Emergency Fund... 100% Cash or Invest Portion

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Topic Author
radeon962
Posts: 113
Joined: Wed Dec 30, 2009 8:20 pm

Emergency Fund... 100% Cash or Invest Portion

Post by radeon962 »

I received some excellent advice back in 2009 and have worked to hit my goals from that time. I have paid off all of our vehicles, no credit card debt or other debt other than the mortgage at 4% which we are working on paying down early by paying $300/mo. additional.

My EF is now $30,000 in Amex Savings (0.85%) and maintain $10,000 in my Bank of America Savings (essentially no interest) for more "normal" emergency expenses.

I have 6 kids, 4 of them that drive, 2 of them are in college and 2 more will be starting college within 3 years. Maintaining a household of 8 with 5 cars (all used which means that there are times that cash is needed for repairs but this comes from my BOA savings). I have been able to not draw from my Amex Savings and built it up over the past 4 years to it's current balance.

My wife stays at home to take care of the household as that is a full-time job itself. I'm 46 and plan to work at least 16 more years.

Retirement savings is in a 401k & 457 through ICMA with a current balance of $502,000 (last checked).

Roth IRA started this year ($5,500) with Vanguard in the Life Strategy Growth and plan to fund again next year and also establish a Roth IRA for my wife. Will be moving funds to meet my AA once I have sufficient funds to do so in each account.

So, my basic goals are falling in line with my plan, but am curious what other Bogleheads do with their EF.

Just looking for advice on EF and keeping it all in cash earning a marginal return. I realize the strict definition is for "emergencies" but every year that cash sits in the account it loses spending power due to inflation (2% or better).

Does it make sense to "diversify" your long term EF in CD's or other places and if so what might be recommended or should I just consider my EF as that and don't consider it as an investment? I don't see a lot of places where rates are much better or even at 2% so other than moving to something with more risk, I don't see a lot of options.

Thanks, Bill
Johm221122
Posts: 6394
Joined: Fri May 13, 2011 6:27 pm

Re: Emergency Fund... 100% Cash or Invest Portion

Post by Johm221122 »

I bonds could atleast help your money keep pace with inflation and prevent tax drag .(need to beware of future tax problem when cashing them in)

Cd's and pay current tax plus cashing in pentallly if needed

Placing cash needs in tax advantaged accounts
http://www.bogleheads.org/wiki/Placing_ ... ed_account
John
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FNK
Posts: 1360
Joined: Tue May 17, 2011 7:01 pm

Re: Emergency Fund... 100% Cash or Invest Portion

Post by FNK »

You can put a portion ($10-20K?) into a CD. There was a thread recently about PenFed paying 2-3% with a half-year early withdrawal penalty. Worst case - break the CD.

Consider I bonds - these will match inflation, plus .2%. Can't sell in the first year though, and will lose 3 month of interest if you sell in first 5 years.

Beyond that... you certainly have a lot of potential emergencies to cover!!! I'd actually focus on your insurance first. You can put your emergency money to work by optimizing coverage. Basically, if you jack up deductibles to $1000 (or even $2000) on all policies, you'll save a lot of premium by putting that $1-2000 at risk - and that's equivalent to investing the cash, only tax free. On the other end, you might want an umbrella insurance policy for your family.
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TheTimeLord
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Joined: Fri Jul 26, 2013 2:05 pm

Re: Emergency Fund... 100% Cash or Invest Portion

Post by TheTimeLord »

I too am a fan of I Bonds.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
Topic Author
radeon962
Posts: 113
Joined: Wed Dec 30, 2009 8:20 pm

Re: Emergency Fund... 100% Cash or Invest Portion

Post by radeon962 »

I already have an umbrella policy.

Good idea on the deductibles. I'll take a look at where they are at. Family vehicles carry collision as they are newer. Kids cars have basic coverage.
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Skinut
Posts: 87
Joined: Fri Mar 30, 2012 9:37 am

Re: Emergency Fund... 100% Cash or Invest Portion

Post by Skinut »

I maintain an ER fund with a total amount similar to yours. Very recently I decided I will "invest" 15-20M in a combination of I-bonds and Penfed 5 year CD.

I did 5M in I-bonds and 5M in a 5 year CD to start. Next year I will do another round of the same. This way I am not tying up 2/3s at the same time.

Hopefully that helps, nice work on the ER fund :beer
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Re: Emergency Fund... 100% Cash or Invest Portion

Post by john94549 »

Many folks (at least the chronic Boglehead over-savers) do tend to plop too much in their (under-achieving) emergency funds. An emergency fund is just that. A fund one can tap in "emergencies". A car blow-up, well, that's an emergency. A house fire, well, that's an emergency. Extraordinary medical expenses (coughing up a deductible), well, that counts. It's not rocket-science. Play the "what if" game. Add up all those potential "emergencies". For the "one-in-a-million" emergencies (e.g., an earthquake. with a $75,000 deductible), it's probably wiser to invest. Our "earthquake deductible" fund is currently in a PenFed CD, earning 3.5%.

The bottom line is always: is it more prudent to tap one's emergency fund than to borrow? If you have a low-cost HELOC (ours is at 2.25%), it might be a wash. Stated another way, I might prefer to purchase my next car on our HELOC than by liquidating funds we have in CDs garnering a better rate. It's just math.
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