Downsizing emergency fund
Downsizing emergency fund
I was laid off from my job with a mega-corp a few months ago. I found something else right away, and it actually wound up being a bit of a windfall for me as the severance package I was given was pretty good. I was just paid the last of what I'm owed by my former company, and now that I step back and take a look at my finances, I'm shocked to see that my "emergency fund" has grown to almost 20% of my net worth. I've been guilty of a little mental accounting, in that I consider my retirement money (in my tax deferred accounts) separate from the rest. Mostly because I've assumed that a good portion of "the rest" will needed prior to retirement, even if I don't know exactly what for yet. Among the possibilities I have in my mind are a down payment on a larger house, vehicle replacement, kids expenses, etc. Currently, most of this money is in a so called "high yield" savings account, the rest in CDs. Options I've considered include a CD ladder, Ibonds, and short term bond funds. I've been around long enough to know that the advice from the Bogleheads will likely be to invest this money according to my asset allocation (currently 80/20 stock/bond - I'm 39), but I find myself struggling to pull the trigger on that. I'm comfortable being fairly aggressive with money I know I won't touch for decades, but I guess I'm a bit more hesitant with funds I might need sooner. Should I just bite the bullet and open a taxable account?
Re: Downsizing emergency fund
Your EF isn't related to your net worth. It is related to your spending and the cost of possible emergencies. This is why people tend to size their EF in terms of a number of months worth of spending. A lot of people use the cost of finding new employment after a job loss or the cost of major medical expenses to gauge this.
You didn't mention the size of your EF or what your spending is, so I don't understand why you would want to decrease the size of your EF.
Also, an EF is for emergencies rather than known or assumed upcoming expenses such as buying a house or replacing a car. I'd recommend opening separate savings accounts for each upcoming expense / savings goal. CDs aren't returning much more than savings accounts, and savings account provide more liquidy. Setup your buckets and see where you stand. Make sure your EF remains funded appropriately, then save within each bucket as needed.
If this is money that you need in the next five or so years, do not buy stocks. A bank is the place to put money that you need.
You didn't mention the size of your EF or what your spending is, so I don't understand why you would want to decrease the size of your EF.
Also, an EF is for emergencies rather than known or assumed upcoming expenses such as buying a house or replacing a car. I'd recommend opening separate savings accounts for each upcoming expense / savings goal. CDs aren't returning much more than savings accounts, and savings account provide more liquidy. Setup your buckets and see where you stand. Make sure your EF remains funded appropriately, then save within each bucket as needed.
If this is money that you need in the next five or so years, do not buy stocks. A bank is the place to put money that you need.
Re: Downsizing emergency fund
I try to keep six months of living expenses in my emergency fund. Since my husband and I both work full time, and it's highly unlikely we would both lose our jobs at the same time, that seems sufficient. Six months of living expenses would actually last us for a couple of years if one of us lost a job but the other remained employed.
We have separate savings funds for other likely major expenditures. For example, my husband's 12-year-old car just died and we pulled from our car fund to pay cash to replace it. I am now replenishing the money in that fund because my car is 9 years old and will probably also need replacement in the next couple of years. Similarly, we assume that at some point our house will need some major maintenance/repairs every year or so (roof, heater, air conditioner, etc.) so we save separately for that. We have a home equity line of credit (currently with a balance of $0) that we can also draw on if everything were to hit us at once.
When I say these things are separate funds, it doesn't necessarily mean that they are physically separate. I have a savings account at Ally Bank where I inter-mingle the money from these separate "funds" but in my own personal accounting I keep them separate. I know approximately how much money I want to have in each category (emergency fund, car replacement, housing maintenance/repairs) and when I go below that amount because of an expense I start adding money back in. If my various funds are fully funded, any additional money I have goes to after tax investments (I always fully fund our tax advantaged 403b accounts and backdoor Roth IRAs).
We have separate savings funds for other likely major expenditures. For example, my husband's 12-year-old car just died and we pulled from our car fund to pay cash to replace it. I am now replenishing the money in that fund because my car is 9 years old and will probably also need replacement in the next couple of years. Similarly, we assume that at some point our house will need some major maintenance/repairs every year or so (roof, heater, air conditioner, etc.) so we save separately for that. We have a home equity line of credit (currently with a balance of $0) that we can also draw on if everything were to hit us at once.
When I say these things are separate funds, it doesn't necessarily mean that they are physically separate. I have a savings account at Ally Bank where I inter-mingle the money from these separate "funds" but in my own personal accounting I keep them separate. I know approximately how much money I want to have in each category (emergency fund, car replacement, housing maintenance/repairs) and when I go below that amount because of an expense I start adding money back in. If my various funds are fully funded, any additional money I have goes to after tax investments (I always fully fund our tax advantaged 403b accounts and backdoor Roth IRAs).
Re: Downsizing emergency fund
Hey - everything you have is in the emergency fund if you need it.
The "emergency fund" is a device to get people who have never saved a penny to start saving.
Once you have some money you don't need the gimmick. All your resources are available for something no matter what it is. Are you not going to spend any more money on an emergency or some situation if the money required is more than is in your "emergency fund?" Of course not.
The "emergency fund" is a device to get people who have never saved a penny to start saving.
Once you have some money you don't need the gimmick. All your resources are available for something no matter what it is. Are you not going to spend any more money on an emergency or some situation if the money required is more than is in your "emergency fund?" Of course not.
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Re: Downsizing emergency fund
The objective is to have sufficient funds in the event of an emergency without having to deplete long-term investments earmarked for retirement.derosa wrote:Hey - everything you have is in the emergency fund if you need it.
The "emergency fund" is a device to get people who have never saved a penny to start saving.
