Sell me on the benefits of an emergency fund

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whodidntante
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Re: Sell me on the benefits of an emergency fund

Post by whodidntante » Sun Feb 18, 2018 1:16 pm

mrpotatoheadsays wrote:
Sun Feb 18, 2018 2:14 am
A major earthquake hits. Power is knocked-out, businesses are closed. The only thing being accepted is cash. I go to my safe and pull out my emergence fund - a stack on fresh bills to trade for food and water.

Replace "earthquake" with "Chinese cyberattack" or "fire" or "flood" or ...
30 gallons of gas would be a lot more useful than cash in all of these scenarios.

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Re: Sell me on the benefits of an emergency fund

Post by SCV_Lawyer » Sun Feb 18, 2018 1:38 pm

KlangFool wrote:
Sun Feb 18, 2018 11:01 am
SCV_Lawyer wrote:
Sun Feb 18, 2018 10:41 am
You just need access to capital, and it doesn't need to be cash or bonds either. As livesoft has explained several times, even if your taxable account is 100% equities that are down at the time, that is OK as long as there are bonds in your qualified plans. Sell the equities in your taxable, and at the same time, sell bonds and buy equities in your qualified plans in the same amount (just be careful for a wash sale rule if you sold equities for a taxable loss).
SCV_Lawyer,

This is assuming the person is not in shock and froze. In a recession and job loss situation, the last thing that a person could do is to act rationally and sell stock or bond in an appropriate fashion. It is not possible for most normal human beings. We will make mistake if we are forced to do something. With one year of the emergency fund, the person does not have to do anything. It is a lot safer.

We need to protect ourselves from any possible bad decision at that stressful situation.

KlangFool
Well, I guess if one is concerned that he/she won't act rationally, then putting a safeguard in place makes sense, with the understanding that there is a cost to such a safeguard in lost potential returns. This is not a concern for me personally, so I choose to stay fully invested.

radiowave
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Re: Sell me on the benefits of an emergency fund

Post by radiowave » Sun Feb 18, 2018 2:03 pm

whodidntante wrote:
Sun Feb 18, 2018 1:14 pm
sambb wrote:
Sun Feb 18, 2018 1:37 am
Im sure people here will talk about all the emergencies that could happen, but in reality, having the fund was a terrible decision for me, and i got rid of it. I have significant taxable holdings, and a few credit cards. YMMV
Same here. People with sufficient liquidity don't need a big pile of cash. I think for people of means who hold onto big cash positions an "emergency fund" is a way of backdooring a much more conservative portfolio, while still feeling like they are 80/20 or whatever. Which is fine, but call it what it is: a more conservative portfolio.
The dilemma n having a large cash position as an "emergency fund" is that it is not keeping up with inflation so over time you are losing money and putting a drag on overall assets. On the other hand, having too little cash on hand can be problematic if someone needs to sell equity (capital gains tax) or withdraw tax-deferred funds to cover unexpected expenses. Agree that credit cards with enough credit line can help in many situations, however you still need to pay off the bills.

As I'm coming down the home stretch to retirment (tentatively class of 2023), the emergency fund is becoming a cash fund to bridge to retirement, e.g. pay off mortgage and/or move to LCOL area, etc. It's interesting how your perspective changes as you get closer to retirement as one poster on a previous BH thread said his entire portfolio was an emergency fund in retirment.
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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 2:07 pm

SCV_Lawyer wrote:
Sun Feb 18, 2018 1:38 pm
KlangFool wrote:
Sun Feb 18, 2018 11:01 am
SCV_Lawyer wrote:
Sun Feb 18, 2018 10:41 am
You just need access to capital, and it doesn't need to be cash or bonds either. As livesoft has explained several times, even if your taxable account is 100% equities that are down at the time, that is OK as long as there are bonds in your qualified plans. Sell the equities in your taxable, and at the same time, sell bonds and buy equities in your qualified plans in the same amount (just be careful for a wash sale rule if you sold equities for a taxable loss).
SCV_Lawyer,

This is assuming the person is not in shock and froze. In a recession and job loss situation, the last thing that a person could do is to act rationally and sell stock or bond in an appropriate fashion. It is not possible for most normal human beings. We will make mistake if we are forced to do something. With one year of the emergency fund, the person does not have to do anything. It is a lot safer.

We need to protect ourselves from any possible bad decision at that stressful situation.

KlangFool
Well, I guess if one is concerned that he/she won't act rationally, then putting a safeguard in place makes sense, with the understanding that there is a cost to such a safeguard in lost potential returns. This is not a concern for me personally, so I choose to stay fully invested.
SCV_Lawyer,

Let's assume that your assumption about yourself is correct, it makes you not a normal person. If there is a recession and a person lost his job and/or business plus many of his neighbors are in the same situation, it is unlikely that the person will be able to act rationally.

I had been through many recessions and economic crisis. People freaking out is a normal behavior.

KlangFool

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 2:16 pm

I would argue that most normal/average people don't even have an EF nor investments. So, what's your point, Klang?

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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 2:19 pm

chevca wrote:
Sun Feb 18, 2018 2:16 pm
I would argue that most normal/average people don't even have an EF nor investments. So, what's your point, Klang?
chevca,

My point is a normal person that has investment but no EF will not act rationally in a financial crisis.

KlangFool

chevca
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Re: Sell me on the benefits of an emergency fund

Post by chevca » Sun Feb 18, 2018 2:21 pm

I don't think there's any way you could possibly know how others would act in that circumstance.

