Investing Emergency Fund
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Investing Emergency Fund
I currently have 30K in a money market account, I also keep 5K in savings. Im curious if anyone has researched the 7twelve portfolio. I'm thinking of investing my emergency fund in the portfolio. I understand the risk but also the reward. The 7twelve is safer it seems because of the bonds and cash is i believe around 40% of the total. So if I needed money in a down market i could use the cash portion of the portfolio without risking having to pull out when the market is low. I could open my 7twelve brokerage account with 36K at 3k in each of the twelve indexes. I do all my own investing and would like to here some different opinions that will essentially either talk me into or out of doing this.
Re: Investing Emergency Fund
The 7Twelve Portfolio
http://www.7twelveportfolio.com/
Frugalnotbroke:
Paul
http://www.7twelveportfolio.com/
Frugalnotbroke:
By definition, an emergency fund has to be safe and available, so the 7twelve doesn't fit the purpose. If you are thinking of just the bond portion, which is 35-40% of the 7twelve, then that is what your emergency fund would be, although you may want the bond portion to buy more stocks when they are down. Most people do not mix the EF with stocks.I currently have 30K in a money market account, I also keep 5K in savings. Im curious if anyone has researched the 7twelve portfolio. I'm thinking of investing my emergency fund in the portfolio. I understand the risk but also the reward. The 7twelve is safer it seems because of the bonds and cash is i believe around 40% of the total. So if I needed money in a down market i could use the cash portion of the portfolio without risking having to pull out when the market is low. I could open my 7twelve brokerage account with 36K at 3k in each of the twelve indexes. I do all my own investing and would like to here some different opinions that will essentially either talk me into or out of doing this.
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: Investing Emergency Fund
Don't mean to bite a newbie , but having 12 funds in an emergency fund sounds a little bit nuts to me. Even using 40% bonds and cash does not make this a good idea - the only thing you could depend on in an emergency would be that 40% of your "emergency fund".
Keep in mind that your emergency fund is most likely to be needed when the market has crashed. That's when a lot of job loss happens and that's when you will most need the entire amount you have set aside for emergencies.
Keep in mind that your emergency fund is most likely to be needed when the market has crashed. That's when a lot of job loss happens and that's when you will most need the entire amount you have set aside for emergencies.
Link to Asking Portfolio Questions
Re: Investing Emergency Fund
Northpointe Bank (based in Michigan) is currently offering 5% interest on up to $10,000 in a checking account. There are some requirements such as having 15 debit card transactions per statement cycle and having direct deposit, but if you're already accustomed to using a debit card for monthly purchases then these requirements are not a big deal. You could put $10,000 there and the other $25,000 in and Ally account earning 1.05%.
$10,000 @ 5% = $500/year
$25,000 @ 1.05% = $262.50/year
Earning interest of $762.50 each year on a balance of $35,000 is a 2.178% return, which is not at all shabby in our low rate environment, especially considering your emergency fund would remain perfectly liquid and accessible.
$10,000 @ 5% = $500/year
$25,000 @ 1.05% = $262.50/year
Earning interest of $762.50 each year on a balance of $35,000 is a 2.178% return, which is not at all shabby in our low rate environment, especially considering your emergency fund would remain perfectly liquid and accessible.
Actions have consequences.
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Re: Investing Emergency Fund
7-12 is apparently meant to be a conservative portfolio, but it is supposed to be a whole portfolio. You might use the most secure and stable funds within the portfolio as your backup emergency fund but you would not want a portfolio meant to be a whole portfolio to serve as your emergency fund.
It does make sense to have a tiered approach to your emergency fund so you get some return, especially if you are securely employed and really don't anticipate dipping in regularly.
My emergency fund is $10K in a second checking account. Second tier is $10K in I-Bonds and $15K in Vanguard short term corporate bond ETF (VCSH). Third tier is $25K in my state tax exempt muni bond fund. That gives me $60K in relatively liquid accounts with gradually increasing risk exposure. I also have Total Stock Market in a brokerage account that I could draw upon any time the market is up.
I do think it is good to have some amount in savings or MM so you do not have to have a taxable transaction every time you need to write a big check.
