketing on TFSAs mostly being about savings accounts.

EDIT : It is a mistake in my opinion, not necessarily in other people's.
« Last Edit: June 25, 2014, 09:25:32 AM by YoungInvestor »

nereo

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Re: Suggestions for Emergency Fund Investment
« Reply #6 on: June 25, 2014, 09:47:35 AM »
Many financial gurus encourage emergency funds.   They often note 6 months of expenses as a magic number.   So let's say you spend 6 K per month.  That would be 36 K in the fund.   

I like to look at investments over 60 years. (I call this the grandkid fund)  So at a stock market average of 10% over 60 years your 36K would end up being worth about 3 -6 million adjusted for inflation.    A zero percent money market would be worth about $1,500.   That is a substantial difference to me.    And it keeps your cash from doing "essentially nothing."
Frankie's Girl said it best about the spending $6k per month on a FIRE site....
I just have to take issue with the 10% stock market average over 60 years adjusted for inflation.  The greatest 50 year period I can find is 9.2%, and that's pretty extraordinary.  Average is just over 7%, worst is 4.7%.  If we assume a still thick $16k and 7% returns, that's just under $1M, not "3-6 million adjusted for inflation".
Your point that having a huge emergency fund limits those employees from doing anything still holds Bob Werner, but let's be realistic with the math, ok?

AJDZee

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Re: Suggestions for Emergency Fund Investment
« Reply #7 on: June 25, 2014, 12:06:10 PM »
I'd put my investments with the largest expected return in the TFSA, if I were you. In the long run, you're better off not paying taxes on a 7% return than on a 1-2% interest.

This is a mistake many people do with the marketing on TFSAs mostly being about savings accounts.

EDIT : It is a mistake in my opinion, not necessarily in other people's.

Great point, YoungInvestor.
I should have clarified I hold that money in my TFSA only because I still have contribution room until the end of this year when I max out.
At the end of the year I'll be moving that money to a regular account so I'll have $10,500 limit in 2015.

Johnny Aloha

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Re: Suggestions for Emergency Fund Investment
« Reply #8 on: June 25, 2014, 12:25:03 PM »
I'm an optimism person personally. If you're in debt and working to get out (not including low interest rate debt for the sake of this sentence) then having your e-fund in a super safe place is important IMO. As your assets rise I think if you're okay with the risk you can become more aggressive with your e-fund.

I personally had moved my e-fund into my Roth IRA once I had plenty in the account. Even if I took a 50% bath on the account it would still have been more than my e-fund if things if I needed it when things went south. But that's my personal take and I'm comfortable with that level of risk and understand the downsides to it (primarily selling when the market is low).

But I can understand if you have a family to support or are more risk averse that you may view it differently.

This is what we are moving towards also, as well as keeping lots of available credit.  I also keep a fair amount in BRK.B which I consider an emergency fund - stable, solid underlying asset, and unlikely (although very possible) to decrease in value (2009 was -9%).

I've always kept a sizable amount in a short term bond fund paying 2%, and have never touched the money.  It just sits there.  So now it's time to put it to work.

AssetGrinder

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Re: Suggestions for Emergency Fund Investment
« Reply #9 on: June 25, 2014, 02:58:57 PM »
Many ways you can go about this. Some love putting money into their TFSA and some are firmly against it. There is positives and negatives to both. The safe route is to go with a short term bond fund ETF in your tfsa. Corporate Canadian investment grade 1-5 year bond ladders from ishares CBO yields 4.11% paid monthly which is not too shabby for a safer investment. Or you could shop around for GIC CD rates at about 2% for something redeemable after 90 days.

Best of luck!

Bob W

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Re: Suggestions for Emergency Fund Investment
« Reply #10 on: June 26, 2014, 08:34:24 AM »
Many financial gurus encourage emergency funds.   They often note 6 months of expenses as a magic number.   So let's say you spend 6 K per month.  That would be 36 K in the fund.   

I like to look at investments over 60 years. (I call this the grandkid fund)  So at a stock market average of 10% over 60 years your 36K would end up being worth about 3 -6 million adjusted for inflation.    A zero percent money market would be worth about $1,500.   That is a substantial difference to me.    And it keeps your cash from doing "essentially nothing."
Frankie's Girl said it best about the spending $6k per month on a FIRE site....

I just have to take issue with the 10% stock market average over 60 years adjusted for inflation.  The greatest 50 year period I can find is 9.2%, and that's pretty extraordinary.  Average is just over 7%, worst is 4.7%.  If we assume a still thick $16k and 7% returns, that's just under $1M, not "3-6 million adjusted for inflation".
Your point that having a huge emergency fund limits those employees from doing anything still holds Bob Werner, but let's be realistic with the math, ok?