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Re: Sell me on the benefits of an emergency fund

Post by SCV_Lawyer » Sun Feb 18, 2018 2:30 pm

KlangFool wrote:
Sun Feb 18, 2018 2:07 pm

Let's assume that your assumption about yourself is correct, it makes you not a normal person.
My wife tells me that all the time...maybe she is on to something. :D

But in all seriousness, my only point is that if you consciously elected not to have an EF because you knew that you had other sources of capital to draw upon, then I would think you would remember that strategy, at least once the initial shock of the bad event wore off. But I will also admit that I have been lucky enough to be fully-employed for my entire post-college career. Fingers crossed that it will last 5 more years.

And good luck to all that have EFs don't need to drawn upon them.
Last edited by SCV_Lawyer on Sun Feb 18, 2018 2:34 pm, edited 2 times in total.

KlangFool
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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 2:33 pm

chevca wrote:
Sun Feb 18, 2018 2:21 pm
I don't think there's any way you could possibly know how others would act in that circumstance.
chevca,

That is true if you have no first-hand observations. After a few recessions across 30+ years, I have enough observations to know how most folks will behave.

KlangFool

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Re: Sell me on the benefits of an emergency fund

Post by KlangFool » Sun Feb 18, 2018 2:37 pm

SCV_Lawyer wrote:
Sun Feb 18, 2018 2:30 pm
KlangFool wrote:
Sun Feb 18, 2018 2:07 pm

Let's assume that your assumption about yourself is correct, it makes you not a normal person.
My wife tells me that all the time...maybe she is on to something. :D

But in all seriousness, my only point is that if you consciously elected not to have an EF because you knew that you had other sources of capital to draw upon, then I would think you would remember that strategy, at least once the initial shock of the bad event wore off. But I will also admit that I have been lucky enough to be fully-employed for my entire post-college career. Fingers crossed that it will last 5 more years.

And good luck to all that EFs (if you have one) don't need to be drawn upon.
SCV_Lawyer,

<<I would think you would remember that strategy, at least once the initial shock of the bad event wore off. >>

The problem is it is usually too late. The bad decision was made during the initial shock.

<<And good luck to all that EFs (if you have one) don't need to be drawn upon.>>

I was unemployed for more than 1 year a few times. I had used up a fair amount of my EF before I found another job.

KlangFool

P.S.: My niece's house in Houston was flooded last year. We sent her some money with our Emergency Fund.
Last edited by KlangFool on Sun Feb 18, 2018 2:47 pm, edited 1 time in total.

JBTX
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Re: Sell me on the benefits of an emergency fund

Post by JBTX » Sun Feb 18, 2018 2:47 pm

I’ve never really thought of our liquidity as an emergency fund per se, but it does serve that purpose. We keep about 6 months in bank accounts, and another 6-8 months in ibonds. The ibonds serve as both a backup and liquid fund as well as part of our bond allocation. The rest is basically extra cash that we keep for the ups and downs of life, especially with a family. I’ve been working contract and income flows vary a lot. We will need 3 cars over the next 3-4 years. Kid going to college. We just remodeled and tapped into some of it.

I just look at it as part of a diversified portfolio of varying risks. We keep no cash in our investment accounts which are almost all retirement accounts. We could certainly tap into a Roth in an emergency but I’d really prefer not to.

Part of it is just a feeling of security and independence.

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Re: Sell me on the benefits of an emergency fund

Post by SimplicityNow » Sun Feb 18, 2018 4:04 pm

bligh wrote:
Sun Feb 18, 2018 1:04 pm
I have made several posts on this forum pointing out that I think "Emergency fund" is a poor label given to "Cash Reserves". In a true emergency, your entire net worth becomes your "emergency fund". I am not going to have my family live under a bridge while I have seven figures sitting in an IRA, because I didn't set aside an emergency fund, or burnt through it.

Understand the purpose of cash reserves. Most corporations and businesses keep cash reserves on hand. They don't refer to them as emergency funds. Instead they realize their ongoing and unexpected expenses occur. The cash reserves provide the liquidity needed to be able to tide over most situations where current cash flows are unable to meet current expenses. This could be due loss of income, or due to unexpected spike in expenses. The cash reserves provide immediate liquidity without the need to sell assets, potentially at a loss or inopportune moment.

I have significant (for me) assets in taxable brokerage accounts that I could also tap in an emergency. However, I still maintain cash reserves. The cash reserves fluctuate over time but I keep them in a defined range as much as possible.

I think if we all started referring to it as cash reserves, its function would be much clearer.
+1

This is part of the response I made to a similar post:

"The more thought I give to it, the more I think the whole idea is just mental accounting. In reality all of one's assets are an emergency fund. Of course there would be a hierarchy in liquidating those assets depending on how the market was doing. If you need $100,000 for a life saving operation for your child you will sell what you need to in order to pay for it no matter what the market is doing.

I have followed the recommendations here to keep our emergency fund allocation separate and not to include it when computing our asset allocation.
I think I am changing my mind in that regard. I'm not sure if my recent retirement factors into that thought process although my spouse is still working."

Updated: After thinking more about EF, I have decided not to count them separately and will now consider them part of my fixed income allocations. They are still kept in high yield savings accounts and short term no early withdrawal penalty CDs. But by including them as a fixed income asset, I will need to increase my equity allocation in order to achieve the asset allocation specified in my IPS.

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Re: Sell me on the benefits of an emergency fund

Post by cfs » Sun Feb 18, 2018 4:11 pm

I am not selling you nothing! My signature applies. Gracias por leer / cfs
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echidna
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Re: Sell me on the benefits of an emergency fund

Post by echidna » Sun Feb 18, 2018 5:37 pm

I think to discuss this logically, you need to begin by defining "emergency". In this context, we are particularly referring to things that affect financial security.

Then make a list of potential emergency situations and assign some rough level of consequence (magnitude, duration of effects) and probability to each. These would be (as Donald Rumsfeld famously said) your known unknowns. Then, inevitably, there will be some "unknown unknowns" that you can't even imagine. Pretty hard to allow for these apart from having a flexible, multi-faceted response strategy.