In sum, I would keep the $30K in something safe, but view it as part of a larger diversified portfolio with exposures to different risk levels and factors.
It does make sense to have a tiered approach to your emergency fund so you get some return, especially if you are securely employed and really don't anticipate dipping in regularly.
My emergency fund is $10K in a second checking account. Second tier is $10K in I-Bonds and $15K in Vanguard short term corporate bond ETF (VCSH). Third tier is $25K in my state tax exempt muni bond fund. That gives me $60K in relatively liquid accounts with gradually increasing risk exposure. I also have Total Stock Market in a brokerage account that I could draw upon any time the market is up.
I do think it is good to have some amount in savings or MM so you do not have to have a taxable transaction every time you need to write a big check.
In sum, I would keep the $30K in something safe, but view it as part of a larger diversified portfolio with exposures to different risk levels and factors.
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Re: Investing Emergency Fund
aristotelian wrote:7-12 is apparently meant to be a conservative portfolio, but it is supposed to be a whole portfolio. You might use the most secure and stable funds within the portfolio as your backup emergency fund but you would not want a portfolio meant to be a whole portfolio to serve as your emergency fund.
It does make sense to have a tiered approach to your emergency fund so you get some return, especially if you are securely employed and really don't anticipate dipping in regularly.
My emergency fund is $10K in a second checking account. Second tier is $10K in I-Bonds and $15K in Vanguard short term corporate bond ETF (VCSH). Third tier is $25K in my state tax exempt muni bond fund. That gives me $60K in relatively liquid accounts with gradually increasing risk exposure. I also have Total Stock Market in a brokerage account that I could draw upon any time the market is up.
I do think it is good to have some amount in savings or MM so you do not have to have a taxable transaction every time you need to write a big check.
In sum, I would keep the $30K in something safe, but view it as part of a larger diversified portfolio with exposures to different risk levels and factors.
retiredjg wrote:Don't mean to bite a newbie , but having 12 funds in an emergency fund sounds a little bit nuts to me. Even using 40% bonds and cash does not make this a good idea - the only thing you could depend on in an emergency would be that 40% of your "emergency fund".
Keep in mind that your emergency fund is most likely to be needed when the market has crashed. That's when a lot of job loss happens and that's when you will most need the entire amount you have set aside for emergencies.
But aren't we all a little nuts sometimes. But you are correct I should leave my emergency fund as an insurance policy and insurance should cost money. I guess I feel I should be seeking to get at least a 3% return so that my fund stays the same with inflation.
aristotelian wrote:7-12 is apparently meant to be a conservative portfolio, but it is supposed to be a whole portfolio. You might use the most secure and stable funds within the portfolio as your backup emergency fund but you would not want a portfolio meant to be a whole portfolio to serve as your emergency fund.
It does make sense to have a tiered approach to your emergency fund so you get some return, especially if you are securely employed and really don't anticipate dipping in regularly.
My emergency fund is $10K in a second checking account. Second tier is $10K in I-Bonds and $15K in Vanguard short term corporate bond ETF (VCSH). Third tier is $25K in my state tax exempt muni bond fund. That gives me $60K in relatively liquid accounts with gradually increasing risk exposure. I also have Total Stock Market in a brokerage account that I could draw upon any time the market is up.
I do think it is good to have some amount in savings or MM so you do not have to have a taxable transaction every time you need to write a big check.
In sum, I would keep the $30K in something safe, but view it as part of a larger diversified portfolio with exposures to different risk levels and factors.
In all honesty I could probably live on my 5k for 5 months. I have 0 debt and live as frugal as possible. I'm newer to building wealth and want to maximize my returns. I am 38 and only got serious about my finances at about age 30. Thank you for your input and advise I do appreciate everyones input. I'm glad I found this group of like minded individuals to bounce things off of.
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Re: Investing Emergency Fund
Check out I-Bonds. Guaranteed to keep pace with inflation, liquid after one year. Many people use them as their emergency fund. Basically you get CD rates but with savings account liquidity. I think they would be perfect for what you are seeking.Frugalnotbroke wrote:
But aren't we all a little nuts sometimes. But you are correct I should leave my emergency fund as an insurance policy and insurance should cost money. I guess I feel I should be seeking to get at least a 3% return so that my fund stays the same with inflation.
https://www.treasurydirect.gov/indiv/pr ... glance.htm
Re: Investing Emergency Fund
The whole point of an emergency fund is that it really is not an investment vehicle. Your primary concern for the money should be availability of the funds/ how quickly you can get your hands on the money as well as safety of the money(loss of principal).
