Emergency Fund

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spat4040
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Emergency Fund

Post by spat4040 » Tue Nov 05, 2013 11:59 pm

Hello,

I am 26 - on the verge of engagement - I have just completed reading Boglehead Guide to Investing - and have read two other 'financial' books. I have established the proper emergency fund but just have it sitting in a low interest savings account. . .

I also have $ for a down payment also sitting in a low interest savings account. . .

Meanwhile, I am maxing out the ROTH IRA using Vanguard TRA FUNDS and a employer sponsored 401K.

Should I be doing anything with the emergency fund or down payment? I feel like they are just collecting dust - but maybe that is the point.

Everything else - I am trying to hit the proper allocations desired in the Boglehead book.

Thoughts are appreciated.

Thank you.

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morbster
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Re: Emergency Fund

Post by morbster » Wed Nov 06, 2013 4:04 am

spat4040 wrote:Should I be doing anything with the emergency fund or down payment? I feel like they are just collecting dust - but maybe that is the point.


Two questions:

When do you plan on buying a house? If it's greater than one year, then I would recommend i bonds. Now is the perfect time to buy, since the newest 6-month fixed rate was increased to a composite 1.38%. You could purchase $10k this year, $10k next year (and an additional $10k if you get married as well). More information on i bonds from the Bogleheads Wiki. I bonds are a great way to protect your money against inflation, but you cannot cash out on any of your investment for at least one year. If funds are withdrawn before 5 years of bond life, you lose 3 months' interest.

What is the interest rate on your savings account? Currently, one of the best rates around is a Barclays savings account, which yields 0.90% with no fees or minimum balance. It's definitely a lower interest rate, but much better than you'll earn at almost any other bank.

I recently moved our emergency fund to a Barclays acccount, and I plan on gradually transitioning the cash to i bonds. Just need to make sure it is slow enough to maintain a solid level of liquidity with our money.

z3r0c00l
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Re: Emergency Fund

Post by z3r0c00l » Wed Nov 06, 2013 6:32 am

CDs or iBonds are great, most of my eFund is there. However, we are probably only talking a few hundred bucks here or there, so don't agonize over this. Your 401K is the money making investment, and at your age, the most important thing is income and savings. That trumps investing in almost any scenario.

IPer
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Re: Emergency Fund

Post by IPer » Wed Nov 06, 2013 6:38 am

I was always under the impression that the EFund needed to be completely liquid in order to qualify as a true emergency fund. However, as my eFund amount has increased I ended up having around 2/3 of it in CD's which hold a one month interest penalty for pre-withdrawal, however, since the bank is switching to a 90-day penalty I need to think more clearly about where these funds will live. It is not much to agonize over, they will not produce large yields or gains and that is not what they are meant for. They are there to give one the peace of mind that they are available when / if a true emergency occurs.
Read the Wiki !

Call_Me_Op
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Re: Emergency Fund

Post by Call_Me_Op » Wed Nov 06, 2013 7:01 am

spat4040 wrote:
Should I be doing anything with the emergency fund or down payment? I feel like they are just collecting dust - but maybe that is the point.


Basically, that is correct. In the current interest rate environment, safety of principal = very low return (as you say, collecting dust).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Phineas J. Whoopee
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Re: Emergency Fund

Post by Phineas J. Whoopee » Wed Nov 06, 2013 11:10 am

rkatz0 wrote:I was always under the impression that the EFund needed to be completely liquid in order to qualify as a true emergency fund. However, as my eFund amount has increased I ended up having around 2/3 of it in CD's which hold a one month interest penalty for pre-withdrawal, however, since the bank is switching to a 90-day penalty I need to think more clearly about where these funds will live. It is not much to agonize over, they will not produce large yields or gains and that is not what they are meant for. They are there to give one the peace of mind that they are available when / if a true emergency occurs.

Nothing stops you from having an emergency fund in an asset that can change value, including a CD - taking into account, as you have, early withdrawal penalties.