Obvious emergencies most of us might encounter include loss of job (if not retired), medical emergencies/disasters (what if you have a disabling stroke?), failure of a financial institution you're involved with, divorce and its financial consequences, fire/flood/earthquake/etc. destroying your primary residence, identity theft, fraud (suppose you invested with Bernie Madoff - lots did!), and so on. You might chose to add more unlikely events like war, nuclear accident, asteroid impact and so on.

I'm not trying to make an exhaustive list here, but I think that would be a useful exercise for the group if it hasn't already been done.

I'm explicitly not including stock market crashes and related events as I think your investment strategy should be predicated on something similar to at least the worst past such events recurring during your life. Maybe however you could have a category for a "nuclear market meltdown".

Holding a dedicated "emergency fund" of say 3-12 months ordinary spending might help with some of the above emergencies, but maybe not all. But I do agree with others that if you have liquid taxable investments, they could be the core of such a fund. The one reservation I have would be taking a big capital gains tax hit if I needed to pull a lot out of such a fund in a hurry. OTOH, this might still be better than paying the opportunity cost of holding (for the long term) cash currency or cash in low-yielding bank accounts.
Last edited by echidna on Mon Feb 19, 2018 3:28 pm, edited 2 times in total.

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Re: Sell me on the benefits of an emergency fund

Post by scrabbler1 » Sun Feb 18, 2018 6:23 pm

I have my EF in layers, or tiers, as do many others in this forum. The first tier is about $500 over and beyond the minimum balance needed to avoid account fees in my local bank's checking account. This money, earning no interest, is easily accessible in cash from an ATM or from a personal check. Its purpose is to cover smaller, unforeseen expenses which can arise a given month. I tap into this small cushion fairly often.

The second tier is about $40k in an intermediate-term muni bond fund which has checkwriting privileges. It earns about 2-2.5% interest, mostly tax-free. I do risk some loss of principal if I have to tap into it when its NAV is down, but this fund's NAV doesn't bounce around a whole lot. The fund earns about $100 per month in interest, as I hate the idea of having a big blob of money earning zilch or next to zilch. The presence of checkwriting privileges makes the money a little more easily accessible in case I have to write a large check on a moment's notice. I have had this fund for 24 years and I have averaged just under one check a year (for any purpose), sometimes I made a small profit, sometimes took a small loss. This $40k is part of the bond portion of my AA, of course.

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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Sun Feb 18, 2018 6:45 pm

radiowave wrote:
Sun Feb 18, 2018 2:03 pm
...The dilemma n having a large cash position as an "emergency fund" is that it is not keeping up with inflation so over time you are losing money and putting a drag on overall assets...
People who are trying to sell you mutual funds and securities often say something like this and I don't think it's so. It relies on deliberating mixing up two different meanings of the word "cash." Certainly, physical paper currency is not going to keep up with inflation, and neither will a bad checking account (like a zero-interest business checking account), but by and large over time bank accounts and money market mutual funds have pretty well kept up with inflation... even beaten it, though not by much, but have kept up.
For example, from inception in 6/30/1975 through 12/31/2017, $10,000 invested in the Vanguard Prime Money Market Account would have grown to $80,358.23.
Source
Image
According to the BLS inflation calculator, $80,358.23 in December 2017 had the same buying power as $17,471.73 did at the time investment was made.
Image
So, it didn't lose "money," and it didn't fail to keep up with inflation. In fact, it beat inflation by a cumulative total of almost +75% in 42 years. Now, that's nothing to write home about, but it works out to exceeding inflation by 1.3% per year.
A money market fund didn't "lose money," which means a smaller number of dollars except when people are trying to bash cash or TIPS.
It didn't fail to keep up with inflation.
It beat inflation.
Competitive bank accounts would have done the same thing.
You can keep money in an emergency fund without "losing money" in any reasonable meaning of the phrase.
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Re: Sell me on the benefits of an emergency fund

Post by echidna » Sun Feb 18, 2018 7:26 pm

nisiprius wrote:
Sun Feb 18, 2018 6:45 pm
A money market fund didn't "lose money," which means a smaller number of dollars except when people are trying to bash cash or TIPS.
It didn't fail to keep up with inflation.
It beat inflation.
Competitive bank accounts would have done the same thing.
You can keep money in an emergency fund without "losing money" in any reasonable meaning of the phrase.

First of all, your calculation needs to be done on an after-tax basis if you are using a taxable money-market (etc.) account outside of a tax-advantaged situation. The result will then depend critically on your overall tax bracket, including state tax. The effect of compounding at the lower effective after-tax annual rate can be profound over the long-term. Even if the money is inside a tax-advantaged account, the tax on withdrawal (if applicable, which it will not be for say a Roth IRA) needs to be included.

Secondly, even ignoring tax, current yields for VMMXX are falling behind inflation.

Thirdly, there is a perfectly reasonable sense in which the fund is "losing money", and that is through the opportunity cost of not having the money invested in higher yielding (and possibly tax-advantaged) ways.
Last edited by echidna on Sun Feb 18, 2018 8:09 pm, edited 4 times in total.

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Re: Sell me on the benefits of an emergency fund

Post by Makaveli » Sun Feb 18, 2018 7:52 pm

HRPennypacker wrote:
Sun Feb 18, 2018 3:02 am
Helps me sleep better at night, so I have one. That's probably the main reason.
+1

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Re: Sell me on the benefits of an emergency fund

Post by radiowave » Sun Feb 18, 2018 8:01 pm

Current reported inflation rate Feb 14 is 2.1$ (http://www.usinflationcalculator.com/in ... ion-rates/). Current high yield savings are running 1.4-1.5% (https://www.bankrate.com/banking/savings/rates/ ). Ally is showing a 2.0% 12 mo CD so that barely is keeping up savings but as echidna notes, that is before accounting for taxes on interest. So yes, mitigating some of inflation risk with high yield savings and CDs or short term treasuries is possible but there is a slow bleed over time that could be significant over many years. Granted, there is a sleep well at night factor for having cash, and good reasons for keeping a stockpile of cash readily available, e.g. saving for a house, car, home improvement, etc. or building a bridge to retirment to fund the first couple years without worrying about a market downturn.

