Author Topic: Which Vanguard Fund for Emergency Fund?  (Read 29423 times)

bootyman

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Which Vanguard Fund for Emergency Fund?
« on: February 07, 2015, 01:35:45 PM »
I've decided to move a portion of my emergency fund out of the checking account and into a conservative vanguard fund.  Which fund would you recommend?

I am entertaining..

VBMFX - Total Bond Market Index Fund
VWITX - Intermediate-Term Tax-Exempt Fund
VBIIX - Intermediate-Term Bond Index Fund

They all have genereted pretty smooth returns.  I am in the 28% tax bracket if that makes a difference. 

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #1 on: February 07, 2015, 02:14:14 PM »
Taxable account? Yes, if you don't want any stocks in your emergency fund account, VWITX - Intermediate-Term Tax-Exempt is the way to go.

Personally, I just put everything into my 80/20 Stock/Bond fund.

SaintM

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #2 on: February 07, 2015, 02:48:08 PM »
Each of those funds has a $3,000 minimum initial investment.  If your emergency fund is that big, it's not really an emergency fund anymore.  Think of it as your (first?) investment account.  After that, put the rest of your money in stocks, or Dodge's 80/20 stock/bond allocation.

Gin1984

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #3 on: February 07, 2015, 02:49:19 PM »
Each of those funds has a $3,000 minimum initial investment.  If your emergency fund is that big, it's not really an emergency fund anymore.  Think of it as your (first?) investment account.  After that, put the rest of your money in stocks, or Dodge's 80/20 stock/bond allocation.
My EF which covers one month of expenses is $3000, why would you say that is too big for an EF?

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #4 on: February 07, 2015, 02:56:48 PM »

Each of those funds has a $3,000 minimum initial investment.  If your emergency fund is that big, it's not really an emergency fund anymore.  Think of it as your (first?) investment account.  After that, put the rest of your money in stocks, or Dodge's 80/20 stock/bond allocation.
My EF which covers one month of expenses is $3000, why would you say that is too big for an EF?

Indeed, "too big" should be determined by # of months it covers, not a dollar amount. So if you wanted a 6-month emergency fund, $18,000 is your number. If I thought that was too high, it wouldn't be $18,000 that's too high, it'd be the 6 months.

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #5 on: February 07, 2015, 03:29:17 PM »
I don't see any reason that an emergency fund should be held in anything but cash, in an insured savings account. People got burned in the recent crisis trying to find a way to make a tiny incremental return on their cash holdings. For an emergency fund, having immediate liquidity, i.e. holding your fund in a savings account connected to a checking account, is far more valuable than making a 1.5% return over a 0.25% return.

GGNoob

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #6 on: February 07, 2015, 03:30:55 PM »
Personally, I'd do something more like a Lifestrategy 20/80 or 40/60 stock/bond fund. I also really like Vanguard Wellesley Income Fund for an "emergency" fund. But that's just me.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #7 on: February 07, 2015, 03:36:23 PM »

I don't see any reason that an emergency fund should be held in anything but cash, in an insured savings account. People got burned in the recent crisis trying to find a way to make a tiny incremental return on their cash holdings. For an emergency fund, having immediate liquidity, i.e. holding your fund in a savings account connected to a checking account, is far more valuable than making a 1.5% return over a 0.25% return.

I can't imagine an emergency which:

1.  Couldn't wait 1-2 business days to transfer money from my Vanguard account to my bank account

And

2. Couldn't be floated on my credit cards

And

3. Couldn't be paid by check.

Seriously, can you give me an example? It might change my thinking on this.

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #8 on: February 07, 2015, 03:45:17 PM »

I don't see any reason that an emergency fund should be held in anything but cash, in an insured savings account. People got burned in the recent crisis trying to find a way to make a tiny incremental return on their cash holdings. For an emergency fund, having immediate liquidity, i.e. holding your fund in a savings account connected to a checking account, is far more valuable than making a 1.5% return over a 0.25% return.

I can't imagine an emergency which:

1.  Couldn't wait 1-2 business days to transfer money from my Vanguard account to my bank account

And

2. Couldn't be floated on my credit cards

And

3. Couldn't be paid by check.

Seriously, can you give me an example? It might change my thinking on this.