If you feel you have plenty in your Emergency Fund and can move a portion of it to try to earn a little extra, then look at money market funds.
Rule #1 Don't step over a quarter to pick up a penny.
If you feel you have plenty in your Emergency Fund and can move a portion of it to try to earn a little extra, then look at money market funds.
Rule #1 Don't step over a quarter to pick up a penny.
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Re: Investing Emergency Fund
I do appreciate everyones input. I'm new to being able to invest actual money over and above maxing out my tax sheltered retirement accounts. I guess I'm very green to how it works. I do all my investing through Vanguard and have never tried to get any money out, only putting in. Excuse me if this seems stupid but is it more or less difficult to get money out of certain funds. What i mean is as far as any emergencies go I have a high limit credit card that I use and pay monthly and if I had any kind of emergency i could easily put a 30k charge on it and retrieve the money to pay it off at the end of the month.
I just recently got to my goal of 35K emergency fund which I hold 5K in savings for anything immediate and the other 30K I hold in my settlement moneymarket account at vanguard. I've had a 5K emergency fund for 8 years while I worked hard and payed off all my debt including my mortgage and have actually never had to dip into it. Now I'm ready to concentrate on building wealth
I welcome advise from seasoned vets and have enjoyed reading this page since I found it recently.
Thanks
I just recently got to my goal of 35K emergency fund which I hold 5K in savings for anything immediate and the other 30K I hold in my settlement moneymarket account at vanguard. I've had a 5K emergency fund for 8 years while I worked hard and payed off all my debt including my mortgage and have actually never had to dip into it. Now I'm ready to concentrate on building wealth
I welcome advise from seasoned vets and have enjoyed reading this page since I found it recently.
Thanks
Re: Investing Emergency Fund
Many people use a multi-tiered emergency fund. This is a frequently asked question. For myself, I don't use a cash emergency fund. Yep, I can use credit cards for most emergencies and yep, it is easy to get money out of an investment account.
See the usual web pages:
https://www.bogleheads.org/wiki/Emergency_fund
https://www.bogleheads.org/wiki/Placing ... ed_account
See the usual web pages:
https://www.bogleheads.org/wiki/Emergency_fund
https://www.bogleheads.org/wiki/Placing ... ed_account
Re: Investing Emergency Fund
If emergency money is in a Roth acct, you would have to pay a penalty to withdrawal that money if it has not been in there 5 years and you are not 59.5
You can get out of any fund at anytime (unless it is a hedge fund and some other specialized funds that may minimize your ability to withdrawal), if you want to do that you probably should look at a regular mutual fund taxable account.
You can get out of any fund at anytime (unless it is a hedge fund and some other specialized funds that may minimize your ability to withdrawal), if you want to do that you probably should look at a regular mutual fund taxable account.
Re: Investing Emergency Fund
That's untrue as far as my research has confirmed, but it does seem to be a very common misconception.Mr.BB wrote:If emergency money is in a Roth acct, you would have to pay a penalty to withdrawal that money if it has not been in there 5 years and you are not 59.5
Re: Investing Emergency Fund
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Last edited by ACM4297 on Sun Jun 18, 2017 7:14 pm, edited 1 time in total.
Re: Investing Emergency Fund
https://www.irs.gov/publications/p590b/ch02.htmlACM4297 wrote:This is only true of the earnings on your funds. You can withdraw your principal at any time for any reason for free.Mr.BB wrote:If emergency money is in a Roth acct, you would have to pay a penalty to withdrawal that money if it has not been in there 5 years and you are not 59.5
Re: Investing Emergency Fund
Yep, I read at that IRS link:
IRS Publication 590b wrote:You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).
Re: Investing Emergency Fund
We use insight prepaid accounts for the bulk of our e-fund. They offer 5% on up to 5000 in a savings account and each person can have two accounts. That gets us 20k earning 5%, so we don't worry about the rest sitting at 1%. It does take a few days, though, for an ach pull to bring the funds back into our checking.
