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Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:36 pm
by Audi3470
As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:39 pm
by Thesaints
Audi3470 wrote:As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.
Who says that ?

Of course, in case the brokerage account contains a few different stocks, that would be quite accurate. In the world of finance when it rains it pours.
The value of your stocks could be substantially reduced at the exact time you need funds.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:41 pm
by livesoft
Check this out:
https://www.bogleheads.org/wiki/Placing ... ed_account
and of course
https://www.bogleheads.org/wiki/Emergency_fund

That bogleheads.org Wiki answers all questions. Amazing!

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:43 pm
by KlangFool
Audi3470 wrote:As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.
Audi3470,

There are two requirements for the emergency fund:

1) Liquidity

2) Preservation of value.

With stock and bond, you would not know the value of the investment when you need it. So, your 100K stock may only worth 50K when you need to spend the money. If your taxable account is very big with respect to your annual expense and you could lose 50% without causing the problem of cash flow, then, you could this. But, many folks with a large portfolio do not care about investing their emergency fund. They could afford not to.

KlangFool

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:43 pm
by lowndes
Audi3470 wrote:As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.
My emergency fund is in my taxable brokerage account. Works for me but others might be uncomfortable with approach.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:45 pm
by Thesaints
lowndes wrote: My emergency fund is in my taxable brokerage account. Works for me but others might be uncomfortable with approach.
Yeah, but is it individual stocks, a CD, gold coins ? A taxable brokerage account can contain almost anything.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 5:54 pm
by lowndes
Thesaints wrote:
lowndes wrote: My emergency fund is in my taxable brokerage account. Works for me but others might be uncomfortable with approach.
Yeah, but is it individual stocks, a CD, gold coins ? A taxable brokerage account can contain almost anything.
It's a three fund portfolio consisting of index funds (total stock, international and bonds)

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:02 pm
by qwertyjazz
The concern is the loss of a job could be correlated with a downswing of the stock market on a macro level (economic slowdown so you are more likely to lose your job) or micro level (bad luck) so many want to keep emergency fund safer. The alternative argument is lost increases of the safe money. It comes down to the size of your taxable, how secure your job is and how well it correlates to your investments IMO

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:02 pm
by raven15
Mine is. Or actually, I don't officially have an emergency fund. I have about three months of expenses in checking strictly for convenience. Then there is the taxable account, with a seperate and slightly more conservative allocation than tax sheltered. The bond funds there are evenly split between high yield tax exempt and government bond, and will gradually transition from small emergency fund, through large emergency fund, to anticipated house down payment. Money sitting around losing to inflation is money wasted.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:17 pm
by triceratop
I am, like you, an investor in my young 20s. I use my brokerage account as part of my emergency fund, in addition to my checking account which typically has 1-2 months expenses. I have treasury bond ETFs in my brokerage account which I can sell for little to no tax impact were an emergency to occur.

I do not know where you read that it cannot be considered part of an EF, but that is incorrect.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:18 pm
by ControlContentment
Mine is. I keep most of my bond holdings there (vanguard intermediate muni). My structure:

- 1 month in checking
- 3 more months in savings or money market (looking for convenient yield, currently cap one 360 money market at 1.1%)
- taxable brokerage which is about 50/50 equities and bonds

My retirement accounts are all over 95% equities. Works for us.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:29 pm
by coincollector
It's all about risk versus reward and how much risk for said reward you want to take. I think if your living paycheck to paycheck and funneling everything into the markets, that can be a bad idea when you might need cash yesterday and the market has tanked. On the other hand, keeping money in cash is basically a loosing endeavor, your money will slowly be eaten away by the inflation monster (not to be confused with the cookie monster). I'm in a similar boat as everyone else, I keep a few months on hand but then invest the rest. Whatever you feel will work best for you is what you should do. No need to loose sleep by being uncomfortable with your plan of attack, conservative, aggressive or otherwise.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:30 pm
by runner540
How soon everyone glosses over the memories of recessions.

In your adult life, you have known nothing but raging bull markets and high employment. I take lots of calculated risk with my long term accounts, but emergency fund is split between a couple of 1% online accounts, plus a healthy cushion in checking and cold hard cash at home. I am paying an opportunity cost or insurance premium, but I sleep well.

I suggest you read the newspapers (not just the wikipedia articles that have hindsight) from Sept and early October 2008. The global financial system was very close to collapse, and there were no jobs, except as repo men/women.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:51 pm
by BolderBoy
Audi3470 wrote:It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case...
The worst case is that you could lose some, most or all of your invested money.
Keep your emergency fund safer than that.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 6:55 pm
by triceratop
runner540 wrote:How soon everyone glosses over the memories of recessions.

