Count emergency cash as a Bonds asset?
Count emergency cash as a Bonds asset?
I have 1yr expenses in the bank.
lets say I have a simple AA:
total bonds = Age - 10
total intl = 25%
total market = rest
should I count that emergency $ as a Bonds asset class?
Why/Why not?
lets say I have a simple AA:
total bonds = Age - 10
total intl = 25%
total market = rest
should I count that emergency $ as a Bonds asset class?
Why/Why not?
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
Re: Count emergency cash as a Bonds asset?
I have to believe there is no hard and fast rule on this, but my preference is to set my asset allocation for my "investable assets". Things like Emergency cash, home, cars, 529 plans funds are kept out of that. I believe this is all personal preference.
The reason I do this is to make sure I mentally consider the emergency cash as just that and nothing more.
The reason I do this is to make sure I mentally consider the emergency cash as just that and nothing more.
Re: Count emergency cash as a Bonds asset?
It is entirely personal preference. I include CDs and money market savings account at my credit union in my asset allocation as part of fixed income but do not include checking and savings accounts. No right or wrong answer but I'd be more inclined to leave the EF out if there was a higher likelihood you might need to use it for an emergency (or to pay cash for a new car).
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
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Re: Count emergency cash as a Bonds asset?
I would expect there is no hard and fast rule or answer.
For us, we keep our cash separate and do not include it in our asset allocation.
Keep investing simple.
For us, we keep our cash separate and do not include it in our asset allocation.
Keep investing simple.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Count emergency cash as a Bonds asset?
I do (or at least I'm planning on getting there), especially since it is not likely that I will need the emergency fund in any given year. There is a significantly opportunity cost of keeping an extra $20K+ in cash or it's equivalent for 30+ years. My I-Bonds will function as the bond portion of my portfolio, and I can redeem them if I have the need to do so. Sure, my allocation may then go from a 90/10 split to a 95/5, a small difference all things considered. This is no more complicated than doing it another way.
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Re: Count emergency cash as a Bonds asset?
1) I would count it as cash, not bonds.
2) I had a sort of mental accounting thing. I didn't count cash that I though really might be likely to be used for emergencies. I did count cash that was available for emergencies if push came to shove, but that I planned to hold until retirement. For example, I didn't count the cash in the checking account, but I did count the cash in the Roth IRA.
2) I had a sort of mental accounting thing. I didn't count cash that I though really might be likely to be used for emergencies. I did count cash that was available for emergencies if push came to shove, but that I planned to hold until retirement. For example, I didn't count the cash in the checking account, but I did count the cash in the Roth IRA.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Count emergency cash as a Bonds asset?
It depends on how conservative you are.Gambler wrote:should I count that emergency $ as a Bonds asset class?
Why/Why not?
Many others have a 6 month E-fund. You could probably take a bit of license with anything beyond that... depending on your profession, job security, and how you define "emergency." And how did you define what your 12 months of expenses are? Is it a "I can live at the current state of spending for 12 months" E-fund or "I'm going to be canceling cable and eating Ramen noodles" E-fund?Gambler wrote:I have 1yr expenses in the bank.
So some people are at Age-10 for the bond allocation, while others are at Age-20, just Age in Bonds, or something entirely different. Behaviorally, if you are conservative with the Bond Allocation itself, you may either be conservative and keep the E-fund entirely out of the portfolio, or you may compensate and be OK with considering some part of the E-fund as part of the bond allocation. For instance, you could consider anything beyond 6 months as the bond allocation, or you could consider anything beyond the bare-bones Ramen E-Fund as part of the bond allocation in the portfolio.Gambler wrote:lets say I have a simple AA:
total bonds = Age - 10
total intl = 25%
total market = rest
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Re: Count emergency cash as a Bonds asset?
This is another reason to be aggressive with stock/bond ratio when you are young. A disproportionate amount of your money is tied up in an e-fund.
Re: Count emergency cash as a Bonds asset?
I count my cash as part of my retirement portfolio. I do not have a dedicated emergency fund. I believe my portfolio is large enough and liquid enough to handle any emergencies.
TSM - 50%
TISM - 30%
TBM - 19%
Cash - 1%
If someone were to ask me what my AA was, I would say 80/20, even though technically cash is not bonds. 1% is in the noise.
If you cash is in the noise, who cares what you call it.
TSM - 50%
TISM - 30%
TBM - 19%
Cash - 1%
If someone were to ask me what my AA was, I would say 80/20, even though technically cash is not bonds. 1% is in the noise.
If you cash is in the noise, who cares what you call it.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
Re: Count emergency cash as a Bonds asset?
You should count emergency fund as cash and as a separate bucket in my opinion. It needs to be there when you need it. You do not rebalance it. You do not buy more unless you need more months of expenses. I would take minimal to no risk with this.
