Math Help Please: Investing an Emergency Fund
- new2bogle2
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Math Help Please: Investing an Emergency Fund
I am hoping to find some help here and gather information about the benefit or risk of using investments as an emergency fund. I have read a few posts here where people ask the ways in which an emergency fund should be invested; typical answers include CDs, I-Bonds, Savings Accounts.
An article I came across on another site talked about investing about 130% of a typical emergency fund into something such as a bond fund. This got me thinking and is the reason for this post. I originally learned that an emergency fund needs to be some place safe and liquid such as a Savings Account. The principal of this money needs to be protected, I learned, so it should not risk a loss of principal. Upon further research I noticed 1 flaw (possibly 2) with this way of thinking: This E.F. will lose money due to inflation over time in a savings account. To counter this problem, I have been suggested to utilize I-Bonds rather than a Savings Account.
That brings me to a 2nd potential problem which is a loss of potential earnings on this money. Let's assume Person A earns $100K and has a $20k E.F., this money invested in I-Bonds will grow with inflation over the next 30 years. If Person B also earns $100K but has an E.F. of $26k (130% of 20k), and invested in a somewhat conservative and passive fund, it would have the ability to lose over 23% of it's original money and still total more than the $20K Person A invested. The goal here is not to lose money however, but this money is meant to offer a short term loss of principal buffer for an emergency. If this $26K was invested in an index fund which, in theory, may return 10% per year, this E.F. will have earned $20,060.59 in only interest (the total fund will be worth $46,060.59) in 6 years.
Of course if there is an emergency every year there may be a problem, but I am assuming most households don't have unplanned emergencies most years. In either situation, people should plan for payments of cars, vacations, etc, this fund is for true emergencies such as a major medical bill. So I am wondering if this money may be smarter mathematically to invest over time or is it smarter to invest in I-Bonds? I did not include taxes in the information above, I also am not sure if there are any penalties which may come into play with Person B above. I am not making a pitch to invest an E.F., I am only explaining something from my beginner's point of view and hope to have someone here help move me through this process. If this money should be invested in a place other than I-Bonds, please share where or what type of investments may be smart to use. Also is there a minimum net worth required to be Person B rather than Person A? This is a long OP with many questions, I hope that does not scare people away from posting replies below.
An article I came across on another site talked about investing about 130% of a typical emergency fund into something such as a bond fund. This got me thinking and is the reason for this post. I originally learned that an emergency fund needs to be some place safe and liquid such as a Savings Account. The principal of this money needs to be protected, I learned, so it should not risk a loss of principal. Upon further research I noticed 1 flaw (possibly 2) with this way of thinking: This E.F. will lose money due to inflation over time in a savings account. To counter this problem, I have been suggested to utilize I-Bonds rather than a Savings Account.
That brings me to a 2nd potential problem which is a loss of potential earnings on this money. Let's assume Person A earns $100K and has a $20k E.F., this money invested in I-Bonds will grow with inflation over the next 30 years. If Person B also earns $100K but has an E.F. of $26k (130% of 20k), and invested in a somewhat conservative and passive fund, it would have the ability to lose over 23% of it's original money and still total more than the $20K Person A invested. The goal here is not to lose money however, but this money is meant to offer a short term loss of principal buffer for an emergency. If this $26K was invested in an index fund which, in theory, may return 10% per year, this E.F. will have earned $20,060.59 in only interest (the total fund will be worth $46,060.59) in 6 years.
Of course if there is an emergency every year there may be a problem, but I am assuming most households don't have unplanned emergencies most years. In either situation, people should plan for payments of cars, vacations, etc, this fund is for true emergencies such as a major medical bill. So I am wondering if this money may be smarter mathematically to invest over time or is it smarter to invest in I-Bonds? I did not include taxes in the information above, I also am not sure if there are any penalties which may come into play with Person B above. I am not making a pitch to invest an E.F., I am only explaining something from my beginner's point of view and hope to have someone here help move me through this process. If this money should be invested in a place other than I-Bonds, please share where or what type of investments may be smart to use. Also is there a minimum net worth required to be Person B rather than Person A? This is a long OP with many questions, I hope that does not scare people away from posting replies below.
- abuss368
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Re: Math Help Please: Investing an Emergency Fund
There are a lot of good cash management threads on the forum right now. I started a couple of them.
The old saying of "cash is king" is still very true. Cash provides liquidity and flexibility. The need for cash always shows up when you least expect it.