My flow of logic is:

1. You should hold your emergency fund in cash, because many supposedly "cash-like" vehicles can lose you money, I.e. all of the bond funds OP mentioned have seen fluctuations of up to 10-20% in value over time.

2. All else equal, greater liquidity is desirable.

3. Thus, it is better to hold your emergency fund in a savings account than as cash in some less-liquid vehicle at Vanguard or elsewhere.

Peace of mind is the key. A fund such as this should be a very tiny percentage of your net worth if you are following the advice on this site. If you have all of the rest of your net worth in higher yielding assets, it won't make any difference financially to keep a few months in cash.
« Last Edit: February 07, 2015, 03:47:47 PM by phillyvalue »

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #9 on: February 07, 2015, 03:48:29 PM »

I don't see any reason that an emergency fund should be held in anything but cash, in an insured savings account. People got burned in the recent crisis trying to find a way to make a tiny incremental return on their cash holdings. For an emergency fund, having immediate liquidity, i.e. holding your fund in a savings account connected to a checking account, is far more valuable than making a 1.5% return over a 0.25% return.

I can't imagine an emergency which:

1.  Couldn't wait 1-2 business days to transfer money from my Vanguard account to my bank account

And

2. Couldn't be floated on my credit cards

And

3. Couldn't be paid by check.

Seriously, can you give me an example? It might change my thinking on this.
An emergency fund exists partly to cover for situations you cannot predict.

surfhb

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #10 on: February 07, 2015, 03:51:52 PM »
Your EF should be a paltry sum compared to your net worth ( or eventually will be).    This is an insurance policy and nothing more....keep it in cash at bank.   

Id sure be bummed if I lost half my EF, half my retirement investment value AND my job at the same time......That can be reality very easily.     Make sense?



« Last Edit: February 07, 2015, 04:01:26 PM by surfhb »

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #11 on: February 07, 2015, 04:16:43 PM »
I'm with MrMoneyMustache on this one:

http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

While I understand why some people feel they need it, I'm not one of them.

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #12 on: February 07, 2015, 04:32:02 PM »
Some HELOC were frozen during the financial crisis. Obviously another housing crisis may not be on anyone's mind, but if equity in your home declines significantly and credit freezes up, it's possible.

In my case, I don't own a home, so the point is moot. But I think generally worrying about the lost interest on a very small portion of your portfolio falls into the "penny wise, pound foolish" category.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #13 on: February 07, 2015, 05:07:03 PM »
Some HELOC were frozen during the financial crisis. Obviously another housing crisis may not be on anyone's mind, but if equity in your home declines significantly and credit freezes up, it's possible.

In my case, I don't own a home, so the point is moot. But I think generally worrying about the lost interest on a very small portion of your portfolio falls into the "penny wise, pound foolish" category.

I'd guess that most people here have a higher credit card limit, especially across all their credit cards, than their emergency fund would be.

A single $3,000 (one month) deposit would compound to $445,000 over my expected lifetime.

A single $18,000 (6 month) deposit, would compound to $2.6 million over my expected lifetime.

A single $18,000 (6 month) deposit, made on the day your baby was born, would fully pay for their college education upon graduation.

I have nothing against those who feel the opportunity cost is worth it, but I'm not one of them.  If I suddenly needed $18,000 in physical cash to hand someone:



All the credit cards and other lines of credit were somehow frozen, no additional lines of credit could be opened anywhere (banks/personal loans...etc), checks were not accepted, my savings account is still accessible despite all this, it couldn't wait a few business days, and I didn't see it coming...I guess I'll just accept that risk.

SaintM

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #14 on: February 07, 2015, 05:26:18 PM »
Hard to be impressed with a stack of ones covered by a $100 note.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #15 on: February 07, 2015, 05:27:45 PM »
Hard to be impressed with a stack of ones covered by a $100 note.

That's the point.  :-P

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #16 on: February 07, 2015, 05:27:55 PM »
You're changing the subject pretty drastically. The OP's question was, should you store short term emergency funds in cash or a bond fund to earn an extra percent or two. Now you are comparing that to investing in stocks. I think it's fairly obvious that it's a bad idea to have 100% of your net worth invested in stocks. For most of us, there's a pretty strong correlation between our income from employment and the direction of the stock market. Probably one of the worst things you could do from a long-term perspective is to lose your job and have to tap your stock portfolio at a time when it has declined significantly.

