Should I invest my emergency fund?

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frankie1800
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Should I invest my emergency fund?

Post by frankie1800 » Thu Nov 02, 2017 1:57 pm

Hello!

This is my first Boglehead post! I did read the book and I have been trolling around for a bit. I feel like I was becoming a boglehead before I knew what a boglehead was. I started to incorporate the Warren Buffett 90/10 strategy when I first heard his proclamation on how he would have his wife assets allocated upon his death. That is when I discovered index funds. I wish I would have been in them all along as I have made most of the same mistakes investing as others have.

I am still trying to figure out how much to have as an emergency fund but when I got that figured, do you think it would be a good idea to put some or all of it in TIPS or a Bond Index fund? This would be in my non-retirement account. I realize it is better to have these investments in tax sheltered accounts but would it not be better to have it doing something rather than nothing since the risk with these funds is very low?

Also, I just discovered Vanguard's Admiral Funds. Is there any reason why I would invest in say VFINX as opposed to Admiral Fund VFIAX as long as I have the minimum required investment? They both appear to be exactly the same with the exception of the initial investment and expense ratios.

SimplicityNow
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Re: Should I invest my emergency fund?

Post by SimplicityNow » Thu Nov 02, 2017 4:29 pm

frankie1800 wrote:
Thu Nov 02, 2017 1:57 pm
Hello!

This is my first Boglehead post! I did read the book and I have been trolling around for a bit. I feel like I was becoming a boglehead before I knew what a boglehead was. I started to incorporate the Warren Buffett 90/10 strategy when I first heard his proclamation on how he would have his wife assets allocated upon his death. That is when I discovered index funds. I wish I would have been in them all along as I have made most of the same mistakes investing as others have.

I am still trying to figure out how much to have as an emergency fund but when I got that figured, do you think it would be a good idea to put some or all of it in TIPS or a Bond Index fund? This would be in my non-retirement account. I realize it is better to have these investments in tax sheltered accounts but would it not be better to have it doing something rather than nothing since the risk with these funds is very low?

Also, I just discovered Vanguard's Admiral Funds. Is there any reason why I would invest in say VFINX as opposed to Admiral Fund VFIAX as long as I have the minimum required investment? They both appear to be exactly the same with the exception of the initial investment and expense ratios.


Welcome to the forum!

The rule of thumb for an emergency fund is 3-6 months of ordinary expenses. According to Christine Benz, Morningstar's Director of Personal Finance, that amount might want to be increased for higher income workers or workers whose work can feature blocks of time where they are not working like construction workers.

They should be kept in liquid accounts with low volatility. Breakable CDs. short term bond funds or high yield savings accounts.

As for the 2nd part of your post: there would be no reason to invest in investor shares vs. admiral shares of the same vanguard fund since the admiral shares have a lower expense ratio. If the funds are not held at Vanguard you may need to buy investor funds as many brokerages do not offer the admiral version of the fund. If that is the case it may be wiser to invest in an ETF equivalent of the same fund.

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JupiterJones
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Re: Should I invest my emergency fund?

Post by JupiterJones » Thu Nov 02, 2017 4:52 pm

SimplicityNow wrote:
Thu Nov 02, 2017 4:29 pm
They should be kept in liquid accounts with low volatility. Breakable CDs. short term bond funds or high yield savings accounts.
Yup. The job of your emergency fund is not to "work for you" and earn money. It's there to protect you from having to dip into your investments (perhaps selling at a loss) and/or going into debt and incurring interest costs. So it has to maintain its value and be there when you need it, first and foremost.

It's not the rockstar on stage, it's the security guard at the foot of the stage. Asking the security guard to start playing guitar in the show is a great way to A) expose the rockstar to unnecessary risk, and B) ruin the music.
Stay on target...

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bengal22
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Re: Should I invest my emergency fund?

Post by bengal22 » Thu Nov 02, 2017 9:00 pm

I do not have an emergency fund per se. All of my investments are liquid because I can sell one day and in most cases cut a check the next day. If I need money same day I can use a credit card. I am one that believes that one should be earning all he can on all of his money. Now if I know I have a fairly large expenditure coming up on a fixed time period I may park some money in my money market. But I do not just have money set aside for an oops moment.

bubbadog
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Re: Should I invest my emergency fund?