Re: Investing Emergency Fund
Our emergency fund is a series of buckets from cash to savings account, ibonds, short term bonds and TSM index fund. When considering the value of the stocks towards an emergency I mentally discount them 50%. I also include Roth IRA contributions as a bucket.
Re: Investing Emergency Fund
Frugalnotbroke wrote:
As I mentioned above, an emergency fund needs to be liquid and not part of your long term investments. An emergency can go like this--
There is something unexpected that causes the market to drop by 50% and you lose your job at the same time. You should not tap your retirement money to cover this, so do you really want to charge 30k to a credit card charging you some high interest rate when you suddenly have no income?
Once the EF is in place, you can work on building your retirement.
EF
https://www.bogleheads.org/wiki/Emergency_fund
Paul
No, it's not usually difficult to get money out of certain funds or accounts, but...Excuse me if this seems stupid but is it more or less difficult to get money out of certain funds. What i mean is as far as any emergencies go I have a high limit credit card that I use and pay monthly and if I had any kind of emergency i could easily put a 30k charge on it and retrieve the money to pay it off at the end of the month.
As I mentioned above, an emergency fund needs to be liquid and not part of your long term investments. An emergency can go like this--
There is something unexpected that causes the market to drop by 50% and you lose your job at the same time. You should not tap your retirement money to cover this, so do you really want to charge 30k to a credit card charging you some high interest rate when you suddenly have no income?
Once the EF is in place, you can work on building your retirement.
EF
https://www.bogleheads.org/wiki/Emergency_fund
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: Investing Emergency Fund
That isn't true in a lot of cases. It depends on how the money got into the Roth. If the principal came fromACM4297 wrote:This is only true of the earnings on your funds. You can withdraw your principal at any time for any reason for free.Mr.BB wrote:If emergency money is in a Roth acct, you would have to pay a penalty to withdrawal that money if it has not been in there 5 years and you are not 59.5
regular Roth contributions, then you are correct. If the principal came from conversions of after tax traditional
accounts (backdoor Roth conversions and mega backdoor conversions) then a 5 year rule applies. It is even more restrictive than
the 5 year rule on earnings of regular contributions because it is on an account basis, not global.
https://www.kitces.com/blog/understandi ... nversions/
Since more than 1/2 of the money flowing into Roths is from conversions rather than direct contributions, it isn't
a rare point.
Last edited by bada bing on Mon May 22, 2017 1:46 pm, edited 1 time in total.
Re: Investing Emergency Fund
Aren't those too low ($10,000) for emergency fund? It says "$10,000 in TreasuryDirect and $5,000 in paper bonds purchased with IRS tax refunds"aristotelian wrote:Check out I-Bonds. Guaranteed to keep pace with inflation, liquid after one year. Many people use them as their emergency fund. Basically you get CD rates but with savings account liquidity. I think they would be perfect for what you are seeking.Frugalnotbroke wrote:
But aren't we all a little nuts sometimes. But you are correct I should leave my emergency fund as an insurance policy and insurance should cost money. I guess I feel I should be seeking to get at least a 3% return so that my fund stays the same with inflation.
https://www.treasurydirect.gov/indiv/pr ... glance.htm
Close to 2% is not bad at all, since it's taxed the same way as CD (regular income at federal level) it's a good alternative.
Can those be bought through VG? I don't see a buy option in that TD site.
I agree with earlier poster, ROTH can be utilized as emergency fund, but if that's the case pretty much any investment can be used as emergency fund, what if market tanked just before you needed the funds? The point of emergency fund is that it should be somewhere that won't lose value or depreciate even if short period.
livesoft wrote:Many people use a multi-tiered emergency fund. This is a frequently asked question. For myself, I don't use a cash emergency fund. Yep, I can use credit cards for most emergencies and yep, it is easy to get money out of an investment account.
Cash limits on most cards are low, and even if you have convenience checks the APRs are terrible.
It's a risky way, if one can move funds from investments quickly, why not use that as source of emergency fund?