Doing math of the future based on the past is always just wishful thinking.  lol

You're are correct about the 10% average return.  Yet this is a number often noted by financial gurus.  I'm an ex investment broker so 10% has been pretty easy.  It's hitting the 12% average with a low beta that is harder.  For the average Joe I would suggest they are unlikely to ever beat inflation and probably will buy high and sell low for a loss.  (this is about 70% of individual investors and hopefully not our readers here).

6K a month in spending?  That is probably about average for the 2 income family.   They pretty much spend everything and thus the need for an emergency fund.  People who have money don't need one.   They should invest every single dollar.   If your correct about the $1,000,000 that is still bigger than $1,500 in 60 years by a factor of 666.  And the risk of a so called "emergency"  tend to decrease to near zero as one becomes wealthier.

Here's some things people consider emergencies ---  Heater out,  loss of job,  car break down,  medical problem.   They really more like foreseeable events as in all heaters will eventually go out, most cars eventually break down,  most people eventually have a medical issue.   

So for me these emergencies are anticipated events.  I just don't know when?

Chaplin

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Re: Suggestions for Emergency Fund Investment
« Reply #11 on: June 26, 2014, 08:57:00 PM »
Thank you all. The discussion has helped clarify my thinking about this.

I didn't give a lot of details about my situation (apologies for that), so a wide range of responses make sense.

A few thoughts and points related to the comments:

1. The only reason I'm considering tax-sheltering the gains in my emergency fund, when they are likely to be very modest, is that I have the room in the TFSA right now. I have now filled up my RRSP room and am working on filling up my wife's, but it will be several years yet before we can can fill up the TFSA room. Once that happens, "investment grade" money will push the emergency fund back out into a non-registered account.

2. Why have an emergency fund at all? With credit card room and line of credit, I can certainly float all the usual "emergencies" which were pointed out by Bob Werner to be expected, just not scheduled. The key for me is that we live in Vancouver and have a mortgage. Being Canada, there's no mortgage tax deduction, so in addition to the Vancouver-sized payment, I'm dumping in a lot of extra principal (while still maxing out my RRSP and very close to matching out my wife's). There are good arguments for paying the minimum on the mortgage and maxing out the TFSAs right away rather than paying extra principal, but let's call this my Canadian compromise. The emergency fund is to ensure that the mortgage doesn't become a problem in the event of the loss of one of our incomes. Even if that happened, we could get by on one income, but that would require refinancing the mortgage into a longer term to bring the payment down.

3. The mortgage will be paid off in five years barring anything unexpected, so what I'm really looking for is suggestions on how to have the emergency fund generate a moderate return for a moderate risk. One way or another, I'm not going to make much off this "investment" but can it be "a little" versus "very little." The final payment to finish off the mortgage will probably be the contents of the emergency fund itself, since it won't be necessary any more.


TomTX

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Re: Suggestions for Emergency Fund Investment
« Reply #12 on: June 28, 2014, 05:51:05 AM »

You're are correct about the 10% average return.  Yet this is a number often noted by financial gurus.  I'm an ex investment broker so 10% has been pretty easy.  It's hitting the 12% average with a low beta that is harder.  For the average Joe I would suggest they are unlikely to ever beat inflation and probably will buy high and sell low for a loss.  (this is about 70% of individual investors and hopefully not our readers here).

You are claiming a regular 10% or better return on your investments, after inflation adjustment, every year? That means a raw return of 12-13%, even in these low-inflation times.

For how many years?

ender

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Re: Suggestions for Emergency Fund Investment
« Reply #13 on: June 28, 2014, 06:02:35 AM »
If you need an emergency fund of $10k you might considering doubling that number  to 20k but then investing it.

That way even if the value drops by 50% you still have the amount you need for emergencies.

Bob W

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Re: Suggestions for Emergency Fund Investment
« Reply #14 on: July 15, 2014, 08:28:54 AM »

You're are correct about the 10% average return.  Yet this is a number often noted by financial gurus.  I'm an ex investment broker so 10% has been pretty easy.  It's hitting the 12% average with a low beta that is harder.  For the average Joe I would suggest they are unlikely to ever beat inflation and probably will buy high and sell low for a loss.  (this is about 70% of individual investors and hopefully not our readers here).

You are claiming a regular 10% or better return on your investments, after inflation adjustment, every year? That means a raw return of 12-13%, even in these low-inflation times.

For how many years?

Sorry, not Bernie Madoff here. lol     As I mentioned,  all projections of the future are wishful thinking.   

That said, one can put together a low beta group of stock, bond and REITs diversified over countries that shows a past performance for 15 years of 10+ percent average, with a down year max of 5%.   Will it do it in the future?  Who the heck could predict that?    I think it is more than prudent to adjust assumptions for inflation.   

So a 8% return after taxes probably just barely beats inflation.

(I'm defining inflation as the ever increasing cost of goods and services caused by what former fed Chairman,  Ben Bernake termed "the inflation tax.")