Post by bubbadog » Thu Nov 02, 2017 9:28 pm

I do not have a dedicated EF either. I have been investing for twenty years and have never had an occasion where it was needed. I can certainly appreciate why some people need one for things like sudden job loss, major unexpected expense, . I consider my EF buried in my taxable account. If your taxable account is large enough that you could cover several years of normal expenses, why do you need to park 3-6 months worth of expenses on the sidelines not working for you?

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Re: Should I invest my emergency fund?

Post by runner540 » Thu Nov 02, 2017 9:31 pm

JupiterJones wrote:
Thu Nov 02, 2017 4:52 pm
SimplicityNow wrote:
Thu Nov 02, 2017 4:29 pm
They should be kept in liquid accounts with low volatility. Breakable CDs. short term bond funds or high yield savings accounts.
Yup. The job of your emergency fund is not to "work for you" and earn money. It's there to protect you from having to dip into your investments (perhaps selling at a loss) and/or going into debt and incurring interest costs. So it has to maintain its value and be there when you need it, first and foremost.

It's not the rockstar on stage, it's the security guard at the foot of the stage. Asking the security guard to start playing guitar in the show is a great way to A) expose the rockstar to unnecessary risk, and B) ruin the music.
What a great explanation! Thanks for sharing this. I agree with this advice, just had never heard it that way before.

DorothyB
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Re: Should I invest my emergency fund?

Post by DorothyB » Thu Nov 02, 2017 9:40 pm

I like Jupiter's explanation also. The job of the EF is to protect, not to earn you lots of money.

Pre-retirement, I had an emergency fund. I kept most of it very liquid, but did put some in IBonds knowing that I couldn't cash them for a bit and would lose 3 months interest if I needed them before 5 years and some in CDs that I could cash out if needed.

The big downside to investing your EF is - what if the day you need it is the day the market is down 15%?

mega317
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Re: Should I invest my emergency fund?

Post by mega317 » Fri Nov 03, 2017 12:28 am

Usually the numbers make the answer "it doesn't matter at all".

If a few months' expenses is a large percentage of your assets, you probably don't want any risk at all. So savings account, I bonds, CDs, etc.

To your specific question of a bond index fund: some people use short-term bond funds. The Vanguard short-term bond index fund yield is 1.8%. Well, you can get 1.3% in a savings account. How many dollars is 0.5% of your emergency fund? Like 100-200 bucks a year (taxable)? You could lose more than that with NAV changes. If you try to increase the yield (short-term corporate, or even intermediate-term funds), and remember it will be on the order of dozens to maybe a couple hundred dollars a year, then you increase the risk.

In my own situation when starting out I had a huge amount of cash in a high-yield savings account--basically every dollar I saved beyond retirement accounts. I figured that was my emergency fund and future unknown costs like a down payment and a car. (And I didn't know or think about CDs and such at that time.) Once things came in to focus (got married, bought a house and a car, had the first child) my taxable account was big enough that, like the posters above, I didn't need to worry about it and invested it all.

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wintermute
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Re: Should I invest my emergency fund?

Post by wintermute » Fri Nov 03, 2017 1:03 am

DorothyB wrote:
Thu Nov 02, 2017 9:40 pm
The big downside to investing your EF is - what if the day you need it is the day the market is down 15%?
I personally take some credit and term risk (when it pays more than CDs) and I add 10% more money than I would otherwise keep in my EF.

The most valuable thing I learned from this forum is the emergency fund. I keep 1 year and once went thru 9 months of it looking for work.

OP could add a stock fund on top of an existing EF. But think about rebalancing. You could sell gains into your EF but never take from it to buy more stocka (instead use income or just let it grow back).

When I looked at credit bonds for mine I also looked at using around 10-20% total stock, the rest savings. The returns were nearly identical to 100% bonds. Just more concentrated in a small portion. But the advantage of that is you can spend the cash first if the stock fund is down.

a__
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Re: Should I invest my emergency fund?