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Re: Investing Emergency Fund
Correct, $10K per person, per year (a couple could purchase $10K each). Also it is not liquid for the first year. My approach would be to buy $10K per year for three years, keeping the rest in savings or money market until allowed to make the next purchase. After three years you will have $30k guaranteed to be matching inflation.Gamma Ray wrote: Aren't those too low ($10,000) for emergency fund? It says "$10,000 in TreasuryDirect and $5,000 in paper bonds purchased with IRS tax refunds"
Close to 2% is not bad at all, since it's taxed the same way as CD (regular income at federal level) it's a good alternative.
Can those be bought through VG? I don't see a buy option in that TD site.
You cannot buy through Vanguard. Must buy from Treasury Direct.
Re: Investing Emergency Fund
Doughroller had a great post on the Emergency fund recent.
http://www.doughroller.net/investing/th ... vestments/
http://www.doughroller.net/investing/th ... vestments/
Re: Investing Emergency Fund
Can you get this if you're not in Chicago i.e. living in another State?tanstaafl wrote:We use insight prepaid accounts for the bulk of our e-fund. They offer 5% on up to 5000 in a savings account and each person can have two accounts. That gets us 20k earning 5%, so we don't worry about the rest sitting at 1%. It does take a few days, though, for an ach pull to bring the funds back into our checking.
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Re: Investing Emergency Fund
Emergency cash can be invested in one year treasury bills. They are yielding around 1.1% at this moment, and interest tax-deferred for one year. They can be sold on the secondary market if you need the money.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.
Re: Investing Emergency Fund
Paul Merriman's Recommendations for Vanguard gives the following for emergency funds:
- Vanguard Prime Money Market (VMMXX) - First 3-6 months worth of living expenses
- Vanguard Short-Term Corporate Bond Index Admiral (VSCSX) - Funds in excess of 3-6 months of living expenses
- willthrill81
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Re: Investing Emergency Fund
Admittedly, I'm more aggressive than most investors, but about one-third of our EF is invested in Wellesley Income in my Roth. Granted, I can't touch the earnings until 59.5, but I can withdraw the principal whenever I need to. Yes it's about 38% stocks, but even in the atrocious year of 2008, the fund lost only 9.84%, which it then recovered and then some in 2009. The future could certainly look different, but I'm totally comfortable with that level of volatility given the strong historic returns of the fund. My thoughts are that if an 90% of an EF wouldn't be enough to meet your real emergencies, there probably isn't enough of a cushion in it to begin with. And to be honest, rather than following a strict 'formula' for our EFs, most of us just pick an arbitrary round number that we're comfortable with. So a little volatility with a portion of one's EF doesn't seem like a big deal IMHO.
Honestly though, for those with a 60/40 or more conservative AA, assuming they can access enough of the money without penalties, I really question whether a separate EF is needed at all. I'm 100% equities with my retirement assets, so I want a fairly conservative separate EF, but many here have 60/40, 50/50, or even more conservative AAs. For such folks, I don't really see the point in an EF (assuming the bond money can be reached when needed).
Honestly though, for those with a 60/40 or more conservative AA, assuming they can access enough of the money without penalties, I really question whether a separate EF is needed at all. I'm 100% equities with my retirement assets, so I want a fairly conservative separate EF, but many here have 60/40, 50/50, or even more conservative AAs. For such folks, I don't really see the point in an EF (assuming the bond money can be reached when needed).
The Sensible Steward
Re: Investing Emergency Fund
What would be the benefit of these, compared to online savings that pay similar returns?brother7 wrote:Paul Merriman's Recommendations for Vanguard gives the following for emergency funds:
- Vanguard Prime Money Market (VMMXX) - First 3-6 months worth of living expenses
- Vanguard Short-Term Corporate Bond Index Admiral (VSCSX) - Funds in excess of 3-6 months of living expenses
Why do people find it's necessary to invest the emergency fund, while getting 1 to 1.5% is sufficient for something you might need immediately, or something you want to remain with 0 risk. Especially the money market account, with 0% yield, I don't really see the point.