If the maximum possible penalty on your emergency fund CDs is, for example, 3% of the total, you can simply maintain an emergency fund 3% larger than you otherwise would have. You can use the same reasoning for bond funds, savings bonds, or whatever you like.

Some forum members point out an institution may not, under unknown future circumstances, be willing to let you redeem a CD early. I'd say that's a consideration for an emergency fund.

PJW

Chadnudj
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Re: Emergency Fund

Post by Chadnudj » Wed Nov 06, 2013 11:35 am

Also consider laddering CDs in your emergency fund. Since an emergency fund is meant to cover a certain number of months expenses, you can gradually shift an emergency fund into a CD ladder that would ensure that one month of expenses is always coming "due" in the CD. So if you have a 6 month emergency fund, take one month's expenses and put it in a 3-month CD, then do the same next month, and the same next month, etc.....half your emergency fund would be in cash, the other half in a slightly higher interest CDs. If you have a 1-year emergency fund, you could keep 3 months in cash and ladder the other 9 months in 6-month CDs, etc.

nwffdiver
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Re: Emergency Fund

Post by nwffdiver » Wed Nov 06, 2013 2:27 pm

Chadnudj wrote:Also consider laddering CDs in your emergency fund. Since an emergency fund is meant to cover a certain number of months expenses, you can gradually shift an emergency fund into a CD ladder that would ensure that one month of expenses is always coming "due" in the CD. So if you have a 6 month emergency fund, take one month's expenses and put it in a 3-month CD, then do the same next month, and the same next month, etc.....half your emergency fund would be in cash, the other half in a slightly higher interest CDs. If you have a 1-year emergency fund, you could keep 3 months in cash and ladder the other 9 months in 6-month CDs, etc.


The biggest problem with this scenario Is currently most 3/6/9 month CDs are gaining less interest than a MM savings account.

I keep 3 months EF in an Ally account at .86%. My second tier is ibonds. I have 6 additional months that are past the 1 yr mark so I would only lose the last 3 mos of interest. Nothing short term will make you much interest.

As was said before... Rates are poor now!

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Epsilon Delta
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Re: Emergency Fund

Post by Epsilon Delta » Wed Nov 06, 2013 2:41 pm

nwffdiver wrote:
Chadnudj wrote:Also consider laddering CDs in your emergency fund. Since an emergency fund is meant to cover a certain number of months expenses, you can gradually shift an emergency fund into a CD ladder that would ensure that one month of expenses is always coming "due" in the CD. So if you have a 6 month emergency fund, take one month's expenses and put it in a 3-month CD, then do the same next month, and the same next month, etc.....half your emergency fund would be in cash, the other half in a slightly higher interest CDs. If you have a 1-year emergency fund, you could keep 3 months in cash and ladder the other 9 months in 6-month CDs, etc.


The biggest problem with this scenario Is currently most 3/6/9 month CDs are gaining less interest than a MM savings account.

I keep 3 months EF in an Ally account at .86%. My second tier is ibonds. I have 6 additional months that are past the 1 yr mark so I would only lose the last 3 mos of interest. Nothing short term will make you much interest.

As was said before... Rates are poor now!



Just for clarification. Once the CD ladder is established all your CDs are one-year CDs with staggered maturities. You only use the shorter terms to get things started (or you could start with a MM account and buy four one-year CDs at three-month intervals, if shorter terms are unattractive).

IlliniDave
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Re: Emergency Fund

Post by IlliniDave » Wed Nov 06, 2013 3:39 pm

On the emergency fund, if it's fairly large (covers a year or longer), you could put a fraction is some safe S-T bonds. I do about 4 mos worth "collecting dust", and 8 mos worth in S-T bond funds at Vanguard.

Because of my age I skipped straight to the Bogleheads Guide to Retirement (very good book, btw), so I'm not familiar with the guidance on emergency funds given in the Investment Guide.

On the house money it would depend on how soon you plan to buy (apologies if you said that and I missed it). If it's more than a year away, a CD that pays better than the collecting dust is probably okay.