Post by a__ » Fri Nov 03, 2017 2:08 am

I keep about 1 month's worth of expenses as cash buffer in my checking account. Over that, the money I really consider as my EF is in my taxable account, invested specifically in Vanguard's Balanced Index fund. This provides both modest return and modest risk protection. I also protect against downside risk by funding this account to about 130% of my target amount.

inbox788
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Re: Should I invest my emergency fund?

Post by inbox788 » Fri Nov 03, 2017 3:11 am

I pushed half my emergency fund (about 3 months out of 6 month expenses) into taxable account invested in intermediate term municipal bonds. Figure it's unlikely to be used and should return a little more than 1% savings account. I'm considering keeping about 1 month in cash/savings and the rest in bonds. I'm hoping the bonds grow to 9-12 months expenses, in case it dips suddenly.

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BeBH65
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Re: Should I invest my emergency fund?

Post by BeBH65 » Fri Nov 03, 2017 4:12 am

Hello Frankie,

Welcome to the forum.

Please have a look at our wiki page on energency funds
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

NYC_Guy
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Re: Should I invest my emergency fund?

Post by NYC_Guy » Fri Nov 03, 2017 7:27 am

I use I bonds for my emergency fund.

If you are targeting for example, a $60,000 EF, I’d suggest building the EF up in a higher yielding savings account (eg, at Ally). Once you are at the target, I would put $20,000 per year (assuming you are married) into I bonds. The first year you do that, don’t take anything out of the savings account. The next two years you would move $20,000 from the savings account to I bonds. Once you have $60,000 in I bonds and the last purchase is a year old, close out the savings account.

Once retired, you may want to count the I bond portfolio as part of your fixed income portfolio. Before retirement, I wouldn’t do that.

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Re: Should I invest my emergency fund?

Post by harvestbook » Fri Nov 03, 2017 7:49 am

inbox788 wrote:
Fri Nov 03, 2017 3:11 am
I pushed half my emergency fund (about 3 months out of 6 month expenses) into taxable account invested in intermediate term municipal bonds. Figure it's unlikely to be used and should return a little more than 1% savings account. I'm considering keeping about 1 month in cash/savings and the rest in bonds. I'm hoping the bonds grow to 9-12 months expenses, in case it dips suddenly.
That's what we do, too.
I'm not smart enough to know, and I can't afford to guess.

aristotelian
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Re: Should I invest my emergency fund?

Post by aristotelian » Fri Nov 03, 2017 7:55 am

+1, I Bonds are a great choice for emergency fund. Currently yielding 2.58%, much better than any savings account, and interest is tax deferred. Do be aware that they take a year to become liquid, so it is important to also have funds in liquid savings.

I also use Vanguard Prime Money Market fund now that the interest rate is pretty close to savings accounts. No reason other than convenience of having my cash savings linked to my brokerage.

I think the "I don't have an emergency fund" attitude works if you have a very big liquid brokerage account, but for someone who is just starting to invest it is probably still a good idea.

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nisiprius
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Re: Should I invest my emergency fund?

Post by nisiprius » Fri Nov 03, 2017 8:07 am

First: "savings" is money you have decided not to spend. "Investments" are what you choose to do with your savings. A bank account can be, and often is, an investment.

Second: emergency funds are hard to discuss, and I've never seen any good analysis of them, because it is hard to say what an "emergency" is or how big they tend to be. The idea probably goes back to more than fifty years ago, and the general idea is that newlyweds with $10,000 in the bank should not use that $10,000 to buy 30 shares of Tesla stock, just because of a stock tip from a friend.

Third: the most frequently discussed "emergency" is job loss. The odd thing is that any sensible consideration of job loss would include analyzing your situation with respect to unemployment insurance. It is surprisingly difficult to find out because the rules vary in every state, and I, for one, have never thought it would be a good idea to ask the HR department about it. However, when I was earning good money in a state with good unemployment benefits and was laid off in 2008, my benefits amounted to over $500/week, and would have continued for (at least) six months. (I know it took me 5-1/2 months to find a new job).

The main points about an emergency fund are: since you may need to tap it suddenly, if it's not in a bank account--if it's at a brokerage in something that fluctuates in value--it shouldn't be anything that fluctuates so much that you will feel terrible if you need to tap it when it is down.