Cost of goods for MMM readers shouldn't be that big of a factor, since we buy so few, but it can be a bummer to note that the projected 3 million in investments you anticipate in 14 years might only be worth 1 million. 

Bob W

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Re: Suggestions for Emergency Fund Investment
« Reply #15 on: July 15, 2014, 09:06:04 AM »

3. The mortgage will be paid off in five years barring anything unexpected, so what I'm really looking for is suggestions on how to have the emergency fund generate a moderate return for a moderate risk. One way or another, I'm not going to make much off this "investment" but can it be "a little" versus "very little." The final payment to finish off the mortgage will probably be the contents of the emergency fund itself, since it won't be necessary any more.
[/quote]

IMHO,  buying a house and paying off a mortgage is a personal choice that people should make with lots of information.   May I share the following?

Assumptions -
500 K mortgage at 4% for 30 years
500 K in investments at 8% for 30 years

At the end of 30 years you will have 4 million in investments and a home valued at approximately 1.5 million.

If you pay off your home today instead of investing the 500K, in 30 years you will only have the 1.5 million home. 

So here is food for thought --

If the mortgage is a stress consider some options --

1.  Sell the home and rent a very nice home.  (this pretty much covers the fear of job displacement)
      Your rent will be nicely paid for out of your investment account from the sale of your home.  You will also transfer the home emergency risk to the landlord thus decreasing the need for a home emergency fund all together.  And you will be free to pursue future employment or fun opportunities without having to worry about selling your home in a down market. 
2.  Refinance you home at an interest only 30 year note.   This should cut your monthly mortgage by 30 to 40 percent.  This may help with the fear of losing the job scenario.
3.  Sell your home and buy a cheaper one with a much lower mortgage.   

(Special Note:  My wife considers where we live a "home,"  while I consider it a "house."  She also considers me a 24/7 free handyman and landscape service.  Whereas I only do that in my spare time!  Of course, since I'm writing this,  I'm correct and she is errant.)

Mortages are a tool that can help you amass a great deal of wealth over time.   My biggest frustration with MMM is that he paid cash for his home.  IMHO this is the complete opposite of badassity  --- the opposite being wussassity.

I believe it is wiser to have the money to pay off your home but to never have more than 30% equity tied up in the home. 

Or you could use the 33,33,33 theory.   Put 33 percent of your investments into real estate, stocks and bonds.   (eggs in a basket theory)

So if your home is 500K and paid off and you have less than 1 million in stocks and bonds,  it is prudent to move some of that house money to stock and bond money.   

MMM appears to be close to the 33 theory at some level.

As I said at the beginning --- buying a home or paying off a mortgage are personal choices.  I just wanted to share the reasoning behind not paying off a mortgage.   

Scandium

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Re: Suggestions for Emergency Fund Investment
« Reply #16 on: July 15, 2014, 02:24:29 PM »
Many financial gurus encourage emergency funds.   They often note 6 months of expenses as a magic number.  So let's say you spend 6 K per month.  That would be 36 K in the fund.   

I like to look at investments over 60 years. (I call this the grandkid fund)  So at a stock market average of 10% over 60 years your 36K would end up being worth about 3 -6 million adjusted for inflation.    A zero percent money market would be worth about $1,500.   That is a substantial difference to me.    And it keeps your cash from doing "essentially nothing."

If your worried about a 40% bump down in the market just when you have an emergency,  simply put 9 months into the stock fund.    I assume your high interest debts are all paid down?

So it is your choice  ---  Which would you rather your grandkids have?  Enough money for a spring break trip or enough money to live on for their entire lives?

Holy mother of dog - who would be spending 6K a month on a FIRE site? That's crazypants.

I like matchewed's suggestion. I'm considering this move myself as even with a huge drop, we'd still have plenty to pull out in an emergency, and we have an insane amount of credit available to us in the event of a real emergency. We do still plan on keeping a few thousand in a savings account just for easy access (and because my husband prefers it that way) but I'd probably be closer to like 1% of my total assets in cash if I had my way... it all depends on your comfort levels with a cash cushion vs. investing.

well, we'll soon have about $2,000 mortgage, $1,500 daycare and $1,500 expenses. Total  $5,000 so that's not that far off.. And I think we're reasonably frugal. Not MMM level, but better than average. (probably add some baby expenses, and daycare is actually $1700 first year as well..)

bolabin

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Re: Suggestions for Emergency Fund Investment
« Reply #17 on: July 15, 2014, 11:29:11 PM »
well, we'll soon have about $2,000 mortgage, $1,500 daycare and $1,500 expenses. Total  $5,000 so that's not that far off.. And I think we're reasonably frugal. Not MMM level, but better than average. (probably add some baby expenses, and daycare is actually $1700 first year as well..)

:O Kids are expensive