And credit cards don't help with paying the rent.

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #17 on: February 07, 2015, 05:32:35 PM »
I'd guess that most people here have a higher credit card limit, especially across all their credit cards, than their emergency fund would be.
This is probably true. My combined credit limit is higher than my annual spending. And 63% or so of that annual spending can't even be paid by a CC anyway.


If your identity was stolen, I could see your credit cards and other lines of credit getting frozen (as in, you might end up having to freeze them yourself, and then get issued new cards. Though if you have multiple cards, the chances of all such cards needing to be reissued at the same time is practically zero).  So far fetched, to be sure.

But as you say, while I will always advise people to just using a savings account (or maybe a tiered emergency fund where the first tier is a savings account, and further tiers could possibly lose principal but do get a better return), it really is up to the individual - whatever they can SWAN with (sleep well at night).

Hard to be impressed with a stack of ones covered by a $100 note.
=P

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #18 on: February 07, 2015, 05:40:18 PM »
You're changing the subject pretty drastically. The OP's question was, should you store short term emergency funds in cash or a bond fund to earn an extra percent or two. Now you are comparing that to investing in stocks. I think it's fairly obvious that it's a bad idea to have 100% of your net worth invested in stocks. For most of us, there's a pretty strong correlation between our income from employment and the direction of the stock market. Probably one of the worst things you could do from a long-term perspective is to lose your job and have to tap your stock portfolio at a time when it has declined significantly.

And credit cards don't help with paying the rent.

Correct, I'm not addressing the OP's question.  I'm addressing the idea that not having an emergency fund falls into the "penny wise, pound foolish" category.

I'm not comparing it to a 100% stock portfolio.  I used the expected return of an 80/20 stock/bond portfolio.

Credit cards are just one of the many lines of credit I mentioned.  If I needed to pay rent, I'd pay with a check, or online through my checking account.  By the time it posts I will have had ample time to transfer over some funds from Vanguard.  If there were a truly exceptional situation, where their website no longer accepted checking account/check payments, and I need to pay rent in actual physical hard cash, and a credit card were literally my only option, I'd take it with me to the bank, and get a cash advance.

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #19 on: February 07, 2015, 06:27:55 PM »
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.
And what about when you lose your job during a market crash, forcing you to sell your investments at a substantial loss?

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #20 on: February 07, 2015, 06:41:52 PM »
Wow, what a scary thought... if I didn't have access to so many low-interest credit instruments. I can borrow hundreds of thousands of dollars at less than 2% interest. There is no need to sell any investments.
Where are you getting these loans? I'm not trying to be accusatory, I'm genuinely intrigued.

But let's assume I needed to sell $6,000 in investments to make it through a few months. Even in a market crash where things are down 50%, that only costs me $6,000 compared to selling at the market peak -- less than I can save in a month of work, and not a big deal at all.
And what if your unemployment extends more than just a few months?

And you say you can replace $6k in one month of work. Some of us here don't make that much in a month.

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #21 on: February 07, 2015, 06:49:33 PM »
There are many ways to get low-interest credit when you start to accumulate hundreds of thousands of dollars in investments -- such as margin, pledged asset lines, and similar products.
good to be true.
Again, you're giving advice that makes assumptions that may not be realistic for everybody. I do not have hundreds of thousands of dollars in investments that grant me 2% or less interest loans.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #22 on: February 07, 2015, 07:13:22 PM »
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.
And what about when you lose your job during a market crash, forcing you to sell your investments at a substantial loss?

If that's what you're trying to protect against, even a 6 month emergency fund won't last you through the crash.  If you still don't have a job after 6 months, you will have to sell some of your portfolio.

This seems more like an argument to not be 100% stocks, than it is to have a cash emergency fund.  But even if you were 100% stocks, and your portfolio dropped 50%, as Cathy mentioned, you'd only be losing 50% on the portion you had to sell.  So if you had to sell $18,000 for six months of expenses, and stocks were down 50%, that would have cost you an additional $18,000.  Since money in the stock market is expected to double every 7-10 years or so, that limits your risk of loss to that timeframe.

In other words, if your $18,000 investment has more than doubled, you'll be ahead by investing.  In that sense, a cash emergency fund really has a limited shelf-life of usefulness.  And that's the worst case 100% stocks scenario.  If you have bonds in your portfolio, you'll be just fine.