It's not and either/or proposition, just tradeoffs depending on individual needs and risk tolerance.
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Re: Sell me on the benefits of an emergency fund

Post by Ged » Sun Feb 18, 2018 8:06 pm

To me an emergency fund always meant having outside my IRA/401K in something other than equities that I could use in case of something like a period of unemployment or similar unexpected immediate need.

The main thing is to avoid IRA early withdrawal or sale of equities at a bad time.

That to me is the benefit of an emergency fund.

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Re: Sell me on the benefits of an emergency fund

Post by echidna » Sun Feb 18, 2018 10:13 pm

Reading over all the posts here, I'm struck by the very different perspectives different people have, and I think to a large extent, this reflects different life situations. Of course, I tend to think first from my own current situation.


Example 1: A couple in mid-life with a large mortgage, kids in school, trying to max. out contributions to 401k's, IRA's, college accounts, etc., They have large and relatively inflexible living expenses which consume most of their remaining income. They may have little in the way of liquid assets outside of their tax-advantaged retirement accounts, and may face large early withdrawal penalties if they need to tap those accounts. Their only significant asset outside of the retirement accounts may be their home equity, and that could be seriously compromised in an economic downturn which could also threaten their employment security and job-related health benefits.

It sounds like a fairly explicit emergency fund arrangement is needed in this case.


Example 2: A retired couple aged 65+, house paid off, empty-nesters, receiving social security and medicare, retirement portfolio at least 25x annual expenses, retirement expenses flexible (can cut back on travel and other luxuries if necessary), can rent a room in their house for extra income if need be, can tap their home equity in an emergency, even if real estate prices tank, or downsize their house or take out a reverse mortgage.

I think any major emergencies can likely be covered from their investment portfolio or home equity (e.g., a HELOC loan), without an explicit emergency fund. If they have a (notional) emergency fund, it may be more for peace of mind that real economic need.


Obviously there is a whole spectrum of situations, so there is unlikely to be a one-size-fits-all solution to the OP's question.

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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Sun Feb 18, 2018 10:25 pm

echidna wrote:
Sun Feb 18, 2018 7:26 pm
...First of all, your calculation needs to be done on an after-tax basis...
When have you seen people quote returns on mutual funds or stock market "on an after-tax basis?" People frequently will say "the U.S. stock market has had a real return of 6.4% since 1900" without mentioning taxes, even in an aside. Second, opportunity cost is not "losing money," it is "opportunity cost."
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Re: Sell me on the benefits of an emergency fund

Post by patrick » Sun Feb 18, 2018 10:41 pm

thangngo wrote:
Sun Feb 18, 2018 9:52 am
Life happens.

- One morning you go to work, your car broke down. You need a replacement car.
- One night you come back from work, your wife tells you she wants a divorce.
- Just as you come back home from a vacation, a fire destroy your house and all your belongings.
- One day you wake up, your wife got sick and diagnosed with cancer. She goes to long-term treatment and your family loses one source of income. All your savings get wiped out in a matter of months.
- One weekend, you have a fun class reunion party and have one glass too much to drink. You cause an accident and kill another person. His/her family sues you to your bones.
- The global economy goes to the next Great Depression. Everyone's stock portfolio loses up to 80% value.

Shall I go on?

Put it as whatever you want, but stock market always has two components, two faces of the same coin: risk and rewards. As far as risk management goes, when you expose all of elements of your life to risk, you'll get caught with your pants down, eventually.
The emergency fund (as traditionally defined -- lots of cash) doesn't reduce risk much for the emergencies you listed. I presume the same goes for most of those you didn't list.

1. Replacing a car: It takes at least a little while to decide which car to buy, so there's time to sell mutual funds.
2. Divorce: You lose half of the emergency fund too.
3. House burns down: You can buy replacement household goods with a credit card and sell mutual funds before the grace period ends. Even a 12 month emergency fund won't buy a new house.
4. Health problems: Loss of income doesn't add new expenses; you'd have the same expenses as before, and could sell mutual funds in advance of each monthly housing payment. If the income loss lasts long enough you'd exhaust the emergency fund anyway. For medical bills, my experience at least is that they accept credit cards, mail bills months later, or sometimes both.
5. Lawsuits: What would stop the judgment creditor from going after your emergency fund too?
6. Economic depression: In a repeat of the Great Depression, bond funds will do just fine. If we broaden this to include inflationary depressions, the cash emergency fund could also lose a lot in real terms.

Obviously having $400K in stocks and $100K in cash is safer position than having $400K in stocks and no other assets. But that seems more due to the overall portfolio size and stock percentage.

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Re: Sell me on the benefits of an emergency fund

Post by echidna » Sun Feb 18, 2018 10:59 pm

nisiprius wrote:
Sun Feb 18, 2018 10:25 pm
echidna wrote:
Sun Feb 18, 2018 7:26 pm
...First of all, your calculation needs to be done on an after-tax basis...
When have you seen people quote returns on mutual funds or stock market "on an after-tax basis?" People frequently will say "the U.S. stock market has had a real return of 6.4% since 1900" without mentioning taxes, even in an aside. Second, opportunity cost is not "losing money," it is "opportunity cost."
Regarding quoting after-tax returns on funds, it is done all the time. Just look for example at Vanguard's "Price and Performance" tab for a typical fund. You will see data for "Returns before taxes", "Returns after taxes on distributions" and "Returns after taxes on distributions and sale of fund shares". These are SEC-mandated disclosures, as I understand it. For an interesting discussion of the reasoning behind the mandates, see https://www.sec.gov/rules/proposed/33-7809.htm (the most recent info I could find on a quick look).