In your adult life, you have known nothing but raging bull markets and high employment. I take lots of calculated risk with my long term accounts, but emergency fund is split between a couple of 1% online accounts, plus a healthy cushion in checking and cold hard cash at home. I am paying an opportunity cost or insurance premium, but I sleep well.

I suggest you read the newspapers (not just the wikipedia articles that have hindsight) from Sept and early October 2008. The global financial system was very close to collapse, and there were no jobs, except as repo men/women.
Do you think it is not possible to hold safe instruments in a taxable account?

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 7:01 pm
by runner540
triceratop wrote:
runner540 wrote:How soon everyone glosses over the memories of recessions.

In your adult life, you have known nothing but raging bull markets and high employment. I take lots of calculated risk with my long term accounts, but emergency fund is split between a couple of 1% online accounts, plus a healthy cushion in checking and cold hard cash at home. I am paying an opportunity cost or insurance premium, but I sleep well.

I suggest you read the newspapers (not just the wikipedia articles that have hindsight) from Sept and early October 2008. The global financial system was very close to collapse, and there were no jobs, except as repo men/women.
Do you think it is not possible to hold safe instruments in a taxable account?
I was not aware of a way to hold FDIC insured balances in a brokerage account. Yield on Money market accounts until recently really lagged online savings. I interpreted OP's "investing" to refer to riskier instruments. If that is incorrect, I apologize for making that assumption.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 7:04 pm
by triceratop
runner540 wrote:
triceratop wrote:
runner540 wrote:How soon everyone glosses over the memories of recessions.

In your adult life, you have known nothing but raging bull markets and high employment. I take lots of calculated risk with my long term accounts, but emergency fund is split between a couple of 1% online accounts, plus a healthy cushion in checking and cold hard cash at home. I am paying an opportunity cost or insurance premium, but I sleep well.

I suggest you read the newspapers (not just the wikipedia articles that have hindsight) from Sept and early October 2008. The global financial system was very close to collapse, and there were no jobs, except as repo men/women.
Do you think it is not possible to hold safe instruments in a taxable account?
I was not aware of a way to hold FDIC insured balances in a brokerage account. Yield on Money market accounts until recently really lagged online savings. I interpreted OP's "investing" to refer to riskier instruments. If that is incorrect, I apologize for making that assumption.
That is one way to define safe. I was referring to short term treasury funds, whose holdings are also guaranteed by the federal government. Your universal statement seemed in contradiction to this, so I wanted to see if you consider short term treasuries as unsafe.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 7:06 pm
by nisiprius
I haven't seen any very serious analysis of emergency funds, ever. For example, I don't know what counts as an emergency, or any statistical data on the frequency and size of various emergencies. The obvious one is job loss, and I just added a short section to the wiki article pointing out that job loss is a special case because many workers have a built-in partial job loss emergency fund in the form of unemployment insurance.

I think the whole concept goes back, let's say fifty years, to the hypothetical situation of someone young with $10,000 in savings who's eager to buy individual stocks. In this case, you have a very sharp division between very safe assets (a bank account) and assets that are far too risky to be used as an emergency reserve. Individual stocks can and do go to zero. In such a situation, it is very reasonable to advise the young investor to wait, and not to buy individual stocks at all, until they've built up a solid cash emergency fund.

When you have older investors, with more assets, and "softer" choices than individual stocks, things become more complicated. For example, an investment in the Vanguard Total Bond Market Index Fund--with checkbook access--is surely usable for many emergency-like situations. It's not likely that the fund will be down more than 10%, and it's no disaster if you're forced to sell a bond mutual fund when it's down 10%. Depending on the emergency, a personal check written on the bond fund may count as liquid... or not.

About the only thing to do is to ask "do you have a serious plan for what you will do if you encounter a credible 'emergency?'" Do you know where you can get the money? Examples of a credible emergency would be job loss, medical expenses requiring $50,000 in out-of-pocket payments, serious house damage not covered by insurance... bail bonds in weird scenarios...

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 7:25 pm
by baw703916
I think it makes sense to have one's emergency fund be layered. An "emergency" isn't a one size fits all thing, in amount of money needed, reason for the need, duration, correlation with economic conditions...