If your stock fund drops by half, and you need $18,000, you just take it from your bonds:



If your bond fund drops by half (hasn't ever happened, but for illustration purposes), you just take it from stocks:



That's the best part about diversification across uncorrelated asset classes.  It's unlikely they will both drop at the same time :)


johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #23 on: February 07, 2015, 11:33:56 PM »
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.
And what about when you lose your job during a market crash, forcing you to sell your investments at a substantial loss?

If that's what you're trying to protect against, even a 6 month emergency fund won't last you through the crash.  If you still don't have a job after 6 months, you will have to sell some of your portfolio.

This seems more like an argument to not be 100% stocks, than it is to have a cash emergency fund.  But even if you were 100% stocks, and your portfolio dropped 50%, as Cathy mentioned, you'd only be losing 50% on the portion you had to sell.  So if you had to sell $18,000 for six months of expenses, and stocks were down 50%, that would have cost you an additional $18,000.  Since money in the stock market is expected to double every 7-10 years or so, that limits your risk of loss to that timeframe.

In other words, if your $18,000 investment has more than doubled, you'll be ahead by investing.  In that sense, a cash emergency fund really has a limited shelf-life of usefulness.  And that's the worst case 100% stocks scenario.  If you have bonds in your portfolio, you'll be just fine.

If your stock fund drops by half, and you need $18,000, you just take it from your bonds:



If your bond fund drops by half (hasn't ever happened, but for illustration purposes), you just take it from stocks:



That's the best part about diversification across uncorrelated asset classes.  It's unlikely they will both drop at the same time :)
Thanks for the pushback Dodge and Cathy. I see your point and definitely need to think about this some more.

Just a nitpick - I can't take money from bonds in an emergency. Well I can, but it is incredibly undesirable to do so, because my bonds are in my Roth, and I'd be giving up very valuable Roth space to do so.
I'd imagine many people have bonds in retirement accounts which they don't want to withdraw from in an emergency.
(Again, just a nitpick - it's not that central to your point)

EDIT: And the solution to this is just to sell bonds in retirement account, buy stocks in retirement account, and sell stocks in taxable. Of course, this solution assumes you have a taxable account, which some people don't. I do though, so I could pursue this route.
« Last Edit: February 07, 2015, 11:42:04 PM by johnny847 »

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #24 on: February 07, 2015, 11:54:42 PM »
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.
And what about when you lose your job during a market crash, forcing you to sell your investments at a substantial loss?

If that's what you're trying to protect against, even a 6 month emergency fund won't last you through the crash.  If you still don't have a job after 6 months, you will have to sell some of your portfolio.

This seems more like an argument to not be 100% stocks, than it is to have a cash emergency fund.  But even if you were 100% stocks, and your portfolio dropped 50%, as Cathy mentioned, you'd only be losing 50% on the portion you had to sell.  So if you had to sell $18,000 for six months of expenses, and stocks were down 50%, that would have cost you an additional $18,000.  Since money in the stock market is expected to double every 7-10 years or so, that limits your risk of loss to that timeframe.

In other words, if your $18,000 investment has more than doubled, you'll be ahead by investing.  In that sense, a cash emergency fund really has a limited shelf-life of usefulness.  And that's the worst case 100% stocks scenario.  If you have bonds in your portfolio, you'll be just fine.

If your stock fund drops by half, and you need $18,000, you just take it from your bonds:



If your bond fund drops by half (hasn't ever happened, but for illustration purposes), you just take it from stocks:



That's the best part about diversification across uncorrelated asset classes.  It's unlikely they will both drop at the same time :)
Thanks for the pushback Dodge and Cathy. I see your point and definitely need to think about this some more.

Just a nitpick - I can't take money from bonds in an emergency. Well I can, but it is incredibly undesirable to do so, because my bonds are in my Roth, and I'd be giving up very valuable Roth space to do so.
I'd imagine many people have bonds in retirement accounts which they don't want to withdraw from in an emergency.
(Again, just a nitpick - it's not that central to your point)

EDIT: And the solution to this is just to sell bonds in retirement account, buy stocks in retirement account, and sell stocks in taxable. Of course, this solution assumes you have a taxable account, which some people don't. I do though, so I could pursue this route.

