Partially Invest Emergency Fund?

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abrahampayton
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Partially Invest Emergency Fund?

Post by abrahampayton » Thu Jan 02, 2014 4:31 pm

My fiance and I will be pooling our emergency funds into one pot ($16,000) as we make a new life in D.C. We are both financially educated enough to fear inflation and want to keep our emergency fund from losing value. Would investing part of this pool in short/intermediate term muni funds make sense? Or should we just suck it up?

Sidenotes:

Neither of us have any more college debt, car debt, etc.

We will both live in a large church parsonage and will not need to pay any rent.

Iorek
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Re: Partially Invest Emergency Fund?

Post by Iorek » Thu Jan 02, 2014 4:45 pm

There are a number of approaches to this-- the wiki has some discussion, and you might find some other threads.

I'd note you don't really say where your emergency fund is now, but I am assuming it is in a bank account earning next to no interest. In DC you could look into Cardinal Bank, which offers an account with 1% interest (and Capital One may also be doing that now).

Personally I like gradually putting the money into ibonds-- can't touch it for the first year and then there is a small penalty (3 months interest) if you cash out within 5 years. Interest is tax-deferred and the interest rate is adjusted semi-annually so you always at least keep up with inflation.

BanditKing
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Re: Partially Invest Emergency Fund?

Post by BanditKing » Thu Jan 02, 2014 4:57 pm

Some options (mix or match to suit):

1) Put it into a Smartypig.com account which earns 1%, and then set up an automatic contribution to keep growing it (or even accept donations if you take advantage of how the website works).
2) You could put it into a short, limited or intermediate bond fund (I assume at your tax rate, the tax-exempt ones won't make as much sense, but run the numbers). There is some risk of principle, especially if interest rates start to rise again, but it might be enough that you are comfortable and would likely yield better than a high-yield savings.
3) Create a CD Ladder. A little more complicated, but could yield better results.
4) Purchase $16k in Series I bonds (8k for each of you). I would wait until the new rates come out in May. In an emergency, I think that after one year you can cash these in with only a 3-month penalty.
5) Put it all on red (not recommended)

Personally, I have my EF in a combination of Smartypig.com (25%) so that I can access it quickly as cash, and the remainder in an intermediate-term tax-exempt fund at Vanguard.

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Thu Jan 02, 2014 5:21 pm

Iorek wrote:There are a number of approaches to this-- the wiki has some discussion, and you might find some other threads.

I'd note you don't really say where your emergency fund is now, but I am assuming it is in a bank account earning next to no interest. In DC you could look into Cardinal Bank, which offers an account with 1% interest (and Capital One may also be doing that now).

Personally I like gradually putting the money into ibonds-- can't touch it for the first year and then there is a small penalty (3 months interest) if you cash out within 5 years. Interest is tax-deferred and the interest rate is adjusted semi-annually so you always at least keep up with inflation.
Ah, good question. Currently these funds sit in a money market fund with Fidelity. They, as you guessed, earn next to nothing.

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BL
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Re: Partially Invest Emergency Fund?

Post by BL » Thu Jan 02, 2014 5:27 pm

You might look into the CDs at PenFed.org (2% for 3 yr, 3% for 5 yr.). Breaking them after a couple years would still probably pay off. You can donate to a military family organization (see web site) if you don't have military connections in order to join.

Do you have earned income for 2013? If so, you could put it into a Roth (5500/yr) each.

I like I-Bonds, too.
Last edited by BL on Thu Jan 02, 2014 5:30 pm, edited 1 time in total.

Phatphoeater
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Re: Partially Invest Emergency Fund?

Post by Phatphoeater » Thu Jan 02, 2014 5:29 pm

Depending on the size of your investable assets and taxable/non-taxable space, you might consider using the "cash in tax-advantaged space" approach. It is described in the wiki.

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Thu Jan 02, 2014 5:38 pm

BanditKing wrote:Some options (mix or match to suit):

1) Put it into a Smartypig.com account which earns 1%, and then set up an automatic contribution to keep growing it (or even accept donations if you take advantage of how the website works).
2) You could put it into a short, limited or intermediate bond fund (I assume at your tax rate, the tax-exempt ones won't make as much sense, but run the numbers). There is some risk of principle, especially if interest rates start to rise again, but it might be enough that you are comfortable and would likely yield better than a high-yield savings.
3) Create a CD Ladder. A little more complicated, but could yield better results.
4) Purchase $16k in Series I bonds (8k for each of you). I would wait until the new rates come out in May. In an emergency, I think that after one year you can cash these in with only a 3-month penalty.
5) Put it all on red (not recommended)

Personally, I have my EF in a combination of Smartypig.com (25%) so that I can access it quickly as cash, and the remainder in an intermediate-term tax-exempt fund at Vanguard.
You mentioned that we might not be in at a tax rate where Munis make any difference (even in a taxable brokerage account). What rate would I need to be at?

Me - $72,000 Annual Gross
Finance - $45,000 Annual Gross

Household - $117,000 Annual Gross

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Ice-9
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Re: Partially Invest Emergency Fund?