In general it's "okay" to not make a lot of investment return on emergency funds and sinking funds for near term purchases. Investment return by definition comes with risk. Sometimes the risk isn't worth it.
Don't do something. Just stand there!

invest0
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Re: Emergency Fund

Post by invest0 » Wed Nov 06, 2013 3:56 pm

I've also been in a similar situation (hefty emergency fund in a few 0.85% high interest savings, maybe half going towards a house downpayment in the coming years, but that depends on life). Left pondering the best placement for it as well.

What are the general thoughts on getting a 5 year CD that just has limited early withdrawal penalties? Several appear around 2% right now on bankrate.com and similar sites. Assuming the agreement doesn't allow them to stand in your way; I've read that many only make you forfeit the last two months interest if you do ever actually need to withdrawal early. It's also possible to take out virtually unlimited accounts, generally, further nullifying the potential for loss (ie. you could open 25 CDs with 1k in each, and only withdrawal early on 5 if you needed $5k).

Assuming the above conditions would be met, it would certainly be favorable to a 1.38% I-Bond?

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Meg77
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Re: Emergency Fund

Post by Meg77 » Wed Nov 06, 2013 4:56 pm

Check around at local banks to see if any are offering better rates on checking. Legacy Bank here in Texas, for instance, pays 2% on checking accounts if you set up direct deposit. My fiance and I have a joint account plus we each have individual accounts so that covers up to $75K in funds at 2%. I know Prosperity Bank pays 1.25% on checking (they are in Texas and Oklahoma). Lots of smaller banks probably offer these kinds of rates to lure in depositors despite their lack of a national presence - and they usually offer free ATMs due to a lack of those too.

However keep in mind that when you are talking about 0-2% on an EF, it really doesn't matter unless you're talking about a balance of over 6 figures. After taxes you still aren't gaining that much regardless of what rate you find. You'd probably do a lot better to spend your time clipping a few coupons or figuring out how to lower a utility bill than researching and debating various "high" interest rate depository options.

But don't be fooled into investing your EF or down payment money. Better safe and boring with that $$ than exciting and volatile.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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RyeWhiskey
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Re: Emergency Fund

Post by RyeWhiskey » Wed Nov 06, 2013 5:02 pm

I think the most important characteristics of an EF are easy of access and simplicity. An EF is supposed to be there when you need it most - an emergency. Furthermore, given that it is a relatively minimal amount of money as compared to retirement assets, the pursuit of higher yield is made unattractive as we're talking about making an extra hundred bucks a year or so. No matter where you decide to store your EF, make sure you can access it within a couple days and that the complications of having multiple accounts don't outweigh the potential increase in yield. :beer
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Geist
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Re: Emergency Fund

Post by Geist » Wed Nov 06, 2013 8:43 pm

I'm personally a big fan of using I-Bonds for emergency funds. I keep a small portion (1 month's expenses) in a truly liquid savings account, then I've moved the rest into I-Bonds. It only takes 3-4 days to receive funds from cashing in some I-Bonds (which can be withdrawn in any amount above $25), so if there is ever a need for it, I consider that "liquid enough". In very few circumstances can I imagine a scenario when I need tens of thousands of dollars RIGHT NOW vs. 3-4 days from now. The money in the savings account can EASILY cover any immediate needs, and the I-Bond money is just a few clicks & a few days away if truly needed.

Benefits of I-Bonds as an EF:
- "Liquid Enough" when supplemented by a savings account
- Keeps up with inflation & can never lose value
- Low surrender fee (3mo's interest) upon redemption before 5yrs' ownership, or NONE if the I-Bonds have been held for 5+ years
- Rate of return is better than most other [reasonable] options right now & was competitive even back when savings account rates were higher
- Interest can be tax-deferred until redemption
- Simple to maintain -- unlike 1-yr CDs that need to roll over annually, I-Bonds only need to be rolled over at 30-year intervals.

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