Aww man, I was building a long post to say just that!  Oh well, I'll just shorten and post it anyway :)

When you need the money, just sell whatever you have in taxable, and rebalance in your retirement account.  Even if Stocks had a crash and lost 50%, it doesn't matter.  When you rebalance in your retirement account you'll be able to buy those same Stocks for the same price (50% off!).

If you're more comfortable, you can also fill your taxable space with Intermediate Term - Tax Exempt Bonds (just as the OP is considering):

https://personal.vanguard.com/us/funds/snapshot?FundId=0042&FundIntExt=INT (Vanguard is performing maintenance, link not currently working)

These bonds should theoretically return a little less than normal bonds, but it doesn't really matter.  You gain a bit on the tax front, lose a bit on the returns front, and possibly gain a bit from having more stocks in your retirement accounts.  It all pretty much evens out in the end.  If keeping your immediately-available taxable account 100% bonds helps you sleep at night, it won't really affect your portfolio either way.  Indeed, some people actually prefer bonds in taxable!

http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

Really, these decisions just aren't that important.  The important decisions are things like your savings rate, your asset allocation, staying the course, keeping fees low...etc.  If you can keep those in-line, you'll be alright.

Indexer

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #25 on: February 08, 2015, 07:49:02 AM »
Well I personally use VASIX(LifeStrategy Income) as my emergency fund.

Well I keep 3k in cash, but the rest of the EF is in VASIX.

An 80B/20S portfolio like VASIX will normally drop about 10% in a major crash.  In 2008 VASIX dropped about 10.5%.  So just keep a little extra.  Instead of 180 days worth of expenses you have 200 days worth of expenses.(180X1.105=198.9)

Over the past 10 years it has averaged almost 5% returns.  Thats a whole lot better than cash. 

The rest of my portfolio is also 100% stocks right now, so no bonds to sell.  When I'm eventually at an 80/20 or 60/40 I might drop VASIX because as others have mentioned I could just sell bonds which will help with rebalancing anyway.


Couple side notes.

Using tax exempt intermediate:  Well first check your tax equivalent yield.  If you are in a low bracket tax exempt bonds will normally be a worse decision than corporates even in a taxable account.

Using debt:  This is stupid.  Its just plain stupid. 
Credit cards have very high rates so they don't make sense for anything longer than a month.
Lines of credit can be shut down in a crisis.  During '80/09 banks were closing or freezing lines of credit left and right.  I knew a financial planning professor who was on the CFP board who had his HELOC at the bank frozen because they were worried about housing values falling.  He had other resources and he didn't lose his job, but he laughed as he told me that was why no one should use a LOC as an EF.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #26 on: February 08, 2015, 09:39:43 AM »
Yes, if you're in a lower tax bracket, it's usually best not to use tax exempt bonds. Just use regular bonds. This keeps things very simple, as you can use the same bonds in your retirement and taxable accounts.

That's a good point. While it has never happened (that I'm aware of) that all credit card companies simultaneously froze all their cards everywhere, I guess that's a possibility. If that happens, I recommend selling some of your Vanguard funds and moving them to your savings account. Of course this assumes savings accounts are still around :)

That would limit your exposure to a few business days, while you're waiting for the funds to be transferred. Still significantly better than leaving it in savings the whole time, in my opinion.

Indexer

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #27 on: February 08, 2015, 12:11:42 PM »
Quote
Dude, why do you feel it is necessary to make a vitriolic statement, especially when you are not even correct?

Your opinion.  I'll trust someone on the CFP board and the CFP board/Investopedia/BankRate/Bank of America/Wells Fargo/Vanguard/etc./etc./etc. recommendations on this one.  You'll be hard pressed to find anything financial planners/investment firms ALL agree on as much as a liquid emergency fund.

If you have a LOC and it gets closed now you are selling investments in a down market.  And I don't agree selling investments in a down market is no big deal.  You might be ok with it, and you might have multiple LOC, but that doesn't make it prudent advice for every investor.  And having a LOC is a great thing, I'm not discounting it, but it should be in addition to liquid savings. 

I think it would be correct to assume most people on this website aren't living paycheck to paycheck, but I also don't think it's prudent to assume everyone has access to multiple lines of credit in multiple countries, credit cards at 7-8%, a portfolio large enough to handle selling in a down market(we do have some fresh mustachians you know), etc. 