Post by Ice-9 » Thu Jan 02, 2014 5:46 pm

Here's an option that expands on the I-bond option previously mentioned:

Steps to having an inflation-protected emergency fund
1. Figure out how much of your emergency fund you'd be willing to not have access to at any one time
2. Divide that number by 11.
3. Schedule Treasury Direct to invest the amount in #2 in I-bonds on the 26th of each month, pulling the money from the account where you otherwise keep your emergency fund.

This way, at any given moment, the one-year waiting period will only affect you by a prepared-for amount of money you can't access, and you will be 1/11th closer to accessing it each month in case an emergency actually happens. (I use 11 instead of 12 because, if you buy at the end of a month, it is treated as if you purchased on the first of the month.)

Chadnudj
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Re: Partially Invest Emergency Fund?

Post by Chadnudj » Thu Jan 02, 2014 5:54 pm

abrahampayton wrote:My fiance and I will be pooling our emergency funds into one pot ($16,000) as we make a new life in D.C.

Sidenotes:

Neither of us have any more college debt, car debt, etc.

We will both live in a large church parsonage and will not need to pay any rent.

Me - $72,000 Annual Gross
Finance - $45,000 Annual Gross

Household - $117,000 Annual Gross
So you make $117k minus taxes (let's just say $90k post tax), have no debt, and no rent, and have $16k saved up?

My only question - why so much? You can clearly live on just one income, presumably. And I assume your jobs are independent of each other, meaning it's unlikely you'd BOTH lose your jobs at the same time. And you have no kids, and are (I presume) in good health. What are your monthly expenses, and could you cover them on just the smaller salary?

If so, I'd say you could reduce your emergency fund and invest the difference - say, go down to $5000 and invest $11k in a broad, low-cost, index fund that matches your desired AA (or maybe is a bit more conservative). That way, you'd earn more on that money, and it'd still be fairly liquid (insofar as you could sell the shares, even at a loss, if you NEEDED the money).

But really, this is all just personal preference on that front. I'm in favor of a smaller emergency fund that most Bogleheads if you're young, a 2-income couple, have no debt/house, no kids, etc., and more willing to expose my emergency fund to some risk in exchange for a better return....your mileage may vary.

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ElJay
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Re: Partially Invest Emergency Fund?

Post by ElJay » Thu Jan 02, 2014 9:15 pm

Iorek wrote:Personally I like gradually putting the money into ibonds-- can't touch it for the first year and then there is a small penalty (3 months interest) if you cash out within 5 years. Interest is tax-deferred and the interest rate is adjusted semi-annually so you always at least keep up with inflation.
I like this too. I set up part of my earnings to get deposited to TreasuryDirect and purchase Series I savings bonds automatically with the money. To start with, you do need to preserve existing cash during that first year lock period.

For a while I tried putting my emergency fund into a short term bond fund, but the value fluctuations made me queasy. I've just accepted that any "cash" holdings I have are unlikely to keep up with inflation and invest my longer term funds (i.e. retirement) in vehicles that have an expected higher rate of return. For me, lifestyle changes have affected the "value" (i.e. months of living expenses) of my emergency fund more than inflation has.

BanditKing
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Re: Partially Invest Emergency Fund?

Post by BanditKing » Thu Jan 02, 2014 11:01 pm

abrahampayton wrote:You mentioned that we might not be in at a tax rate where Munis make any difference (even in a taxable brokerage account). What rate would I need to be at?

Me - $72,000 Annual Gross
Finance - $45,000 Annual Gross

Household - $117,000 Annual Gross
There are calculators where you can punch in your tax rate and the expecte yield of the muni vs a non-muni fund and get the effective yield. Pick the most appropriate.

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:13 am

BanditKing wrote:
abrahampayton wrote:You mentioned that we might not be in at a tax rate where Munis make any difference (even in a taxable brokerage account). What rate would I need to be at?

Me - $72,000 Annual Gross
Finance - $45,000 Annual Gross

Household - $117,000 Annual Gross
There are calculators where you can punch in your tax rate and the expecte yield of the muni vs a non-muni fund and get the effective yield. Pick the most appropriate.
Thank you, I didn't realize they muni/non-muni calculators out there. I'll definitely give it a look.

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:15 am

Ice-9 wrote:Here's an option that expands on the I-bond option previously mentioned:

Steps to having an inflation-protected emergency fund
1. Figure out how much of your emergency fund you'd be willing to not have access to at any one time
2. Divide that number by 11.
3. Schedule Treasury Direct to invest the amount in #2 in I-bonds on the 26th of each month, pulling the money from the account where you otherwise keep your emergency fund.

This way, at any given moment, the one-year waiting period will only affect you by a prepared-for amount of money you can't access, and you will be 1/11th closer to accessing it each month in case an emergency actually happens. (I use 11 instead of 12 because, if you buy at the end of a month, it is treated as if you purchased on the first of the month.)
This is great advice on Treasury-Direct's I-Bonds. Thanks so much for your help - really appreciate it.

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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:19 am

Chadnudj wrote:
abrahampayton wrote:My fiance and I will be pooling our emergency funds into one pot ($16,000) as we make a new life in D.C.