The problem in quoting after-tax returns is that everyone's tax situation is different, so these data are based on a worst-case scenario using the maximum Federal marginal rates for long-term capital gains, qualified dividends and ordinary income as appropriate. The rates used are only applicable at very high income levels, so understate the returns that most of us will see with just Federal taxation. They also assume a non-tax-advantaged account. Results (long-term) in a tax-advantaged account will be significantly better.

At the same time they don't include state taxes, which can range from zero to of order 13%, and so may seriously understate tax effects if you live in California as I do.

This is why it doesn't make a lot of sense for a fund to quote after-tax returns (beyond the mandated disclosures, which at least give an idea of tax-efficiency). You really need to do the calculation yourself for your own particular situation. Even then, it is a fraught process - do you figure the marginal effect of an increase in income from a particular event, or do you average overall tax burden across various components of your income? (Not all of your income is taxed at your maximum marginal rate, and there can be subtle effects at various points as your rising income causes e.g. the component of Social Security income taxed to rise from 0% to 85%, future Medicare costs to rise, tax on long-term capital gains and qualified dividends to transition from 0% to 15% to 20%, phase-outs for exemptions to occur, and heaven help if alternative minimum tax rears its ugly head.)

I should also add that the tax code is a moving target, both Federally and state-wise. The Federal code just changed significantly, so nearly everyone's effective after-tax returns have changed. Tax rates have changed dramatically over the period stock market returns have been reported. While it's ultimately correct to look at after-tax returns, dealing with tax would be a major confusion factor in documenting past stock market history.

You can now understand why overall stock market returns are quoted without allowing for taxes, but at least these returns will tell you the pre-tax accumulation in a tax-advantaged account. You can then figure out the tax on withdrawal yourself, based on your situation (for example, zero tax at withdrawal for a Roth IRA, taxed as regular income for a Traditional IRA).

Just to emphasize: the key point here is whether investments are in a tax-advantaged account or not. Outside of a tax-advantaged account, it is crucial to take account of the effect of year-by-year taxation in calculating long-term returns (especially at higher income levels), and this is a messy business that depends in detail on individual tax situations.

Similarly, the proper way of assessing economic performance is to use returns after correcting for inflation (as you did in your original post). Once again, you add confusion in quoting "real returns" as there are different methodologies for measuring inflation, although the differences here are certainly less than resulting from the wildly varying possible personal tax regimes.


Regarding "opportunity cost", you are arguing semantics.

You can take your money market fund (interest taxable as ordinary income) and I'll take my balanced portfolio of (say) muni bonds (zero tax) and tax-efficient stock index funds or ETF's (modest tax on mostly dividends - mostly qualified - during accumulation, and long-term capital gains tax on sale). Twenty years down the road, we can see who's ahead (after tax).
Last edited by echidna on Mon Feb 19, 2018 8:23 am, edited 10 times in total.

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Re: Sell me on the benefits of an emergency fund

Post by bling » Sun Feb 18, 2018 11:36 pm

the only benefit of an emergency fund is purely psychological. if it helps you sleep at night, so be it.

otherwise, the simplest thing to do is simply not have one. in a true emergency, you will spend money, regardless of where it comes from. if you don't have any money, like half of americans you'll go into debt to spend it.

i've never had an emergency fund. after every pay check, i pay off my expenses and save whatever is left into my investments.

need to buy a car? sell investments.
need to buy a house? sell investments.
need to go on vacation? sell investments.
need to handle unexpected expense? sell investments.

what if the market is down and i don't want to sell? in such cases bonds hold their value (how often is this not the case?). sell bonds, re-adjust your AA. tax loss harvest. move on with life.

if you had an emergency fund, not only are you accepting inflation-like returns, once you spend it, you have to plan on how to refill it.

the above assumes you have a healthy mix of tax-advantaged and taxable accounts. if you're just starting out, it may make sense to forgo tax efficiency and place bonds in taxable until you built up a healthy dose before you switch to stocks in taxable.

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Re: Sell me on the benefits of an emergency fund

Post by TheDDC » Mon Feb 19, 2018 12:02 am

I have a system that works for us to combine both EF and DCA. It is more "mental accounting". I keep between $10-15k in a high interest 2% checking account used for nothing but auto deposits into tax advantaged accounts. I refill the account monthly with the amount debited for IRA contributions. I have already bought in as a lump sum for 2017 and 2018 for my Roth IRA and am DCAing into my wife's tIRA for 2018. Next year I plan on DCAing for both tax advantaged accounts. Any monthly savings above and beyond the debited amount goes into the taxable brokerage account.

I keep a savings account with enough "escrow" cash to pay property taxes and insurance on the home and cars. I pay insurance in a lump sum annually to get the maximum discount since my insurance does not allow me to pay with a CC.

Note that all this is separate from my budgeted checking account space which is kept pretty tight relative to recurring monthly projected expenses.

This works for us and I HAVE been through a layoff situation. Fortunately my unemployment period did not exceed my severance pay duration. At the time I was holding a full year of expenses in high interest checking and felt pretty good about that, too, but I also was not a Boglehead at the time!

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Re: Sell me on the benefits of an emergency fund

Post by Darth Xanadu » Mon Feb 19, 2018 12:10 am

bling wrote:
Sun Feb 18, 2018 11:36 pm
the only benefit of an emergency fund is purely psychological. if it helps you sleep at night, so be it.

otherwise, the simplest thing to do is simply not have one. in a true emergency, you will spend money, regardless of where it comes from. if you don't have any money, like half of americans you'll go into debt to spend it.