Second, some emergencies require you to be able to get the money quickly, in a form that a service provider will accept. If the power is off, the cell towers will go down in a few hours; you probably can't get an order to your brokerage, and you probably can't get money out of an ATM machine.

I have a check-writing feature on one of my bond funds at Vanguard. Places that are willing to accept checks at all are usually willing to accept them, so that's better than saying "gee, I can probably get that money for you in about a week." However, my favorite home-improvement contractor--who literally takes the checks I write to the bank they are drawn on, to cash them--probably wouldn't!

I would suggest not being too greedy about it all. Don't make it a point of principle to try to keep every penny "invested." Typically the people who tell you "your money should be working harder" are people who have investments they want to sell you. And don't forget that if you shop around for decent bank accounts, the rates that banks pay are in the same ballpark as the more conservative "investments" you can buy at a brokerage.
Last edited by nisiprius on Fri Nov 03, 2017 7:34 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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JupiterJones
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Re: Should I invest my emergency fund?

Post by JupiterJones » Fri Nov 03, 2017 8:59 am

nisiprius wrote:
Fri Nov 03, 2017 8:07 am
Typically the people who tell you "your money should be working harder" are people who have investments they want to sell you.
True that. :beer
Stay on target...

scrabbler1
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Re: Should I invest my emergency fund?

Post by scrabbler1 » Fri Nov 03, 2017 1:31 pm

I have a two-tiered emergency fund. The first tier is about a $500 cushion in my local bank's checking account beyond any minimum balance needed to avoid monthly account fees. This money earns no interest but exists in case I have any small, unforeseen expenses in a given month. This money is very liquid, as I can access it through cash at an ATM or from a personal check.

The second tier is about $40k in an intermediate-term muni bond fund. Part of my overall portfolio, it earns about a 2% return and it is mostly tax-free. I hate the idea of tying up any significant sums of money which earn zilch. This bond fund can fluctuate in value, but not a lot. I can tolerate the risk of having to withdraw from it in a down market in return for the small but steady interest it earns. The fund also has checkwriting privileges, making the money a little more readily accessible. I have averaged less than one check per year and haven't touched the money in several years.

frankie1800
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Re: Should I invest my emergency fund?

Post by frankie1800 » Fri Nov 03, 2017 6:02 pm

I really appreciate the advice! I really appreciate what nisiprius said in regards to not being greedy. I feel like 3-6 months of expenses is crazy. I just wouldn't feel comfortable. I support a family. I realize that there are valid reasons for such a short time frame like separation benefit from an employer, strong job marketability and unemployment insurance.

I really struggled with how much of an emergency fund to have because I do realize more money in savings or safe havens, is less money working for me in the market. So I have settled on an amount.

I was thinking about i-bonds also. I read somewhere that you may be able to write off the taxes on the gains if used for school expenses, if certain income thresholds were met. This could be useful in college planning for my 3 year old. Other than that, it sounds like short term bond funds, high yield savings or CDs.

Thoughts on possibility placing some in a Vanguard TIPS, or just stick strictly with the i bonds?

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nisiprius
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Re: Should I invest my emergency fund?

Post by nisiprius » Fri Nov 03, 2017 7:31 pm

Also, I just discovered Vanguard's Admiral Funds. Is there any reason why I would invest in say VFINX as opposed to Admiral Fund VFIAX as long as I have the minimum required investment? They both appear to be exactly the same with the exception of the initial investment and expense ratios.
Yes, you are right. The short answer is there is no reason why you would invest in VFINX instead of VFIAX. There's no catch. There are no gotchas.

Of course, if we get creative, we can come up with some crazy reason that applies 0.01% of the time, but I'm not going to do that.

For example, if it's not VFINX, but a bond fund that has a check writing option, and you ask them to issue you a checkbook, the checks are tied to one specific fund and ticker symbol. If the checks are tied to VBMFX (Total Bond market index fund, Investor shares) and you go above $10,000 and convert to Admiral shares, you will have to wait for them to send you a new checkbook. Another example would be if you think you are about to jump ship and move from Vanguard to some other brokerage; most? many brokerages cannot hold or buy Admiral shares of Vanguard index funds, so you would need to demote them to Investor shares before trying to move them. Wait, I said I was not give invent any crazy reasons... :oops:
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

frankie1800
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Re: Should I invest my emergency fund?

