Author Topic: Where to keep emergency funds?  (Read 10081 times)

Captain Cactus

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Where to keep emergency funds?
« on: April 14, 2016, 04:54:59 PM »
I currently keep about $35,000 in a savings account for the emergency fund.  This equals about 10 months of our normal spending. 

What are your thoughts on putting about $15,000 into VTSAX?  If the situation arises that I need to tap into the emergency fund at the same time that the stock market crashes and drops 30% then I'll have $30,000 vs $35,000 in the E fund.  Just trying to get perspective on the opportunity cost of just leaving $35k in a regular savings account.

Thanks!


CanuckExpat

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Re: Where to keep emergency funds?
« Reply #1 on: April 14, 2016, 05:30:20 PM »
What's your asset allocation, if it is not 100% equities, you could do something like this:
Placing cash needs in a tax-advantaged account

plainjane

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Re: Where to keep emergency funds?
« Reply #2 on: April 14, 2016, 06:28:46 PM »
What other investable assets do you have?  What percentage is this 35k?

I think having 5 months of your emergency fund in cash, and 5 months invested is a good approach - it helps reduce the drag of having it all in cash while still giving you a solid base if you do need to tap into it.

Captain Cactus

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Re: Where to keep emergency funds?
« Reply #3 on: April 14, 2016, 06:58:47 PM »
What's your asset allocation, if it is not 100% equities, you could do something like this:
Placing cash needs in a tax-advantaged account

This is great, thank you!

Captain Cactus

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Re: Where to keep emergency funds?
« Reply #4 on: April 14, 2016, 07:00:24 PM »
What other investable assets do you have?  What percentage is this 35k?

I think having 5 months of your emergency fund in cash, and 5 months invested is a good approach - it helps reduce the drag of having it all in cash while still giving you a solid base if you do need to tap into it.

About $200,000 in retirement accounts, about $25,000 in taxable accounts, and the $35,000 in the emergency fund.


seattlecyclone

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Re: Where to keep emergency funds?
« Reply #5 on: April 14, 2016, 07:14:21 PM »
Series I savings bonds are worth considering for part or all of your emergency fund. They have better interest than any savings account (adjusted for inflation), and the nominal value won't go down. The only thing you should be aware of beforehand is that you can't withdraw the money for a year, so maybe move half your emergency fund one year and half the next year.

The Mobile Mustachian

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Re: Where to keep emergency funds?
« Reply #6 on: April 15, 2016, 07:17:47 AM »
One thing to consider is - what is an emergency? If you are incapacitated, will your significant other have the means to access these funds easily? If they are unlikely to know how to sell treasuries or stocks, then is a savings account a better option? Just food for thought.

Curbside Prophet

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Re: Where to keep emergency funds?
« Reply #7 on: April 15, 2016, 02:50:14 PM »
Look for the thread here about the Netspend/Brinks prepaid cards.  You can probably take $20k-$25k and put it in an FDIC insured savings account and earn 5%.

steveo

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Re: Where to keep emergency funds?
« Reply #8 on: April 15, 2016, 09:56:46 PM »
I've been thinking is it a good idea just to have some money in the emergency fund say a grand or two but have the rest in bonds. Your bond allocation can be utilised as your emergency fund.

Interest Compound

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Re: Where to keep emergency funds?
« Reply #9 on: April 15, 2016, 11:20:04 PM »
I keep just enough in the bank to pay next month's bills. After that, everything is invested. Here's a fun chart I made in another thread to explain why I'm 100% stocks:

Emergency fund - break even calculation

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



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

steveo

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Re: Where to keep emergency funds?
« Reply #10 on: April 16, 2016, 02:10:26 AM »
IC - I like that breakdown but it looks to me like you are assuming a 10% growth rate in stocks. I don't think that is realistic.

Livewell

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Re: Where to keep emergency funds?
« Reply #11 on: April 17, 2016, 08:39:37 PM »
An emergency fund, whatever the amount you define it as, should be in a place that isn't part of the market and available quickly for the possible emergency.  Really this means cash or money market or maybe treasuries, something where safety and liquidity are the most important factors.

If you're thinking VTSAX is a good place because you want a better return, you probably have too much in your emergency fund.

Interest Compound

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Re: Where to keep emergency funds?
« Reply #12 on: April 17, 2016, 09:24:14 PM »
IC - I like that breakdown but it looks to me like you are assuming a 10% growth rate in stocks. I don't think that is realistic.

Sure. Reducing it only adds a few years. The concept still holds.

Retire-Canada

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Re: Where to keep emergency funds?
« Reply #13 on: April 18, 2016, 08:21:48 AM »
I currently keep about $35,000 in a savings account for the emergency fund.  This equals about 10 months of our normal spending. 

What are your thoughts on putting about $15,000 into VTSAX?  If the situation arises that I need to tap into the emergency fund at the same time that the stock market crashes and drops 30% then I'll have $30,000 vs $35,000 in the E fund.  Just trying to get perspective on the opportunity cost of just leaving $35k in a regular savings account.

Thanks!

Like IC I keep all my money invested. I'm 47 and have never needed an emergency fund to solve a problem. I now have more money than ever saved and invested. I have a non-home equity based line of credit with a $30K limit. I've got several steps of safety net before I even think about selling investments.

If my investments happen to be down 30% when I need a few bucks so what? As IC's post points out it doesn't take long before you are way further ahead to leave your money invested than to sit on cash earning less than inflation.