Once you have some money you don't need the gimmick. All your resources are available for something no matter what it is. Are you not going to spend any more money on an emergency or some situation if the money required is more than is in your "emergency fund?" Of course not.
Your point is valid that all taxable funds are available if needed, but some prefer more flexibility when drawing down assets versus selling equities at market low points or incurring unwanted capital gains taxes.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Re: Downsizing emergency fund
I suppose I chose a poor title for this post. I should have put "emergency fund" in quotes because I don't know what else to call cash sitting in a bank with no specific purpose or timeframe. I know how big my actual emergency fund should be and the point is that I'm well past it at more than a year's worth of expenses. My question is what to do with the rest. I already max all tax deferred accounts so increasing retirement contributions is out.investor1 wrote:Your EF isn't related to your net worth. It is related to your spending and the cost of possible emergencies. This is why people tend to size their EF in terms of a number of months worth of spending. A lot of people use the cost of finding new employment after a job loss or the cost of major medical expenses to gauge this.
You didn't mention the size of your EF or what your spending is, so I don't understand why you would want to decrease the size of your EF.
Also, an EF is for emergencies rather than known or assumed upcoming expenses such as buying a house or replacing a car. I'd recommend opening separate savings accounts for each upcoming expense / savings goal. CDs aren't returning much more than savings accounts, and savings account provide more liquidy. Setup your buckets and see where you stand. Make sure your EF remains funded appropriately, then save within each bucket as needed.
If this is money that you need in the next five or so years, do not buy stocks. A bank is the place to put money that you need.
Re: Downsizing emergency fund
What does that mean? $17.5k in a 401(k)? $5.5k in an IRA? 401(k) + Roth IRA? How about $52k in a 401(k)? Maybe a Mega-backdoor Roth is in order. Is a HDHP w/ an HSA appropriate? Do you have kids? What about 529s?I already max all tax deferred accounts
You can save much as you want for retirement. Once you run out of tax advantaged space, the commonly used options are a taxable account, I bonds, TIPS, and CDs/savings accounts.increasing retirement contributions is out
Again if this cash might be used for anything anytime soon, liquidity is important.
- FelixTheCat
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Re: Downsizing emergency fund
It's good that your EF is growing. To me, EFs are based on the months of living expenses you need.
My EF has grown to 2.5 years of annual expenses. I never plan on trimming it. It simply tells me that in case of a layoff I could be picky about my next employer.
My EF has grown to 2.5 years of annual expenses. I never plan on trimming it. It simply tells me that in case of a layoff I could be picky about my next employer.
Felix is a wonderful, wonderful cat.
Re: Downsizing emergency fund
$17.5K in my 401k and $5.5k in his and her Roth IRAs. Wife is a SAHM so she has no 401k. We have 2 kids. The 529 question is a good one. I have been loath to open one in the past for a couple of reasons. First, I was uncertain I would be able to consistently fund it, and second I was somewhat uncomfortable that I was essentially making a bet that my son would attend college (though I certainly hope he does). Now that we have 2 kids I feel more confident that between both of them I will have need for some college savings. My state does not allow for a tax deduction any longer but the plan is managed by Vanguard. I'll definitely consider this.investor1 wrote:What does that mean? $17.5k in a 401(k)? $5.5k in an IRA? 401(k) + Roth IRA? How about $52k in a 401(k)? Maybe a Mega-backdoor Roth is in order. Is a HDHP w/ an HSA appropriate? Do you have kids? What about 529s?I already max all tax deferred accounts
This is really the crux of my question. My concern is that I am just letting funds accumulate in a savings account where they are not really working for me as much as they could be. Certainly a true EF needs to be liquid and I will definitely keep some of it as such. For the rest, is it strange to want to invest it somewhat more conservatively than my retirement accounts are even though I have no specific timeframe for needing the money?investor1 wrote: You can save much as you want for retirement. Once you run out of tax advantaged space, the commonly used options are a taxable account, I bonds, TIPS, and CDs/savings accounts.
Again if this cash might be used for anything anytime soon, liquidity is important.
Re: Downsizing emergency fund
Whatever its name, an after-tax "cash stash" is always a good thing to have. Each person has his or her own comfort level, and hoarding cash just to "keep score" is probably unwise (in this interest-rate environment). An easy test is the "worry-ometer". If you constantly worry that you'd be unable to pay an unexpected bill, or help a parent or child in a rough patch, or might need to tap retirement funds early (with the dreaded 10% penalty on top of the income tax), your cash stash is inadequate.
- FelixTheCat
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Re: Downsizing emergency fund
I don't follow the "Keep it all in cash" theory. I have some money in a savings account to pay unexpected events like a car breaking down. The bulk of my EF is in a Vanguard short-term tax-exempt bond fund.yosef wrote:For the rest, is it strange to want to invest it somewhat more conservatively than my retirement accounts are even though I have no specific timeframe for needing the money?
Felix is a wonderful, wonderful cat.
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Re: Downsizing emergency fund
You realize that the ST-TE yield is .28%, correct? Savings account after-tax returns in the 35% bracket yield more than the muni fund and with less risk.imgritz wrote:I don't follow the "Keep it all in cash" theory. I have some money in a savings account to pay unexpected events like a car breaking down. The bulk of my EF is in a Vanguard short-term tax-exempt bond fund.yosef wrote:For the rest, is it strange to want to invest it somewhat more conservatively than my retirement accounts are even though I have no specific timeframe for needing the money?
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Re: Downsizing emergency fund
Don't just worry about the risk of putting some of this money in stocks and bonds, worry also about the risk of inflation.
70% Global Stocks / 30% Bonds