We do not look to earn a return on cash. Cash provides peace of mind and almost like a form of insurance in that it is there if you need it.
The old saying of "cash is king" is still very true. Cash provides liquidity and flexibility. The need for cash always shows up when you least expect it.
We do not look to earn a return on cash. Cash provides peace of mind and almost like a form of insurance in that it is there if you need it.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Math Help Please: Investing an Emergency Fund
From my understanding, the big emergency to consider is job loss, and if that is because of, or happens to coincide with a very down economy, then you're likely to get hit three times. I don't know if that would apply in your case, but that's the general thinking.
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Re: Math Help Please: Investing an Emergency Fund
I view my EF as part of my Fixed Income portfolio. iBonds therefor reduce my duration & credit risk, while providing inflation protection. Thats a pretty nice set of characteristics for PORTFOLIO CONSTRUCTION.
The reason I used CAPS is because your focus should not be on the performance of individual investments, but on the performance of the portfolio.
The reason I used CAPS is because your focus should not be on the performance of individual investments, but on the performance of the portfolio.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
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Re: Math Help Please: Investing an Emergency Fund
If you have significant assets then look at this:
http://www.bogleheads.org/wiki/Placing_ ... ed_account
http://www.bogleheads.org/wiki/Placing_ ... ed_account
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
a good point, piece of mind is always a quality item to have.abuss368 wrote: Cash provides peace of mind
- abuss368
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Re: Math Help Please: Investing an Emergency Fund
Exactly. It also allows one to sleep at night.new2bogle2 wrote:a good point, piece of mind is always a quality item to have.abuss368 wrote: Cash provides peace of mind
John C. Bogle: “Simplicity is the master key to financial success."
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
Yes that would be an emergency and also something i should have included as an example. Though my question continues to apply even with that in mind. if the 130% E.F. was invested in a 3-fund portfolio or some other idea, there might be some protection from a total loss of the whole fund at the same of a job loss. Though this still swings back to the original questions posted.Onyxmeth wrote:From my understanding, the big emergency to consider is job loss, and if that is because of, or happens to coincide with a very down economy, then you're likely to get hit three times. I don't know if that would apply in your case, but that's the general thinking.
Re: Math Help Please: Investing an Emergency Fund
Peace of mind is even better.new2bogle2 wrote:a good point, piece of mind is always a quality item to have.abuss368 wrote: Cash provides peace of mind
Here is a thread on the same subject as this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=133458
Oh, it was started by poster new2bogle2, too.
As for what to invest an emergency fund in: Lots of posters like short-term bond funds such as the Vanguard Short-term investment grade bond fund and the Vanguard Short-term corporate bond index fund. It would be very unusual if these funds lost more than 5% before recovering.
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
I did not mean to offend you livesoft, but the other post was asking about the option of investing or not investing and moved off-topic slightly with other's posts. I wrote this to inquire about any mathematical advantage or disadvantage to investing an E.F. however if i did anything wrong, let me know if i need to close this topic.livesoft wrote:Peace of mind is even better.new2bogle2 wrote:a good point, piece of mind is always a quality item to have.abuss368 wrote: Cash provides peace of mind
Here is a thread on the same subject as this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=133458
Oh, it was started by poster new2bogle2, too.
As for what to invest an emergency fund in: Lots of posters like short-term bond funds such as the Vanguard Short-term investment grade bond fund and the Vanguard Short-term corporate bond index fund. It would be very unusual if these funds lost more than 5% before recovering.
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
thanks placeholderplaceholder wrote:If you have significant assets then look at this:
http://www.bogleheads.org/wiki/Placing_ ... ed_account
Re: Math Help Please: Investing an Emergency Fund
Wouldnt it be possible to lose more than that and have your E.F underfunded at the point you need it? Would you continue to fund it to keep that 130%? Or would you change your strategy and park it elsewhere if you saw it losing too much?new2bogle2 wrote:Yes that would be an emergency and also something i should have included as an example. Though my question continues to apply even with that in mind. if the 130% E.F. was invested in a 3-fund portfolio or some other idea, there might be some protection from a total loss of the whole fund at the same of a job loss. Though this still swings back to the original questions posted.Onyxmeth wrote:From my understanding, the big emergency to consider is job loss, and if that is because of, or happens to coincide with a very down economy, then you're likely to get hit three times. I don't know if that would apply in your case, but that's the general thinking.