I disagree. There are real, financial advantages to having an emergency fund. It helps prevent those faced with an emergency from paying more than they need to, which happens regularly when forced to turn to credit.
"A courageous teacher, failure is."

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Re: Sell me on the benefits of an emergency fund

Post by bling » Mon Feb 19, 2018 12:35 am

Darth Xanadu wrote:
Mon Feb 19, 2018 12:10 am
bling wrote:
Sun Feb 18, 2018 11:36 pm
the only benefit of an emergency fund is purely psychological. if it helps you sleep at night, so be it.

otherwise, the simplest thing to do is simply not have one. in a true emergency, you will spend money, regardless of where it comes from. if you don't have any money, like half of americans you'll go into debt to spend it.

I disagree. There are real, financial advantages to having an emergency fund. It helps prevent those faced with an emergency from paying more than they need to, which happens regularly when forced to turn to credit.
in your example it makes no difference if they take $10k out of their $20k emergency fund vs taking selling $10k out of their $20k bond allocation, but the latter has a much higher expected return.

if they need to turn to credit, it also means they didn't have much of an emergency fund (or portfolio) to begin with.

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Re: Sell me on the benefits of an emergency fund

Post by Darth Xanadu » Mon Feb 19, 2018 12:40 am

bling wrote:
Mon Feb 19, 2018 12:35 am
Darth Xanadu wrote:
Mon Feb 19, 2018 12:10 am
bling wrote:
Sun Feb 18, 2018 11:36 pm
the only benefit of an emergency fund is purely psychological. if it helps you sleep at night, so be it.

otherwise, the simplest thing to do is simply not have one. in a true emergency, you will spend money, regardless of where it comes from. if you don't have any money, like half of americans you'll go into debt to spend it.

I disagree. There are real, financial advantages to having an emergency fund. It helps prevent those faced with an emergency from paying more than they need to, which happens regularly when forced to turn to credit.
in your example it makes no difference if they take $10k out of their $20k emergency fund vs taking selling $10k out of their $20k bond allocation, but the latter has a much higher expected return.

if they need to turn to credit, it also means they didn't have much of an emergency fund (or portfolio) to begin with.
Fair enough, I don't disagree. Of course, this assumes one has a bond allocation to begin with. The form of EF is less meaningful than having one to begin with. I'd rather have $40k in straight stocks than $0 in savings.
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Re: Sell me on the benefits of an emergency fund

Post by staythecourse » Mon Feb 19, 2018 12:48 am

Interesting question.

Personally, I ask the same thing about having a fixed income in my asset allocation. So what do I do? I have 1 year EF and everything else in stocks. What I want from EF: Principle stable, liquidity, cover something REALLY bad happening, i.e. unemployment, and helps me stay the course knowing who cares if my portfolio gets cut in 1/2 in any given year. Then everything else in stocks for maximum upside.

What I don't really see a need for is bonds. They are NOT principle stable, no liquidity, and limited upside benefits.

BTW, I am NOT advocating 100% stocks, but more see how funny it is how one person hates having an EF and someone else (me) hates having fixed income.

Good luck.
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Re: Sell me on the benefits of an emergency fund

Post by DC3509 » Mon Feb 19, 2018 2:30 am

This is a very interesting thread and I appreciate the responses.

In my own situation, I have an emergency fund that is about 10% of my total net worth just sitting in a big bank checking account. I have been thinking lately that perhaps I should have more of this invested. There is something to be said for having safety/security/access to cash, but there is also something to be said about missing out on returns. For what its worth, my job and personal life are pretty secure and I do have access to credit cards if need-be (all balances are zero as of now). Thinking this over more, but appreciate the thoughts here.

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Re: Sell me on the benefits of an emergency fund

Post by bantam222 » Mon Feb 19, 2018 3:03 am

I don’t have an emergency fund. I have credit cards and 6 figures in taxable stock market I get at

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Re: Sell me on the benefits of an emergency fund

Post by corn18 » Mon Feb 19, 2018 3:15 am

Death is my only emergency that I keep cash around for. I have enough in our checking account to allow my wife 6 months of not worrying about money while she buries me.

Any other “emergency” has many ways we could handle it without needing a large cash fund.

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Re: Sell me on the benefits of an emergency fund

Post by Engineer250 » Mon Feb 19, 2018 3:29 am

Everyone who states they don't have or don't need an emergency fund usually has a sizable amount of money in after-tax accounts. That's just the 1% that is the bogleheads.

For the rest of us peasants, I'm just barely maxing out two Roth IRAs, one 401k, and putting a teeny bit into mega backdoor Roth. I have an emergency fund. I don't make near enough money (or perhaps wealthy folks would argue I'm just not frugal enough) to have extra money to throw in a taxable account. But if I ever got that point sure I could see not designating some portion as "emergency fund". Because I just have a big pot of after-tax money I can draw from at any time and can call it whatever I like.

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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Mon Feb 19, 2018 8:03 am

echidna wrote:
Sun Feb 18, 2018 10:59 pm
...Regarding "opportunity cost", you are arguing semantics...
Yes. Indeed. I am. That is what I am doing.
You can take your money market fund (interest taxable as ordinary income) and I'll take my balanced portfolio of (say) muni bonds (zero tax) and tax-efficient stock index funds or ETF's (modest tax on mostly dividends - mostly qualified - during accumulation, and long-term capital gains tax on sale). Twenty years down the road, we can see who's ahead (after tax).
Hypothetically, if we invest equal amounts of money that way, you will be "ahead." I really ought to hedge that by "in my opinion, almost certainly," but let me just agree: you will be "ahead." But I will not have "lost money."