To put this all in perspective I do contract work that can end/change anytime this has happened several times. I don't have a super stable job.

In your case if you put $15K in VTSAX and $20K in a bond fund you'd do better than cash and have a pretty safe EF investment you could access if you ever needed it. If it was me I'd go mostly in on stocks with a smaller % in bonds in accordance with my risk tolerance and investment plan.
« Last Edit: April 18, 2016, 08:26:35 AM by Retire-Canada »

2buttons

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Re: Where to keep emergency funds?
« Reply #14 on: April 18, 2016, 10:07:01 AM »
If it were me, I would probably take it back to 6 months and invest the remainder, particularly because you have 7+ months in your taxable account as well. 

That way you have the peace of mind of a six month cash fund, and you are investing a good chunk.  Over time when the taxable account increases in size, you can even slowly reduce your emergency fund further by adding to your positions to say 3 months, and even on down to 1 month in advance.

To me, the emergency fund is more important at the beginning, and becomes less important as your taxable war chest increases in size. 

KBecks

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Re: Where to keep emergency funds?
« Reply #15 on: April 18, 2016, 04:54:37 PM »
You keep it in a local bank savings account / money market account where you can literally walk in any afternoon and walk out with your money.

It's an emergency fund, the job of this money is to be there when you need it.  It's like insurance, you don't expect a return, you forego return to have the money serve its intended purpose.

Your long term investments stay invested for at least 3-5 years.


Captain Cactus

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Re: Where to keep emergency funds?
« Reply #16 on: April 18, 2016, 07:52:57 PM »
OP here.  Thank you all for the feedback.  Out of the $35,000 I am going to keep $25,000 in the savings account.  I am going to take $10,000 and put $5,000 into VTSAX and $5000 into either:

1) Vanguard Total Bond Market Index, or...
2) Vanguard LifeStrategy Income Fund.

What are your thoughts on these two?


Interest Compound

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Re: Where to keep emergency funds?
« Reply #17 on: April 18, 2016, 10:47:00 PM »
OP here.  Thank you all for the feedback.  Out of the $35,000 I am going to keep $25,000 in the savings account.  I am going to take $10,000 and put $5,000 into VTSAX and $5000 into either:

1) Vanguard Total Bond Market Index, or...
2) Vanguard LifeStrategy Income Fund.

What are your thoughts on these two?

LifeStrategy Income is more diversified, and has less volatility. But do you really want both funds? LifeStrategy Income and VTSAX overlap a bit. If this is an option, I'd just keep it simple and go for either the 60/40 or 80/20 LifeStrategy funds.

Captain Cactus

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Re: Where to keep emergency funds?
« Reply #18 on: April 20, 2016, 08:14:21 PM »
OP again.  I want to thank you all for your input and feedback.  I ultimately went with $10,000 in VASIX (Vanguard LifeStrategy Income, 80% bonds and 20% equities).  There it shall sit in my taxable Vanguard account while I pile up VTSAX around it (after maxing out my retirement accounts of course).  $25,000 will remain in my savings account. 




Retire-Canada

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Re: Where to keep emergency funds?
« Reply #19 on: April 21, 2016, 07:05:22 AM »
Glad you got some useful advice.

If you get 5% total return/yr after inflation on that $10K you invested you'll have ~$17 in 10yrs vs. $9K if you let it sit in a savings account and it lost 1%/yr due to inflation. The difference of $8K is a great passive boost to your FIRE plans and if it the market then drops 40% you'll still have ~$10K available as EF funds if you must sell.

Every little bit helps!

PhysicianOnFIRE

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Re: Where to keep emergency funds?
« Reply #20 on: April 21, 2016, 09:38:50 AM »
I keep enough to pay utility bills and other smallish expenses in a local bank ($1k to $2k).

I keep 1 to 2 months worth of expenses at Ally Bank for the 1% interest. Always more than enough there to cover a big months' expenses.

I've got dozens of months' expenses invested in a taxable account with Vanguard.  VTSAX, VFIAX, and VFWAX. This could be liquid in the local bank within 2 business days, so I consider it a part of the emergency fund equation.

mikesinWV

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Re: Where to keep emergency funds?
« Reply #21 on: April 21, 2016, 10:27:03 AM »
Look for the thread here about the Netspend/Brinks prepaid cards.  You can probably take $20k-$25k and put it in an FDIC insured savings account and earn 5%.

There is a FDIC insured savings account paying nearly 5%?

Scandium

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Re: Where to keep emergency funds?
« Reply #22 on: April 21, 2016, 12:29:23 PM »
Glad you got some useful advice.

If you get 5% total return/yr after inflation on that $10K you invested you'll have ~$17 in 10yrs vs. $9K if you let it sit in a savings account and it lost 1%/yr due to inflation. The difference of $8K is a great passive boost to your FIRE plans and if it the market then drops 40% you'll still have ~$10K available as EF funds if you must sell.

Every little bit helps!

This is true. On other hand; we're saving $50k+ per year, so a difference of $8k over 10 years is not that much for having cash available and FDIC insured. I don't think there's a totally wrong answer. Having $10k is always a good thing..

I've accessed the "emergency fund" for $8-12k several times in the last few years for new HVAC, floors and a car. So the cash account does see a bit of rotation. Keeping 100% in stocks seems like a bit of a hassle and risky. I might consider holding $5-10k in bonds though.