I'm not totally opposed to the idea, but as a former resident of Florida, it's important to me to hold at least something in actual bills on me personally, just in case. In Florida I've been in the middle of wicked hurricanes. There's no power and everyone is accepting cash only. Even in New York I had a ton of trouble in 2012 finding an active bank after the snow storm. That to me is the real emergency, and I should have opened with that.
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Re: Math Help Please: Investing an Emergency Fund
OK, that's a different sort of E-fund, needed only in certain parts of the country: a few thousand in actual dollar bills in the house to deal with situations where all ATMs and credit card terminals within 20 miles are shutdown for several days to a week.Onyxmeth wrote:
I'm not totally opposed to the idea, but as a former resident of Florida, it's important to me to hold at least something in actual bills on me personally, just in case. In Florida I've been in the middle of wicked hurricanes. There's no power and everyone is accepting cash only. Even in New York I had a ton of trouble in 2012 finding an active bank after the snow storm. That to me is the real emergency, and I should have opened with that.
I've never encountered such a situation; must be challenging...
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Re: Math Help Please: Investing an Emergency Fund
It is. It gives you an appreciation of holding currency in your hands. Obviously that's tailored to only certain parts of the country, but I thought its worth mentioning since I consider it in my own emergency fund.The Wizard wrote:OK, that's a different sort of E-fund, needed only in certain parts of the country: a few thousand in actual dollar bills in the house to deal with situations where all ATMs and credit card terminals within 20 miles are shutdown for several days to a week.Onyxmeth wrote:
I'm not totally opposed to the idea, but as a former resident of Florida, it's important to me to hold at least something in actual bills on me personally, just in case. In Florida I've been in the middle of wicked hurricanes. There's no power and everyone is accepting cash only. Even in New York I had a ton of trouble in 2012 finding an active bank after the snow storm. That to me is the real emergency, and I should have opened with that.
I've never encountered such a situation; must be challenging...
I guess I just don't look at an emergency fund as a way to grow money. I just saw it as money you know is there completely funded and available for withdrawal when you need it, because you don't know the circumstances under which you may have to use it. What would the allocation on something like this be as opposed to the retirement AA? What happens if it gains too much? Do you pull it out and move it, or does it sit there and continue to grow? I think the idea is worth discussing, but I'd like to hear more about the difference between that and just having a well funded taxable account, if there is any.
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Re: Math Help Please: Investing an Emergency Fund
I was never a big Emergency Fund fan back in my younger years. I was married and the chance we'd both lose our jobs together was pretty slim (and never happened).
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
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Re: Math Help Please: Investing an Emergency Fund
I like to keep a good chunk of my funds out of the market. Say markets shut down because of disaster? How do you access funds? Can you write Vanguard muni fund checks if the markets are shut down for 2 weeks?
I like the tier approach. I keep a weeks worth of cash on hand in case of natural disasters. Than checking for one month, high yield savings/momey market 16 months, than CD for about 2 months, than intermed. muni, taxable stocks etc.
I know my emergency fund is excessive for some but it lets me sleep at night. In case of underemployment, I could last a long time without having to take a bad job or have to move.
I like the tier approach. I keep a weeks worth of cash on hand in case of natural disasters. Than checking for one month, high yield savings/momey market 16 months, than CD for about 2 months, than intermed. muni, taxable stocks etc.
I know my emergency fund is excessive for some but it lets me sleep at night. In case of underemployment, I could last a long time without having to take a bad job or have to move.
Re: Math Help Please: Investing an Emergency Fund
This cash thing in hurricanes and snowstorms is really a false sense of security. I have lived through many hurricanes along the Gulf Coast and was trapped in NY during Sandy. In none of those situations would cash have done me any good at all. Experience teaches me that a good vehicle with enough gas to drive out of the disaster zone is the best preparedness for such an emergency.Onyxmeth wrote:I'm not totally opposed to the idea, but as a former resident of Florida, it's important to me to hold at least something in actual bills on me personally, just in case. In Florida I've been in the middle of wicked hurricanes. There's no power and everyone is accepting cash only. Even in New York I had a ton of trouble in 2012 finding an active bank after the snow storm. That to me is the real emergency, and I should have opened with that.
In all the areas where the power was out, none of the stores and gas stations were even open. No one wanted to drive to work to open the stores. Thus there was nothing to buy whether you had cash or not. So be prepared ahead of time and have an evacuation plan. That plan could be get out before the hurricane hits or it could be wait at home for a few days (no cash needed), then drive out (no cash needed either as you have a full tank of gas).