My wife's friend's mom played the lottery, won a decent-sized jackpot, and ended up with more money than we have in our investment portfolio. Would you say that we "lost money" on our investments?

I never said that cash would match even moderately-risky investments. But I think it's unreasonable to say that you are "losing money" in it unless it not only holds dollar value, not only keeps up with inflation, but also pays your taxes and beats a balanced portfolio of munis and tax-efficient stock mutual funds.
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Re: Sell me on the benefits of an emergency fund

Post by Think » Mon Feb 19, 2018 8:29 am

echidna wrote:
Sun Feb 18, 2018 10:13 pm
Reading over all the posts here, I'm struck by the very different perspectives different people have, and I think to a large extent, this reflects different life situations. Of course, I tend to think first from my own current situation.


Example 1: A couple in mid-life with a large mortgage, kids in school, trying to max. out contributions to 401k's, IRA's, college accounts, etc., They have large and relatively inflexible living expenses which consume most of their remaining income. They may have little in the way of liquid assets outside of their tax-advantaged retirement accounts, and may face large early withdrawal penalties if they need to tap those accounts. Their only significant asset outside of the retirement accounts may be their home equity, and that could be seriously compromised in an economic downturn which could also threaten their employment security and job-related health benefits.

It sounds like a fairly explicit emergency fund arrangement is needed in this case.


Example 2: A retired couple aged 65+, house paid off, empty-nesters, receiving social security and medicare, retirement portfolio at least 25x annual expenses, retirement expenses flexible (can cut back on travel and other luxuries if necessary), can rent a room in their house for extra income if need be, can tap their home equity in an emergency, even if real estate prices tank, or downsize their house or take out a reverse mortgage.

I think any major emergencies can likely be covered from their investment portfolio or home equity (e.g., a HELOC loan), without an explicit emergency fund. If they have a (notional) emergency fund, it may be more for peace of mind that real economic need.


Obviously there is a whole spectrum of situations, so there is unlikely to be a one-size-fits-all solution to the OP's question.
Your logic is spot on. Folks with ‘synthetic bonds’ such as guaranteed annuities from social security and/or highly rated counter parties, and large portfolios, probably have the capacity to deal with emergencies from choice liquidation from a broad asset allocation portfolio. Personally, I just like to have some sort term fixed income funds in a taxable account for either emergencies or opportunities. Backstopping that, which I’m sure other folks use, is taxable accounts, then Roth (principal), etc.

Funny, at 25 I feared losing my job as I had no trust fund and I just plugged along. 25 years later I didn’t really do anything special (maxed 401ks in my early 30s...saved ok..invested pretty aggressively)...and I’m at 2m with no debt.

I am a banker, I was surrounded by folks who tended to be non flashy and their conservative habits rubbed off on me.

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Re: Sell me on the benefits of an emergency fund

Post by AlohaJoe » Mon Feb 19, 2018 8:35 am

Engineer250 wrote:
Mon Feb 19, 2018 3:29 am
Everyone who states they don't have or don't need an emergency fund usually has a sizable amount of money in after-tax accounts. That's just the 1% that is the bogleheads.
I'd actually argue that the opposite is closer to the truth. Someone who can fund 6-12 months of expenses, on top of saving for retirement and providing for their family, are more likely to be in the well-off end of the spectrum.

Median household income is $72,000. Assume they are saving 15% for retirement; that's $10,000 a year. That means all of their other expenses come to around, say, $48,000 a year (according to ADP's salary paycheck calculator); $4,000 a month.

Saving 6 months of expenses -- $24,000 -- would mean stopping retirement contributions for 2.5 years and redirecting those funds to establishing an emergency fund.Saving 12 months of expenses (a number you'll see surprisingly often on Bogleheads) -- $50,000 -- would take 5 years and mean they make no retirement contributions for that time.

You know all those studies that have repeatedly reported things like "nearly two-thirds of Americans do not have enough money in savings to cover the cost of a single one of these [$500] unplanned expenses"? That not because forgoing an emergency fund is something only the 1% does. It's because very few people have emergency funds.

The reality is that most families outside of Bogleheads can't save for an emergency fund (especially of the sizes often throw around on Bogleheads) and make retirement contributions. They have to choose one or the other.

Honestly, if someone asked me whether they should contribute to their 401k or fund an emergency fund, I'd tell them to save for their 401k instead and skip the emergency fund.

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Re: Sell me on the benefits of an emergency fund

Post by bling » Mon Feb 19, 2018 8:41 am

DC3509 wrote:
Mon Feb 19, 2018 2:30 am
There is something to be said for having safety/security/access to cash, but there is also something to be said about missing out on returns.
how many emergencies require same-day access to cash? what emergency cannot be put on a credit card? what emergency cannot wait for the 2 day settlement?

here is one recent thread.
Engineer250 wrote:
Mon Feb 19, 2018 3:29 am
For the rest of us peasants, I'm just barely maxing out two Roth IRAs, one 401k, and putting a teeny bit into mega backdoor Roth. I have an emergency fund. I don't make near enough money (or perhaps wealthy folks would argue I'm just not frugal enough) to have extra money to throw in a taxable account. But if I ever got that point sure I could see not designating some portion as "emergency fund". Because I just have a big pot of after-tax money I can draw from at any time and can call it whatever I like. :sharebeer
all you have to do is take your emergency funds and buy the total bond market in a taxable account. boom, you don't have an EF anymore! also, you're saving +30k a year, i'd say you're plenty frugal enough.
staythecourse wrote:
Mon Feb 19, 2018 12:48 am
Interesting question.