And I do think it is stupid to tell people that its ok to use a credit card as an emergency fund.  That is dangerous advice.  Its fine for you, but people less knowledgeable as you can take that information and think its fine to just keep a CC as their emergency fund.  Now you end up with a novice investor/saver piling up credit card debt in an emergency, or selling stocks in a crisis, or both. 

I'm not trying to pick a fight, or say what you are doing is wrong.  I do however think it is wrong to broadcast that advice to everyone.

GGNoob

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #28 on: February 08, 2015, 12:35:25 PM »
People will never agree on emergency funds: Money Advice the Experts Don't Agree On: Emergency Funds

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #29 on: February 08, 2015, 01:22:48 PM »
I'm not trying to pick a fight, or say what you are doing is wrong.  I do however think it is wrong to broadcast that advice to everyone.

She's not broadcasting this advice to everyone. If you actually read her earlier posts, she specifically said
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.

YoungInvestor

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #30 on: February 08, 2015, 01:27:41 PM »
I generally keep 1 month of expenses around., but that's mostly for convenience. I have good enough health/disability insurance and I think my severance and the few months of weird climate at work before a layoff would cover me well enough. Financially, at least.

MidWestLove

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #31 on: February 08, 2015, 03:46:32 PM »
Speaking of the emergency fund/short term cash mediums - what is the right way to convert Averaged stated duration to interest rate sensitivity? i.e. VWITX (https://personal.vanguard.com/us/funds/snapshot?FundId=0042&FundIntExt=INT) with average stated duration of 4.7 years, what is expected of the fund price is interest rates tick up 100 basis points (1%) ?

Or does it belong in Ask a Moustachian?


Acg

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #32 on: February 08, 2015, 05:23:23 PM »
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.

I know I'm in the minority here but this just isn't true.  I was diagnosed with brain cancer a little over a year ago, I need a cash emergency fund.  I make a 6 figure income and I don't have financially irresponsible habits.  So while I know I'm in the minority here, your statement just isn't true.  Sorry.

Acg

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #33 on: February 08, 2015, 05:38:37 PM »
How does having brain cancer change whether you need a cash emergency fund?

Are you suggesting that life is so stressful from the cancer that you have better things to do than worry about the alternatives?

Wanting to reduce stress and keep things simple could be another reasonable argument for keeping some money in cash -- just recognise that it costs you money to do so, on average.

If I have a seizure tonight and am rushed to the hospital and have to have an emergency craniotomy, I need cash. 

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #34 on: February 08, 2015, 05:41:30 PM »
Whether you call it an emergency fund or not, anyone who anticipates that there is a high probability that they will need to spend more than they earn at a time within the next few years should hold that money in cash or very short term, risk-free investments. It may not seem like it based on recent history, but bonds can decline in value significantly; those that have been around for more than 6 years know that stocks can too. Being diagnosed with cancer seems like a logical reason to believe that spending may exceed earnings in the near future.

RyeWhiskey

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #35 on: February 08, 2015, 05:52:20 PM »
This thread is getting silly. Everyone should have an emergency fund, the point is that the form of that fund depends upon (like all things financial) one's context. Folks who advocate not having an emergency fund are twisting words; they have one, it's just not in a dedicated liquid form. It could be in a mental accounting form as a part of their taxable investments, theoretical lines of credit, etc. But they have one.

So which form is right for you? That depends upon the factors of your life which affect your tolerance for risk. Just as when one writes an investment policy statement and evaluates one's tolerance for investment risk, one ought evaluate one's tolerance for short-term cash needs and the risks associated therewith.

I keep my EF, which is approximately $5000, in a rewards checking account at my local credit union earning 3%. The rest of my money is invested with Vanguard. For the record, I strongly discourage the notion of using credit/debt as an emergency fund (margin included). This is pure lunacy as in an emergency the last thing you want to do is increase leverage, that is, unless you are a compulsive gambler.

johnny847

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #36 on: February 08, 2015, 05:53:53 PM »
How does having brain cancer change whether you need a cash emergency fund?

Are you suggesting that life is so stressful from the cancer that you have better things to do than worry about the alternatives?

Wanting to reduce stress and keep things simple could be another reasonable argument for keeping some money in cash -- just recognise that it costs you money to do so, on average.