Sidenotes:

Neither of us have any more college debt, car debt, etc.

We will both live in a large church parsonage and will not need to pay any rent.

Me - $72,000 Annual Gross
Finance - $45,000 Annual Gross

Household - $117,000 Annual Gross
So you make $117k minus taxes (let's just say $90k post tax), have no debt, and no rent, and have $16k saved up?

My only question - why so much? You can clearly live on just one income, presumably. And I assume your jobs are independent of each other, meaning it's unlikely you'd BOTH lose your jobs at the same time. And you have no kids, and are (I presume) in good health. What are your monthly expenses, and could you cover them on just the smaller salary?

If so, I'd say you could reduce your emergency fund and invest the difference - say, go down to $5000 and invest $11k in a broad, low-cost, index fund that matches your desired AA (or maybe is a bit more conservative). That way, you'd earn more on that money, and it'd still be fairly liquid (insofar as you could sell the shares, even at a loss, if you NEEDED the money).

But really, this is all just personal preference on that front. I'm in favor of a smaller emergency fund that most Bogleheads if you're young, a 2-income couple, have no debt/house, no kids, etc., and more willing to expose my emergency fund to some risk in exchange for a better return....your mileage may vary.
Thank you for your advice. I'd do what you suggested, but my spouse prefers to have a larger emergency fund (which I can understand) - just in case. When it rains, it pours!

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Re: Partially Invest Emergency Fund?

Post by German Expat » Mon Jan 06, 2014 9:27 am

I would not mingle the funds into 1 account until you are married. You can still run 2 separate accounts but treat them like one larger emergency fund. You state fiance in your post and then later on spouse?

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:37 am

German Expat wrote:I would not mingle the funds into 1 account until you are married. You can still run 2 separate accounts but treat them like one larger emergency fund. You state fiance in your post and then later on spouse?
Fair observation. We are 4 months out until we get hitched.

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Re: Partially Invest Emergency Fund?

Post by JamesSFO » Mon Jan 06, 2014 9:39 am

Chadnudj wrote:...
My only question - why so much? You can clearly live on just one income, presumably. And I assume your jobs are independent of each other, meaning it's unlikely you'd BOTH lose your jobs at the same time. And you have no kids, and are (I presume) in good health. What are your monthly expenses, and could you cover them on just the smaller salary?

If so, I'd say you could reduce your emergency fund and invest the difference - say, go down to $5000 and invest $11k in a broad, low-cost, index fund that matches your desired AA (or maybe is a bit more conservative). That way, you'd earn more on that money, and it'd still be fairly liquid (insofar as you could sell the shares, even at a loss, if you NEEDED the money).

But really, this is all just personal preference on that front. I'm in favor of a smaller emergency fund that most Bogleheads if you're young, a 2-income couple, have no debt/house, no kids, etc., and more willing to expose my emergency fund to some risk in exchange for a better return....your mileage may vary.
Personally, I am a big believer in a larger emergency fund, we don't know the OP's monthly expenses but $5K seems unlikely to be even 3 months of expenses for a couple in DC also they mention "making a new life in DC". Which sounds like a move.

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Re: Partially Invest Emergency Fund?

Post by KyleAAA » Mon Jan 06, 2014 9:46 am

A $16k emergency fund doesn't really beg for inflation protection, IMO. Interest in a high-yield online savings account aught to do well enough, for the most part. If you find yourself worrying about it down the road, just add a few hundred dollars. Or better yet, build up a taxable portfolio so that it doesn't matter.

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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:50 am

JamesSFO wrote:
Chadnudj wrote:...
My only question - why so much? You can clearly live on just one income, presumably. And I assume your jobs are independent of each other, meaning it's unlikely you'd BOTH lose your jobs at the same time. And you have no kids, and are (I presume) in good health. What are your monthly expenses, and could you cover them on just the smaller salary?

If so, I'd say you could reduce your emergency fund and invest the difference - say, go down to $5000 and invest $11k in a broad, low-cost, index fund that matches your desired AA (or maybe is a bit more conservative). That way, you'd earn more on that money, and it'd still be fairly liquid (insofar as you could sell the shares, even at a loss, if you NEEDED the money).

But really, this is all just personal preference on that front. I'm in favor of a smaller emergency fund that most Bogleheads if you're young, a 2-income couple, have no debt/house, no kids, etc., and more willing to expose my emergency fund to some risk in exchange for a better return....your mileage may vary.
Personally, I am a big believer in a larger emergency fund, we don't know the OP's monthly expenses but $5K seems unlikely to be even 3 months of expenses for a couple in DC also they mention "making a new life in DC". Which sounds like a move.
I hear you - this was addressed in an earlier post I think.

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abrahampayton
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Re: Partially Invest Emergency Fund?

Post by abrahampayton » Mon Jan 06, 2014 9:51 am

KyleAAA wrote:A $16k emergency fund doesn't really beg for inflation protection, IMO. Interest in a high-yield online savings account aught to do well enough, for the most part. If you find yourself worrying about it down the road, just add a few hundred dollars. Or better yet, build up a taxable portfolio so that it doesn't matter.
You may be right, this may be a case of just agonizing over optimal.

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