Re: Math Help Please: Investing an Emergency Fund
I'll probably feel the same way later on. I always considered the emergency fund more of a focus for beginning investors so they don't have all of their early funds tied up in retirement accounts and take them out when life hits them in the face.The Wizard wrote:I was never a big Emergency Fund fan back in my younger years. I was married and the chance we'd both lose our jobs together was pretty slim (and never happened).
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
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Re: Math Help Please: Investing an Emergency Fund
This is an excellent point. I would expect the ability to access cash by liquidating securities may be limited or non-existent.am wrote:I like to keep a good chunk of my funds out of the market. Say markets shut down because of disaster? How do you access funds?
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Math Help Please: Investing an Emergency Fund
I have related an "emergency" that we had in another context, namely our bank account was frozen for 3 weeks due to a mistake by Bank of America. There was no access to any of the money. No cash was available by walking into the bank. No cash was available out of any ATM. All automatic deposits were simply sucked into a black hole and no checks were paid and all online bill pays were rejected. In reality, it didn't bother us much at all since all our credit cards still worked. I suppose if our credit cards had not worked, then our friends would have been happy to help us out.
And in natural disasters, people do help out when they can. When they can't, you get situations like Tacloban. Then it is imperative to have a real and legitimate evacuation plan that you know will work.
As for the emergency fund, that's really more for long-term job loss I would think because all the short-term stuff you already have made good plans for.
And in natural disasters, people do help out when they can. When they can't, you get situations like Tacloban. Then it is imperative to have a real and legitimate evacuation plan that you know will work.
As for the emergency fund, that's really more for long-term job loss I would think because all the short-term stuff you already have made good plans for.
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
I am not sure the best way for me to have or use an E.F. And reading all these disaster posts above I may choose to keep some cash on hand for security and to sleep better at night. But you mentioned an increase in a persons net worth, which is likely different for everyone, but can you give me a general idea as to what you're talking about here. Is this like being "self insured"? When you have enough money that you call sell an investment, even if it means taking a tax hit, and it won't change your nest egg all that much - is that what you're saying? Would that be 100k in investments outside of assets if someone is debt free? Or 1 million? More? In between those two?The Wizard wrote:I was never a big Emergency Fund fan back in my younger years. I was married and the chance we'd both lose our jobs together was pretty slim (and never happened).
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
I am not opposed to an EF, but I also support my money saved to 'work for me' and I don't want up pass up on chances for that money to grow. I'm not interested in being foolish so if the math says no, then a 1% savings account is where I will stick my EF if I must.
Thanks for the continued posts.
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
a good pointabuss368 wrote:This is an excellent point. I would expect the ability to access cash by liquidating securities may be limited or non-existent.am wrote:I like to keep a good chunk of my funds out of the market. Say markets shut down because of disaster? How do you access funds?
Best.
Re: Math Help Please: Investing an Emergency Fund
There are some checking accounts offering 3% that some members use. There are hoops to jump through. I don't use one myself so I can't be of much more help than that.new2bogle2 wrote:I am not sure the best way for me to have or use an E.F. And reading all these disaster posts above I may choose to keep some cash on hand for security and to sleep better at night. But you mentioned an increase in a persons net worth, which is likely different for everyone, but can you give me a general idea as to what you're talking about here. Is this like being "self insured"? When you have enough money that you call sell an investment, even if it means taking a tax hit, and it won't change your nest egg all that much - is that what you're saying? Would that be 100k in investments outside of assets if someone is debt free? Or 1 million? More? In between those two?The Wizard wrote:I was never a big Emergency Fund fan back in my younger years. I was married and the chance we'd both lose our jobs together was pretty slim (and never happened).
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
I am not opposed to an EF, but I also support my money saved to 'work for me' and I don't want up pass up on chances for that money to grow. I'm not interested in being foolish so if the math says no, then a 1% savings account is where I will stick my EF if I must.
Thanks for the continued posts.
- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
3% in 2014????? How can you know this if you dont use one? Can you direct me to someone who does? That is quite shocking for a savings account to offer more per year than so many other investment tools. are you sure about this 3%? I can't find anything close to that http://www.depositaccounts.com/savings/Onyxmeth wrote:There are some checking accounts offering 3% that some members use. There are hoops to jump through. I don't use one myself so I can't be of much more help than that.