Post by frankie1800 » Sat Nov 04, 2017 7:40 am

nisiprius wrote:
Fri Nov 03, 2017 7:31 pm
Another example would be if you think you are about to jump ship and move from Vanguard to some other brokerage; most? many brokerages cannot hold or buy Admiral shares of Vanguard index funds, so you would need to demote them to Investor shares before trying to move them.
Interesting that you would mention this. I recently discovered the admiral shares. You are correct. I am with eTrade and I can't get them. I am thinking of opening an account with Vanguard. I like Vanguard funds and I would like to take advantage of the lower expenses. If I do open an account with them, I will probably roll over my Roth IRA from American Funds. American has been ripping me off for years, I just didn't really realize it.

Any thoughts on opening a Vanguard investor account?

tampaite
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Re: Should I invest my emergency fund?

Post by tampaite » Sat Nov 04, 2017 8:17 am

frankie1800 wrote:
Thu Nov 02, 2017 1:57 pm

I am still trying to figure out how much to have as an emergency fund but when I got that figured, do you think it would be a good idea to put some or all of it in TIPS or a Bond Index fund? This would be in my non-retirement account.
Keep 12 months of emergency fund in high yield savings account and NO, don't invest your emergency fund as you never know when you may need it in an 'emergency'

SimplicityNow
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Re: Should I invest my emergency fund?

Post by SimplicityNow » Sat Nov 04, 2017 8:27 am

nisiprius wrote:
Fri Nov 03, 2017 7:31 pm
Also, I just discovered Vanguard's Admiral Funds. Is there any reason why I would invest in say VFINX as opposed to Admiral Fund VFIAX as long as I have the minimum required investment? They both appear to be exactly the same with the exception of the initial investment and expense ratios.
Yes, you are right. The short answer is there is no reason why you would invest in VFINX instead of VFIAX. There's no catch. There are no gotchas.

Of course, if we get creative, we can come up with some crazy reason that applies 0.01% of the time, but I'm not going to do that.

For example, if it's not VFINX, but a bond fund that has a check writing option, and you ask them to issue you a checkbook, the checks are tied to one specific fund and ticker symbol. If the checks are tied to VBMFX (Total Bond market index fund, Investor shares) and you go above $10,000 and convert to Admiral shares, you will have to wait for them to send you a new checkbook. Another example would be if you think you are about to jump ship and move from Vanguard to some other brokerage; most? many brokerages cannot hold or buy Admiral shares of Vanguard index funds, so you would need to demote them to Investor shares before trying to move them. Wait, I said I was not give invent any crazy reasons... :oops:
I always enjoy your posts but this one made me laugh out loud!

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Tamarind
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Re: Should I invest my emergency fund?

Post by Tamarind » Sat Nov 04, 2017 9:01 am

Most folks who don't keep a separate emergency fund are using their taxable accounts for this purpose. Which makes total sense for them, but those who are in early accumulation or lower income and so don't have a sizable taxable account should still keep a store of easily accessible assets like a classic EF.

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Re: Should I invest my emergency fund?

Post by TinkerPDX » Sat Nov 04, 2017 9:25 am

frankie1800 wrote:
Thu Nov 02, 2017 1:57 pm

I am still trying to figure out how much to have as an emergency fund but when I got that figured, do you think it would be a good idea to put some or all of it in TIPS or a Bond Index fund? This would be in my non-retirement account. I realize it is better to have these investments in tax sheltered accounts but would it not be better to have it doing something rather than nothing since the risk with these funds is very low?
That's what I do. My emergency funds are just part of my overall asset allocation, and that portion is iBonds in a Treasury Direct account, so in a real emergency I could access them, but they count towards the TIPS portion of my bond allocation.

ETadvisor
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Re: Should I invest my emergency fund?

