Emergency savings strategy

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NeoInvestor
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Joined: Thu Mar 13, 2014 3:31 pm

Emergency savings strategy

Post by NeoInvestor »

Hi everyone,

I am new to investing and currently doing a lot of reading and research on formulating a good long term investment strategy. I apologize for any naive questions.
I recently came across an article titled "Rethink your emergency savings strategy".

http://www.marketwatch.com/story/rethin ... 2014-03-11

I wanted to get an opinion from members about what investment veichles are best for your emergency funds ?
Any personal experiences? pros/cons?

Happy investing!
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LadyGeek
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Re: Emergency savings strategy

Post by LadyGeek »

Welcome! Take a look in the wiki: Emergency fund, which represents a forum consensus on strategy.

Heads up, the article listed by the OP: Rethink your emergency savings strategy, contains opinions by by forum member Mike Piper, who posts here as ObliviousInvestor.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Stonebr
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Re: Emergency savings strategy

Post by Stonebr »

Keeping emergency savings in stocks and market value bond accounts is great when you are affluent, retired, and care-free. Or even when you are working, affluent and loaded with $. But when starting out, use FDIC accounts -- CDs and money market funds. Nowadays you'll find that online savings and CD accounts are the best place.

You'll sleep better.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear
scamper
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Joined: Fri Feb 21, 2014 10:30 am

Re: Emergency savings strategy

Post by scamper »

I decided a few years to use i-bonds purchased through TreasuryDirect for my emergency funds. Once the first year has gone by, the funds can be accessed with only a three month interest penalty. While TreasuryDirect is not the most user-friendly experience, this works in my favor since I never login into, therefore I'm less likely to access the emergency fund for anything other than a real emergency. If an emergency did occur, I can easily transfer the money to my bank.

I would NOT invest my emergency funds in bonds or stocks at this point. Both of these investment vehicles have experienced significant principal erosion in the past and certainly will again. It could be quite likely that events that cause me to need emergency funds could also be negatively impacting the market.
Topic Author
NeoInvestor
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Joined: Thu Mar 13, 2014 3:31 pm

Re: Emergency savings strategy

Post by NeoInvestor »

Thanks for all your responses. Much help!
Iorek
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Re: Emergency savings strategy

Post by Iorek »

+! on the i-bonds-- it's an investment I am happy to hold long-term, but it's also very safe and liquid in the short term (after a year at least).
LordB
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Re: Emergency savings strategy

Post by LordB »

A few years ago when I was setting up my fund I found the best bet was CDs with Ally as they had some with only 3 month penalty and a somewhat decent interest rate. Since then though interest rates on the CDs have dropped and Ally has gotten more restrictive with withdraws. When it comes time to renew them I will likely pull the money out of Ally and put it into ibonds. Fortunately I put the money into separate CDs with ending dates staggered. So I should be able to stagger putting that money into the ibonds as well minimizing the penalty risk.

That said when that time comes in about a year I also check if any CDs or similar are paying more than ibonds. I am reasonably confident that I am not going to randomly spend it and would only do so in a true emergency so ease of tracking/withdrawing isn't really a concern for me and I want to get the best rate that I can at the time and while it looks likely ibonds will still be the way to go who knows what will happen in the world.
berntson
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Re: Emergency savings strategy

Post by berntson »

The key is to know yourself and your financial situation. Where you should hold your emergency reserves depends on:
  1. How big your emergencies could be. If you have a house and a family, your potential emergencies are larger than if it's just you in an apartment and you could move back with your parents in a pinch.

    Whether you have two incomes and whether you can live on one of them. If you are in a household with multiple incomes and could live on either one, then you would need to lose two jobs to need your emergency reserves.

    Your cash flow. This is the difference between your income and your regular necessary expenses (the sorts of expenses that couldn't be cut immediately if necessary). If your cash flow is low, you may need a "Dave Ramsey" emergency fund to help smooth out expenses from month to month. For families with a wider gap between income and spending, an emergency fund is only really needed for large emergencies.

    The size of your portfolio. If you have a large enough portfolio to cover, say, half of your regular necessary expenses using a 4% withdrawal rate, you probably don't need a dedicated emergency fund.
Here is what my wife and I do. We have about 10% of our total savings in bonds and cash and the rest in stocks. We have no separate emergency funds. If we needed money from our portfolio during a market downturn, we spend the cash and bonds first to give stocks a bit of time to recover. If the markets are strong, we draw from the entire portfolio.
IlliniDave
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Re: Emergency savings strategy

Post by IlliniDave »

Lots of ways to skin this cat. I'm a bit conservative on the emergency fund side. I keep enough to keep me fed and in my house for a year. I keep about 1/4-1/3 in cash and 2/3-3/4 in S-T bonds.

When you think about it, every asset you have is part of your emergency fund. It's really just a matter of how "deep" into them you want to go should you run into a significant expense that wasn't anticipated and pre-planned for. For many of us there's a bit of a trade space between accumulating the most in the end and sleeping well throughout the midcourse.
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