I have about 2 years of cash in high yield savings and CDs. I am in a stable profession medicine, but there are few opportunities where I live and I do not want to move. I do not want to have to take a bad job to pay the bills. I figure 2 years plus some part time/locums stuff will allow me to last longer than that plus would not have to touch my investable assets. This makes me sleep better at night. The money I lose to inflation is like the premiums I pay on the insurance policy. As Larry has said, I do not feel bad about paying my life insurance premiums and not using the insurance
I have about 2 years of cash in high yield savings and CDs. I am in a stable profession medicine, but there are few opportunities where I live and I do not want to move. I do not want to have to take a bad job to pay the bills. I figure 2 years plus some part time/locums stuff will allow me to last longer than that plus would not have to touch my investable assets. This makes me sleep better at night. The money I lose to inflation is like the premiums I pay on the insurance policy. As Larry has said, I do not feel bad about paying my life insurance premiums and not using the insurance
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Re: Count emergency cash as a Bonds asset?
I treat it as a separate bucket not part of my AA. In this bucket I keep 25% of it in a HY Savings (smartypig.com) and the remainder is held in Intermediate Tax-Exempt (VWIUX). If the NAV of VWIUX drops, it is brought back in line and re-balancing.
If I should need to tap my EF, I'll exhaust the HY Savings portion before tapping the other portion.
It seems that in a lot of questions like this, that trying to lump EF in with the overall AA seems like trying to self-justify increasing equity. I wonder if this question would be the same if the market was bear. If this is what you want to do, then write your IPS to support it rather than trying to get others to justify it.
If I should need to tap my EF, I'll exhaust the HY Savings portion before tapping the other portion.
It seems that in a lot of questions like this, that trying to lump EF in with the overall AA seems like trying to self-justify increasing equity. I wonder if this question would be the same if the market was bear. If this is what you want to do, then write your IPS to support it rather than trying to get others to justify it.
Re: Count emergency cash as a Bonds asset?
Personally, I agree entirely with ramsfan above -- I count all investable assets as part of my portfolio, but cash & other assets that don't really fit that description (house, E-Fund, sinking funds, and so on) are not included in that.
But really, it truly doesn't matter. When you get down to it, even your AA is really just a planning factor -- "mental accounting" as some here call it. Sure, you can include a "cash" segment in your AA, which will theoretically reduce your portfolio's stock, bond, etc. allocations. But assuming your current situation is what you are most comfortable with, your returns will remain unchanged. I'll try to make a simple example:
-- You currently have $400k in stocks & $100k in bonds, as per your current 80% stock/20% bond asset allocation. You also have $50k in your EF which is not counted as part of your portfolio. Your stocks earn 6% real returns ($24k above inflation), bonds earn 2% real ($6k+inflation), and the EF struggles to stay around 0% real (inflation).
-- Following the most sage advice of all Bogledom, you decide to include your EF as a "Cash" AA bucket. Your AA now looks like: 73% stock/18% bond/9% cash. ::gasp:: Guess what, even though your AA now appears much more conservative, your stocks still earn 6% real returns, bonds continue to earn 2% real, and the EF still flounders around 0% real, and your holdings would STILL earn a total of $30k above inflation.
Bottom line: No big deal -- do what makes sense to you & makes you sleep well at night.
But really, it truly doesn't matter. When you get down to it, even your AA is really just a planning factor -- "mental accounting" as some here call it. Sure, you can include a "cash" segment in your AA, which will theoretically reduce your portfolio's stock, bond, etc. allocations. But assuming your current situation is what you are most comfortable with, your returns will remain unchanged. I'll try to make a simple example:
-- You currently have $400k in stocks & $100k in bonds, as per your current 80% stock/20% bond asset allocation. You also have $50k in your EF which is not counted as part of your portfolio. Your stocks earn 6% real returns ($24k above inflation), bonds earn 2% real ($6k+inflation), and the EF struggles to stay around 0% real (inflation).
-- Following the most sage advice of all Bogledom, you decide to include your EF as a "Cash" AA bucket. Your AA now looks like: 73% stock/18% bond/9% cash. ::gasp:: Guess what, even though your AA now appears much more conservative, your stocks still earn 6% real returns, bonds continue to earn 2% real, and the EF still flounders around 0% real, and your holdings would STILL earn a total of $30k above inflation.
Bottom line: No big deal -- do what makes sense to you & makes you sleep well at night.
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Re: Count emergency cash as a Bonds asset?
I count it in my allocation. Frankly, I believe that ALL investors should be using iBonds for a large portion of their EF. iBonds ware many hats. They are:
- Cash for EF (after 1 year)
- 0 Duration bond - driving down your bond portfolio's overall duration, and allowing - in normal times - for more duration risk elsewhere in the FI portfolio
- Inflation protection for the FI portfolio
- Increased tax advantaged space
They are incredibly valuable because of their safety and flexibility. My EF is:
- $10k in Savings
- iBonds
The $10k in savings is to prevent dipping into iBonds for smaller emergencies. Any large purchase is simply saved for ahead of time and is kept separate. Hope this helps.
- Cash for EF (after 1 year)
- 0 Duration bond - driving down your bond portfolio's overall duration, and allowing - in normal times - for more duration risk elsewhere in the FI portfolio
- Inflation protection for the FI portfolio
- Increased tax advantaged space
They are incredibly valuable because of their safety and flexibility. My EF is:
- $10k in Savings
- iBonds
The $10k in savings is to prevent dipping into iBonds for smaller emergencies. Any large purchase is simply saved for ahead of time and is kept separate. Hope this helps.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.