Re: Math Help Please: Investing an Emergency Fund
RCAs. A typical example of the hoops mentioned are 12 debit card transactions per month and only the first $15000 will get that interest rate. You can find them on the same site you just linked.new2bogle2 wrote:3% in 2014????? How can you know this if you dont use one? Can you direct me to someone who does? That is quite shocking for a savings account to offer more per year than so many other investment tools. are you sure about this 3%? I can't find anything close to that http://www.depositaccounts.com/savings/Onyxmeth wrote:There are some checking accounts offering 3% that some members use. There are hoops to jump through. I don't use one myself so I can't be of much more help than that.
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Re: Math Help Please: Investing an Emergency Fund
I found three credit unions offering 3%, see the link. http://www.depositaccounts.com/checking ... ounts.html
I haven't done any digging into the specifics of these ones, but I looked into high yield checking accounts and they just weren't worth it. They have a number of restrictions, the most important being that you have to use your debit card a lot to get the rate. You get no reward points on the debit card so they pay you higher interest on the account balance to make up for it. When I ran the numbers I was better off getting a credit card with a good rewards point system and then storing the rest of the cash in an online bank like Ally. As an added bonus I don't have to jump through a bunch of hoops.
I haven't done any digging into the specifics of these ones, but I looked into high yield checking accounts and they just weren't worth it. They have a number of restrictions, the most important being that you have to use your debit card a lot to get the rate. You get no reward points on the debit card so they pay you higher interest on the account balance to make up for it. When I ran the numbers I was better off getting a credit card with a good rewards point system and then storing the rest of the cash in an online bank like Ally. As an added bonus I don't have to jump through a bunch of hoops.
Re: Math Help Please: Investing an Emergency Fund
Right. The three you found, and any other RCA that anyone finds, will have those same requirements.sapocanhoto wrote:I found three credit unions offering 3%, see the link. http://www.depositaccounts.com/checking ... ounts.html
I haven't done any digging into the specifics of these ones, but I looked into high yield checking accounts and they just weren't worth it. They have a number of restrictions, the most important being that you have to use your debit card a lot to get the rate.
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Re: Math Help Please: Investing an Emergency Fund
Self insured, yes.new2bogle2 wrote:I am not sure the best way for me to have or use an E.F. And reading all these disaster posts above I may choose to keep some cash on hand for security and to sleep better at night. But you mentioned an increase in a persons net worth, which is likely different for everyone, but can you give me a general idea as to what you're talking about here. Is this like being "self insured"? When you have enough money that you call sell an investment, even if it means taking a tax hit, and it won't change your nest egg all that much - is that what you're saying? Would that be 100k in investments outside of assets if someone is debt free? Or 1 million? More? In between those two?The Wizard wrote:I was never a big Emergency Fund fan back in my younger years. I was married and the chance we'd both lose our jobs together was pretty slim (and never happened).
As time goes on and your net worth increases, one develops various RESOURCES that can be used in the event of certain emergencies, such as borrowing from tax-sheltered retirement funds. So a separate cash EF declines in importance for some of us and you can focus more on investing...
I am not opposed to an EF, but I also support my money saved to 'work for me' and I don't want up pass up on chances for that money to grow. I'm not interested in being foolish so if the math says no, then a 1% savings account is where I will stick my EF if I must.
Thanks for the continued posts.
In fact, I was able to cancel my Life Insurance in my late 40's (with a working spouse and two kids) once my 403(b) accumulation (death benefit) got up to 6 or 7 times my annual salary.
But regarding an Emergency Fund, maybe step one should be to enumerate what possible emergencies we're defending against. If you have health insurance and home owners insurance, then no big emergencies can happen there.
Motor vehicle breakdowns or accidents are no fun but really should not be in the financial Emergency category.
Job Loss is the usual Elephant in the back room that we're concerned about. But if both spouses work, you may be able to limp along for a while with one being unemployed.
Then on the other side of the ledger, make a list of where you can get $$ from if really needed: a "tiered" EF as it is.
A certain amount of cash on hand, some taxable investments, your Roth IRA, and perhaps borrowing from your retirement fund.
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- new2bogle2
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Re: Math Help Please: Investing an Emergency Fund
Yes. That's clearly the elephant!The Wizard wrote:Job Loss is the usual Elephant in the back room that we're concerned about. But if both spouses work, you may be able to limp along for a while with one being unemployed.
Interesting idea. Is this where you would list both gross and net(less taxes and possible penalties) of the areas where money would need to be drawn from at each tier?The Wizard wrote: Then on the other side of the ledger, make a list of where you can get $$ from if really needed: a "tiered" EF as it is.
A certain amount of cash on hand, some taxable investments, your Roth IRA, and perhaps borrowing from your retirement fund.