If I have a seizure tonight and am rushed to the hospital and have to have an emergency craniotomy, I need cash.

I don't think you're talking about an emergency fund any longer. An emergency fund is for unexpected expenses. You, on the other hand, anticipate that the chance of having seizures is significant. So you are putting money aside for this scenario. It isn't really an unexpected expense anymore. I mean certainly there is randomness to whether you will have a seizure on any given night. But it's certainly different form somebody who is completely healthy putting aside money in case of a medical emergency.

NoraLenderbee

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #37 on: February 08, 2015, 05:57:59 PM »
When I lost my job unexpectedly in 2012, the LAST thing I wanted to do was borrow money, even cheaply. I can't imagine taking on CC debt deliberately when I'm out of work.

RyeWhiskey

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #38 on: February 08, 2015, 06:07:37 PM »
I find it surprising that so many people here seem to consider not having a job as an "emergency". I've taken unpaid breaks from work in the past just because I felt like it. It's really not a big deal for me. This whole website is based around retiring -- i.e. not working anymore. So it seems interesting to consider that as an emergency. Just think of your time without work as a preview of what retirement will be like, not as an emergency.

Your posts indicate that you clearly have no understanding of how many of us live and therefore make me doubt the value of your investment advice as it is clearly tailored to your life which has no real relationship to mine. I made $21,000 last year. In no way did I have the luxury of simply not working for fun.

GGNoob

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #39 on: February 08, 2015, 06:09:57 PM »
This thread is getting silly. Everyone should have an emergency fund, the point is that the form of that fund depends upon (like all things financial) one's context. Folks who advocate not having an emergency fund are twisting words; they have one, it's just not in a dedicated liquid form. It could be in a mental accounting form as a part of their taxable investments, theoretical lines of credit, etc. But they have one.

So which form is right for you? That depends upon the factors of your life which affect your tolerance for risk. Just as when one writes an investment policy statement and evaluates one's tolerance for investment risk, one ought evaluate one's tolerance for short-term cash needs and the risks associated therewith.

I keep my EF, which is approximately $5000, in a rewards checking account at my local credit union earning 3%. The rest of my money is invested with Vanguard. For the record, I strongly discourage the notion of using credit/debt as an emergency fund (margin included). This is pure lunacy as in an emergency the last thing you want to do is increase leverage, that is, unless you are a compulsive gambler.

+1

My "emergency fund" is pretty much like yours...1 month's expenses in checking account and the rest invested at Vanguard. I look at it more of our savings versus an emergency fund though. The 1 month's expenses will be used to pay annual expenses and taxes as needed and then replenished. I only keep some cash in my checking because I know I will need it for certain expenses throughout the year. Otherwise it would all be invested.

phillyvalue

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #40 on: February 08, 2015, 06:12:09 PM »
I find it surprising that so many people here seem to consider not having a job as an "emergency". I've taken unpaid breaks from work in the past just because I felt like it. It's really not a big deal for me. This whole website is based around retiring -- i.e. not working anymore. So it seems interesting to consider that as an emergency. Just think of your time without work as a preview of what retirement will be like, not as an emergency.

Because people on this site are actively preparing to retire early, they are likely better insulated against losing their job than the general population. But there is still a huge difference between unexpectedly losing your job and making a calculated decision to retire. The philosophy on here generally seems to be "Retire when you have enough," so the very fact that someone is not retired is evidence they don't have enough yet. And because getting fired and finding a new job for many people will likely mean a lower level of earnings, the retirement calculus can change significantly.


Indexer

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #41 on: February 08, 2015, 06:26:16 PM »
I'm not trying to pick a fight, or say what you are doing is wrong.  I do however think it is wrong to broadcast that advice to everyone.

She's not broadcasting this advice to everyone. If you actually read her earlier posts, she specifically said
Emergency funds are good for (1) lower income people, and (2) people who are just starting out and still have financially irresponsible habits.

For everybody else, an emergency fund is just making you poorer.

I did read the earlier post.  I disagree with it 100%....   Everyone should have an emergency fund.  1 & 2 are the groups of people least likely to have one, but that doesn't change that everyone else should have them.  Honestly lower income and people who are financially irresponsible just need to save anything.  They probably aren't aiming for a 6month EF, they are just trying to save their first 1k.  Emergency funds are for financially responsible investors so you don't have to touch your investments in an emergency.  If your personal preference is to sell stocks or load up on debt in an emergency more power to you, but its not a prudent decision for the vast majority of investors.