Post by ETadvisor » Sat Nov 04, 2017 9:39 am

inbox788 wrote:
Fri Nov 03, 2017 3:11 am
I pushed half my emergency fund (about 3 months out of 6 month expenses) into taxable account invested in intermediate term municipal bonds. Figure it's unlikely to be used and should return a little more than 1% savings account. I'm considering keeping about 1 month in cash/savings and the rest in bonds. I'm hoping the bonds grow to 9-12 months expenses, in case it dips suddenly.
Following...my taxable account is with TD Ameritrade. Are there any commission free ETFs with mid-term tax exempt bonds?

TIA
Last edited by ETadvisor on Sat Nov 04, 2017 9:41 am, edited 1 time in total.

HardHitter
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Re: Should I invest my emergency fund?

Post by HardHitter » Sat Nov 04, 2017 9:40 am

Interesting thread. I have the similar question.

We max 401k and IRA contribution, the rest of money goes into our savings account. Currently, we have $100K+ sitting in savings, which is about 16 months of emergency funds.

Each month, we add around $4-$5K into that emergency fund and use it to pay out large one time payments.

Anticipate the upcoming payments that need to be made:
- Property Tax (around $3.5K in April 2018)
- Tax Liability (estimated to be around $7-$8K in April 2018)

We've already paid out about $10K from our emergency last month to cover first property tax payment and car insurance for the year.

We want to keep the cash "available" because we are looking to

1. Buy the wife a new car (estimating $20-$30K)
2. Want to continue to save up for another down payment on a second house
3. Will be starting a family in 2018

But would the suggestion be to keep 12 months of emergency funds ($72K) in savings and then anything over that invest?

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Re: Should I invest my emergency fund?

Post by vitaflo » Sat Nov 04, 2017 1:31 pm

When you have no taxable account and need $50k in an EF, then sure keeping it in a bank account makes sense. But I'm of the belief that once your taxable account becomes big enough, you don't really need a dedicated emergency fund per se. This is especially true because money is fungible.

If you have say $300k in taxable you can really just keep the "EF" in stocks. I put that in quotes because in reality you'll be using the bonds in your retirement account for your EF. How? If you need the money you'd sell the stocks in your taxable account. This would make your AA out of whack, which would eventually mean you'd need to exchange bonds to stocks in your retirement account to compensate, basically meaning you used your retirement bonds for your EF funds (again, fungible money).

This is how I've been doing it since my taxable account got big enough (IE, even w/ a 50% market drop I'd have plenty of funds for an EF).

frankie1800
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Re: Should I invest my emergency fund?

Post by frankie1800 » Sat Nov 04, 2017 3:48 pm

HardHitter wrote:
Sat Nov 04, 2017 9:40 am
But would the suggestion be to keep 12 months of emergency funds ($72K) in savings and then anything over that invest?

After reading some of the comments in the forum, I am starting to think that a set amount of ER fund that you are comfortable with should be done at first but as the taxable account grows, it may be wise to start shrinking the amount of money simply sitting in a savings account in favor of total investment. I guess that will be a personal decision as everyone has varying limits of what they feel comfortable with.

inbox788
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Re: Should I invest my emergency fund?

Post by inbox788 » Tue Nov 07, 2017 4:04 pm

ETadvisor wrote:
Sat Nov 04, 2017 9:39 am
inbox788 wrote:
Fri Nov 03, 2017 3:11 am
I pushed half my emergency fund (about 3 months out of 6 month expenses) into taxable account invested in intermediate term municipal bonds. Figure it's unlikely to be used and should return a little more than 1% savings account. I'm considering keeping about 1 month in cash/savings and the rest in bonds. I'm hoping the bonds grow to 9-12 months expenses, in case it dips suddenly.
Following...my taxable account is with TD Ameritrade. Are there any commission free ETFs with mid-term tax exempt bonds?

TIA
I keep mine at Vanguard, so everything is pretty much commission free and low fee. And I stick with mutual funds, so end of day prices vs. spreads. Neither is that significant.

https://research.tdameritrade.com/grid/ ... onfree.asp

FWIW, if you click on Bonds (97 funds) and sort by lowest Gross Expense Ratio, you find BND, BIV, VCSH, BSV, VCIT, and other potential choices, but no muni's as far as I can see.

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