Emergency Fund Alternative for Young Accumulator

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Canogapark66
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Emergency Fund Alternative for Young Accumulator

Post by Canogapark66 »

For a young accumulator (age 28) with already having 10 times expenses in taxable brokerage acct, does it make sense to still keep 12 month emergency fund? Has anyone done the research on if that emergency fund was brought down to 2-3 months expenses and the remaining was invested. it seems like for a young accumulator it could be better off put to use compounding now vs. sitting in bank acct losing to inflation each yr?


thoughts?
MrMatt2532
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Re: Emergency Fund Alternative for Young Accumulator

Post by MrMatt2532 »

I would vote no. Once your taxable account is significant, a big emergency fund doesn't matter so much and only decreases long term returns. I would still keep about 3 months in cash for liquidity purposes.
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avenger
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Re: Emergency Fund Alternative for Young Accumulator

Post by avenger »

I would say no. I only have about 18 months of expenses in a taxable account. I keep a separate 3 months cash in a savings account. I also consider about 3 months expenses worth of stable value fund available in my 457 as a second tier EF (see wiki on placing cash needs inside a tax-advantaged account).

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thedayisbrave
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Re: Emergency Fund Alternative for Young Accumulator

Post by thedayisbrave »

What are your short term goals? If you don't have any plans for cash intensive purchases for the next <5 years, my vote is cut your EF down and put that money in your taxable account. However, if you're thinking of buying a house or need a new car, then the cash is probably just fine where it is.
Last edited by thedayisbrave on Tue Jun 10, 2014 3:35 pm, edited 1 time in total.
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mhc
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Re: Emergency Fund Alternative for Young Accumulator

Post by mhc »

What do you mean by 10 time expenses? Monthly, yearly, or something else?

If it is 10 times monthly expenses, I would want a 3-6 month emergency fund. If it is 10 times annual expenses, who cares about an emergency fund.
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ruralavalon
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Re: Emergency Fund Alternative for Young Accumulator

Post by ruralavalon »

Canogapark66 wrote:For a young accumulator (age 28) with already having 10 times expenses in taxable brokerage acct, does it make sense to still keep 12 month emergency fund? Has anyone done the research on if that emergency fund was brought down to 2-3 months expenses and the remaining was invested. it seems like for a young accumulator it could be better off put to use compounding now vs. sitting in bank acct losing to inflation each yr?


thoughts?
I have done no research on your question.

In my opinion a large taxable account can serve the function of a dedicated "emergency fund", since you can quickly access the money without penalty. Your funds are are "liquid", readily converted to cash if needed. You still run the risk of having to sell in a down market, but the market will be up more often than down (same as this, link).
Last edited by ruralavalon on Tue Jun 10, 2014 3:39 pm, edited 1 time in total.
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Topic Author
Canogapark66
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Re: Emergency Fund Alternative for Young Accumulator

Post by Canogapark66 »

yes, 10 times annual expenses have already been accumulated and are sitting in a taxable.
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ruralavalon
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Re: Emergency Fund Alternative for Young Accumulator

Post by ruralavalon »

Canogapark66 wrote:yes, 10 times annual expenses have already been accumulated and are sitting in a taxable.
Thats plenty for emergency protection.
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Watty
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Re: Emergency Fund Alternative for Young Accumulator

Post by Watty »

Along with the definition of “emergency funds” as you get more established the definition of what an “emergency” changes too.

I have had times in my life when a $1000 car repair would have required me to have dipped into my emergency money. Now things like that are mainly just unpredictable expenses to me but not really an emergency.

At some point emergencies are limited to things like job losses or major health problems where the expenses will be stretched out over months so having immediate access to large amounts of money is less important.

One thing to be sure of though is that if you are married then your spouse knows how to access any of other types of accounts that would be used for extended emergencies.
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Zabar
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Re: Emergency Fund Alternative for Young Accumulator

Post by Zabar »

Canogapark66 wrote:yes, 10 times annual expenses have already been accumulated and are sitting in a taxable.
For someone who's 28, that's an impressive achievement. Congrats!