So in order of priority, emergency fund layers might look something like this

1. bank checking account
2. bank savings account
3. HELOC, if applicable
4. brokerage money market holdings in taxable
5. brokerage bond holdings in taxable
6. brokerage stock holdings in taxable (in increasing order of embedded capital gains)
7. CDs
8. retirement accounts

So one example of an "emergency" for me personally occurred two years ago, when I was moving and realized that in the Seattle real estate market I pretty much needed to come up with a cash offer if I were to buy a house here. Not a personal crisis, and I had money again once my previous house sold, but nevertheless, I had to raise a lot of money very quickly. Note that the existence of #5 on the list is a reason not to have all one's bonds in retirement accounts--if all you have in taxable is stocks, you may end up realizing a lot of capital gains.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 7:42 pm
by raven15
baw703916 wrote:Note that the existence of #5 on the list is a reason not to have all one's bonds in retirement accounts--if all you have in taxable is stocks, you may end up realizing a lot of capital gains.
That was what I decided too. I don't need bonds for the long run, hence tax sheltered accounts have only some long term treasuries for rebalancing. I may need bonds in the short or intermediate term, so any bonds I have for that should be available without penalty.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Mon Jul 03, 2017 8:00 pm
by pkcrafter
I think you have received some very good replies. The bottom line is you do not want to have to sell off investments to cover emergency funding, whether they are down or not. You can keep the EF in the same taxable account, but you should also keep a mental accounting of how much you have in available $$ if you need it for an unanticipated event.

Paul

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Tue Jul 04, 2017 8:59 am
by ruralavalon
Audi3470 wrote:As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.
In the worst case you might incur a loss. That is why most people wouldn't have taxable investments like stock index funds as an emergency fund.

When younger we used two bank savings accounts to hold money to cover emergencies.

When older when we had a large taxable account, invested in total market stock index funds, that did function as part of our emergency fund along with a very high limit credit card we didn't ordinarily use. It didn't make sense to me to leave large cash hoard uninvested.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Tue Jul 04, 2017 10:17 am
by bertilak
Audi3470 wrote:As a relatively new investor in my young 20s, can someone tell me why investing in a taxable individual brokerage account is not commonly considered part of an emergency fund?

It seems if I needed to, I could withdraw money from a brokerage account relatively easily. Sure I might incur short term capital gains taxes in the worst case, but a scenario where I'd need to use an emergency fund would probably supersede any worries I have about tax repercussions.
My taxable account is my emergency fund even though it is 100% equities. Since I take dividends as cash I generally have some cash accumulated. The cash gets reinvested at re-balance time but is otherwise available as cash in case of emergency.

I don't worry about having to "sell low" because I can simply re-balance in my IRA which holds both stocks (same fund as in taxable account) and bonds.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Tue Jul 04, 2017 11:45 am
by watchnerd
We (wife and I) are in our mid-40s with no big liabilities (no mortgage, 1 car loan at 0% APR < $450 10 months left, property taxes). We do the following:

--Checking: 2-3 months living expenses

Mostly a buffer so that we don't have to micromanage cash flow and we can pay for moderately expensive things like car maintenance, home maintenance, or a new tv / laptop without moving buckets of money from one account to another.

--Credit Cards: Paid in full each month, potential ~$70k usable

Buffer if we ever suddenly had to pay for something really expensive like a new roof ($20k) without delay. Would be then be paid for from other sources.

--Rainy Day Fund: Short-term savings / Emergency fund / Vacation

100% safe, fairly liquid. Online savings & CDs. Enough to cover 6 months of living expenses, vacation, and a new car/new roof/major house repair all at same time.

--Husband Special Savings / Wife Special Savings: Play Money

100% liquid, online savings. Potentially usable in emergency, contains about 1 month worth of living expenses. Otherwise contributed to in small amounts every month and used to pay for medium priced luxuries that the other spouse thinks is a stupid waste of money (laser facials, new speakers).

--Long Term Savings: Retirement Supplement / Major Catastrophe

Taxable brokerage account, short-medium term risk. Generally untouchable except in extremis. 10% short munis, 30% intermediate munis, 30% intermediate treasuries, 30% stocks. Currently has about 4-5 years worth of living expenses.

Re: Why Isn't a Taxable Account Considered Part of an Emergency Fund?

Posted: Tue Jul 04, 2017 6:55 pm
by ReadyOrNot
Yes, as others have noted, it is quite normal to have some liquid assets in a taxable brokerage account, which would be fine for emergency funds. When money market funds paid reasonable interest, they were part of most taxable brokerage accounts, and would usually be considered perfect emergency funds. Bond funds are pretty liquid, too -- this liquidity is one of the primary reasons for holding bond mutual funds instead of individual bonds. Nothing unusual there.
Perhaps you noticed that people advise against holding much in assets which pay interest or taxable dividends in taxable accounts (to avoid paying the maximum income tax rates). But people often hold some in taxable accounts just to serve as emergency funds.