I find it surprising that so many people here seem to consider not having a job as an "emergency". I've taken unpaid breaks from work in the past just because I felt like it. It's really not a big deal for me. This whole website is based around retiring -- i.e. not working anymore. So it seems interesting to consider that as an emergency. Just think of your time without work as a preview of what retirement will be like, not as an emergency.

The website it based around retiring early, and while some are close to the end others have just begun.  And even people who are retired have emergency funds, but they have them for medical/property/legal/family emergencies.  Most retires I know actually have 12-18 month in liquid funds because they don't have an 'income' to fall back on in a crisis.  They need their investments for income, and they don't want to have to sell in a down market.

Dodge

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #42 on: February 08, 2015, 08:29:14 PM »
To clarify, when I advocate for credit cards as an emergency fund, it only acts as a buffer until you can either:

1.  Pay off the unexpected expense with next month's income, hence not paying any interest, and preferably earning 2% cash back on the deal :)

or

2.  If the unexpected expense is too big, wait a few business days to transfer money from Vanguard.

GGNoob

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #43 on: February 08, 2015, 08:32:30 PM »
To clarify, when I advocate for credit cards as an emergency fund, it only acts as a buffer until you can either:

1.  Pay off the unexpected expense with next month's income, hence not paying any interest, and preferably earning 2% cash back on the deal :)

or

2.  If the unexpected expense is too big, wait a few business days to transfer money from Vanguard.

This is the only use that credit cards play in my emergency fund. Emergencies will most likely be paid with the credit card (I could probably put a years worth of expenses on them), and then I'd sell investments to pay off the credit cards before paying interest.

TheOldestYoungMan

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #44 on: February 08, 2015, 10:16:55 PM »
It's really going to be fine whatever you decide.  Once you've held the emergency fund for awhile, and accumulated more assets elsewhere, you will gain the confidence in your own ability to manage your expenses short and long term, to make the right decision for you.

I have everything in some variation of the VTSAX.  I have had to sell shares at a loss to cover expenses, but the loss was generally super small (basically selling last-in shares to avoid a cap gain on older shares).  When the recession hit in ought 8, stuff had started to go down far enough out that I stopped buying shares for a bit and held on to cash.  If some sort of emergency had happened to me during that, and I didn't have insurance to mitigate it, and I didn't have any time at all to deal with it, well I guess they just get to smash my kneecaps.

You can always find work.  If everything does hit the fan everywhere all at once, it's unlikely any other investment vehicle will protect you significantly better than one where you aren't foregoing decent returns.  Your best emergency fund is your own skill at adapting to adversity.  As a backup, establish a community in your area.  I'm reluctant to hand out cash to someone who lost their job, but I'll pay em a couple hundred to work in the yard all day.  And they can help themselves to the vegetables in the garden.


Cookie Monster

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #45 on: February 09, 2015, 10:06:53 PM »
Most people here agree that timing the market is a fools errand. However, in some ways is the same as insisting in having a liquid emergency fund because selling stocks at a low would be disaster.

We agree that having an unused $10k emergency fund for 10 years costs about $10k on average vs having it in "real" investments. But the risk of selling stocks at a loss to cover your emergency needs is a nightmare. Many people thinks that after a stock crash you are "cashing out" the loss, because after such plunge you should expect to recover your losses. That would be true only if you can time the market, another word for the gambler fallacy. After a big dip market is equally likely to rebound or continue plummeting, just as any day before or after it. In the same way, after a big rally you should not wait to invest your monthly retirement money. The probabilities are reset every day.

So, I recommend having a little cash in hand ($1-2k), mostly for convenience, and invest the rest of the money. After that, you use the credit cards to cover expenses, and sell your investments to pay the total card balance every month.

Bbqmustache

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Re: Which Vanguard Fund for Emergency Fund?
« Reply #46 on: February 10, 2015, 04:27:01 AM »
Our emergency fund is not invested.  Money market account at a local credit union.  I cannot think of a worse thing to do in an emergency than get into debt with using a credit card.  I am not talking about a major car repair, I'm talking a balls to the wall illness or job loss.  Credit card use in those circumstances are gasoline on a small fire.  My two cents.