On the assumption that at least some of your taxable investments are high-quality corporate or muni bonds, I see no need to have a 12-month emergency fund that's separate. The bonds can serve as a backup to a 2-6 month EF, depending upon how comfortable you are. As for advice on how to invest, we'd have to see your overall AA, etc.
Armydoc
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Re: Emergency Fund Alternative for Young Accumulator

Post by Armydoc »

ruralavalon wrote:
Canogapark66 wrote:For a young accumulator (age 28) with already having 10 times expenses in taxable brokerage acct, does it make sense to still keep 12 month emergency fund? Has anyone done the research on if that emergency fund was brought down to 2-3 months expenses and the remaining was invested. it seems like for a young accumulator it could be better off put to use compounding now vs. sitting in bank acct losing to inflation each yr?


thoughts?
I have done no research on your question.

In my opinion a large taxable account can serve the function of a dedicated "emergency fund", since you can quickly access the money without penalty. Your funds are are "liquid", readily converted to cash if needed. You still run the risk of having to sell in a down market, but the market will be up more often than down (same as this, link).
I think that the OP needs to consider the relationship of his potential need to use the emergency fund with the potential for a down market. E.g. if you run a small business where hard times are closely correlated with the overall market, then your need for the emergency cash may be highest when stock prices are lowest, and you could be forced to sell low. One major reason for the EF is so you don't sell low. On the other hand, if your income is relatively "recession-proof," you may not need as much of a buffer.
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mhc
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Re: Emergency Fund Alternative for Young Accumulator

Post by mhc »

Zabar wrote:
Canogapark66 wrote:yes, 10 times annual expenses have already been accumulated and are sitting in a taxable.
For someone who's 28, that's an impressive achievement. Congrats!

On the assumption that at least some of your taxable investments are high-quality corporate or muni bonds, I see no need to have a 12-month emergency fund that's separate. The bonds can serve as a backup to a 2-6 month EF, depending upon how comfortable you are. As for advice on how to invest, we'd have to see your overall AA, etc.
That's not necessary. The taxable could be all stocks and tax-advantaged all bonds. Sell the stocks and exchange some of the bonds for stocks in the tax-advantaged account. This maintains the proper AA without having to have bonds in the taxable account. Of course I am assuming the OP has money in a tax-advantaged account.
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NOgmacks
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Re: Emergency Fund Alternative for Young Accumulator

Post by NOgmacks »

First off, I commend OP in acquiring and saving 10 times annual expenses, as mentioned by somebody else in this thread. It is something to be proud of.

That said, should we not ask on what kind of equities/stocks/bonds that OP is invested in to figure out if that amount is enough as EF?

Eg: If he/she is having most of the funds in something that is highly risky (which is most probably not the case), then, maybe OP should have another fund for EF, no?
Topic Author
Canogapark66
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Re: Emergency Fund Alternative for Young Accumulator

Post by Canogapark66 »

Current A/A in taxable:

56% VTSAX - Total Stock Market
24% VTIAX - Total International Stock Market
20% VBTLX - Total Bond Market
ab80
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Re: Emergency Fund Alternative for Young Accumulator

Post by ab80 »

If you don't have much invested, you need an EF. If you have a lot invested, who cares about the return on such a small portion of your money anyway? I'd go with 6 months if you really hate 12. You can put it in I bonds instead of losing to inflation.

Edit: A lot of people complain about the return on such a small portion of their portfolio, and not just people with a lot of money they could dip into. Even people without much in assets claim to have an EF consisting of credit cards, 401k loans, etc. I usually read such plans as no EF.
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Re: Emergency Fund Alternative for Young Accumulator

Post by grabiner »

See Placing Cash Needs in a Tax-Advantaged Account on the wiki.

If your taxable account is double the cash you need (so that it will still meet your needs if the market crashes), then you can hold your emergency fund in a bond fund in your 401(k) or IRA. If you need to spend your emergency fund, sell taxable stock, and move bonds to stock in the 401(k) or IRA so that you effectively sold bonds.

I do the same thing. I bought a home last year, and my down payment lived in my taxable account, with my bonds in my employer plan. If the stock market had crashed, I would still have had enough in the taxable account to make the down payment. When it didn't crash, I gained the benefit of tax-deferred growth on my stocks until I finally needed to sell some, and sold exactly the amount I needed, for a small capital gain.
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