Re: Investing Emergency Fund
Vanguard Prime Money Market Fund's current yield is 0.97%.Gamma Ray wrote:What would be the benefit of these, compared to online savings that pay similar returns?brother7 wrote:Paul Merriman's Recommendations for Vanguard gives the following for emergency funds:
- Vanguard Prime Money Market (VMMXX) - First 3-6 months worth of living expenses
- Vanguard Short-Term Corporate Bond Index Admiral (VSCSX) - Funds in excess of 3-6 months of living expenses
Why do people find it's necessary to invest the emergency fund, while getting 1 to 1.5% is sufficient for something you might need immediately, or something you want to remain with 0 risk. Especially the money market account, with 0% yield, I don't really see the point.
Vanguard Short-Term Corporate Bond Index Fund Admiral Shares's current yield is 2.17%.
I think both of these are relatively safe investments for an emergency fund.
If the OP already has a taxable account at Vanguard, it would be convenient to park emergency funds there also.
Whether online savings account or Vanguard, it will take a few days to access funds in either one.
Re: Investing Emergency Fund
imperio wrote:Can you get this if you're not in Chicago i.e. living in another State?tanstaafl wrote:We use insight prepaid accounts for the bulk of our e-fund. They offer 5% on up to 5000 in a savings account and each person can have two accounts. That gets us 20k earning 5%, so we don't worry about the rest sitting at 1%. It does take a few days, though, for an ach pull to bring the funds back into our checking.
Yep! We live in FL.
Re: Investing Emergency Fund
Some people may frown at this but we have our EF in saving account, tax exempt muni, and Wellesley.
- willthrill81
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Re: Investing Emergency Fund
That sounds perfectly reasonable to me.dacalo wrote:Some people may frown at this but we have our EF in saving account, tax exempt muni, and Wellesley.
The Sensible Steward
Re: Investing Emergency Fund
If you want to take extra risk then take $10k and do something with that and leave the $20k liquid. $10k in total stock and $20k cash is a 33/67 portfolio.
In a serious downturn your emergency fund might be $25k - can you manage with that in an emergency?
In the worse case your emergency fund is $20k - can you manage with that in the worse case emergency?
If so then go ahead.
In a serious downturn your emergency fund might be $25k - can you manage with that in an emergency?
In the worse case your emergency fund is $20k - can you manage with that in the worse case emergency?
If so then go ahead.
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Re: Investing Emergency Fund
It seems the most common EF layout I've seen, and the one I implement, consists of three buckets:
1) Some amount in Cash in a High Yield Savings account (such as Ally)
2) The remainder held in a short, limited, or intermediate bond fund in a taxable account
3) Some amount in Series I Bonds held at Treasury Direct
In my case, I have 12.5% cash at Ally, 25% at Treasury Direct and the remainder in VWIUX (intermediate-term municipals) in my Vanguard taxable account. The other portion has a risk to NAV, but the returns for me make up for that risk. Future increases to the fund to account for inflation will be directed to the I Bonds portion.
Part of the question also depends on A) how much emergency fund you need and B) how much management you want to do. For me, I have two years worth, hedging primarily against job loss and how long it reasonably could take me to find new work in my field (if at all) and the probability of having to relocate. If I was more comfortable in my job security, I might drop that down to only 12 months.
7 funds? 12 funds? Way to (darn) complicated.
1) Some amount in Cash in a High Yield Savings account (such as Ally)
2) The remainder held in a short, limited, or intermediate bond fund in a taxable account
3) Some amount in Series I Bonds held at Treasury Direct
In my case, I have 12.5% cash at Ally, 25% at Treasury Direct and the remainder in VWIUX (intermediate-term municipals) in my Vanguard taxable account. The other portion has a risk to NAV, but the returns for me make up for that risk. Future increases to the fund to account for inflation will be directed to the I Bonds portion.
Part of the question also depends on A) how much emergency fund you need and B) how much management you want to do. For me, I have two years worth, hedging primarily against job loss and how long it reasonably could take me to find new work in my field (if at all) and the probability of having to relocate. If I was more comfortable in my job security, I might drop that down to only 12 months.
7 funds? 12 funds? Way to (darn) complicated.
Re: Investing Emergency Fund
I keep an emergency reserve of about one year’s expenses in a Vanguard money market fund. It doesn’t bother me that it pays very little. I like knowing that it’s there if I need it.