Personally, I ask the same thing about having a fixed income in my asset allocation. So what do I do? I have 1 year EF and everything else in stocks. What I want from EF: Principle stable, liquidity, cover something REALLY bad happening, i.e. unemployment, and helps me stay the course knowing who cares if my portfolio gets cut in 1/2 in any given year. Then everything else in stocks for maximum upside.

What I don't really see a need for is bonds. They are NOT principle stable, no liquidity, and limited upside benefits.

BTW, I am NOT advocating 100% stocks, but more see how funny it is how one person hates having an EF and someone else (me) hates having fixed income.

Good luck.
this is interesting, and i've thought about doing this myself. i wouldn't be holding cash, but i'd be holding 1 year's worth of expenses in bonds, and everything else becomes stocks. intellectually this sounds like the best thing that i should do. emotionally, i didn't feel anything this recent correction, but i don't know whether i can handle a 50% decline. i used to play poker semi-seriously and made some money from it over a couple years, so i know what it means to control your emotions. nonetheless, losing one hand after making a bad decision/bad read is very different from seeing your savings over the past decade vanish over a couple days. and in the former, you can study how you played the hand wrong and correct your mistakes for future hands, whereas in the market you are literally have no control over what happens -- you just need to ride it out.

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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Mon Feb 19, 2018 8:50 am

Over the maximum time period Morningstar can show me, an investment in the Vanguard Tax-Exempt Money Market Fund would have grown $10,000 on 6/30/1980 to $29,872.49 on 12/31/2017. The CPI was 82.50 at the end of June, 1980, and 247.910 at the end of December, 2017.
Therefore $29,872.49 was equivalent to $9,942.03 on 6/30/1980, representing
a grand total cumulative loss of 0.6% in purchasing power over a holding period of 37 years,
or a real CAGR of -0.016% per year.
I am going to slightly restate my earlier claim:
--a "cash" investment as represented by the Vanguard Tax-Exempt Money Market Fund has roughly kept pace with inflation over thirty-seven years.
Source for fund growth
Image
Source for CPI
Image
Sensible choices for holding an emergency fund should lose little or no real purchasing power, even considering taxes.
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Re: Sell me on the benefits of an emergency fund

Post by echidna » Mon Feb 19, 2018 9:30 am

nisiprius wrote:
Mon Feb 19, 2018 8:03 am
echidna wrote:
Sun Feb 18, 2018 10:59 pm
...Regarding "opportunity cost", you are arguing semantics...
Yes. Indeed. I am. That is what I am doing.
You can take your money market fund (interest taxable as ordinary income) and I'll take my balanced portfolio of (say) muni bonds (zero tax) and tax-efficient stock index funds or ETF's (modest tax on mostly dividends - mostly qualified - during accumulation, and long-term capital gains tax on sale). Twenty years down the road, we can see who's ahead (after tax).
Hypothetically, if we invest equal amounts of money that way, you will be "ahead." I really ought to hedge that by "in my opinion, almost certainly," but let me just agree: you will be "ahead." But I will not have "lost money."

My wife's friend's mom played the lottery, won a decent-sized jackpot, and ended up with more money than we have in our investment portfolio. Would you say that we "lost money" on our investments?

I never said that cash would match even moderately-risky investments. But I think it's unreasonable to say that you are "losing money" in it unless it not only holds dollar value, not only keeps up with inflation, but also pays your taxes and beats a balanced portfolio of munis and tax-efficient stock mutual funds.
Your example of the lottery is a red herring. The "opportunity cost" of participating in a lottery is negative - that is, on average you will invest more than you win in lotteries.

I think the point about opportunity cost is important in the context of an emergency fund, and it should not be reduced to a semantic argument.

What many here are arguing (including me) is that holding many months to of order a years worth of income for emergencies in a ultra-low-risk vehicle like a money market fund is probably unnecessary, and is leaving potential earnings on the table. Most people would be better served financially by other strategies. But it's hard to be specific because there are so many different individual situations.

I also want to emphasize out that part of the point of my example portfolio was the extra tax efficiency that could be achieved with investments other than in money market (etc.) funds for which interest is taxed as ordinary income. It's not just about getting higher average returns (before tax) by taking on some extra volatility.


And BTW, you do realize (as I and later radiowave have pointed out) that with recent inflation and rates of return on VMMXX (or similar funds), you are currently "losing money" by your own definition? This is without subtracting taxes, which will only make things worse.
Last edited by echidna on Mon Feb 19, 2018 9:59 am, edited 6 times in total.

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Re: Sell me on the benefits of an emergency fund

Post by Toons » Mon Feb 19, 2018 9:31 am

Peace Of Mind








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Re: Sell me on the benefits of an emergency fund

Post by MnD » Mon Feb 19, 2018 10:20 am

Pre-kids (1986-1990) mid-late 20's we built a 100% stock taxable "emergency fund" equal to about 1X our not very exciting dual income level at the time, and then never added any funds to it ever again. The very substantial earnings from it have paid for a house down payment, 2 new cars and part of another, a couple years of total costs for State U for 1 kid (when both kids were in college at same time) and a large number of smaller items. After all that, the balance is now about 2.5X the size when we stopped contributing to it in 1990, which is about 50% higher in real terms.

One of the our best investment decisions ever. People have mentioned on this board that a Roth IRA (had they existed back then) would have been better, but the limits were too low and we have spent far more than principal from this account, which for a Roth is all you can take out without penalty. Yes there have been taxes on LTCG and mostly qualified dividends to pay along the way, but those are favored rates.

Another criticism of this method is that the spending from stock emergency fund might come at a bad time for stock prices. I've always treated this account as part of our overall 70/30 AA, so for example when we sell stocks to buy a new car out of the emergency fund, we sell enough fixed income in other accounts and buy stocks so the AA remains at 70/30. Since the portfolio is now a little smaller we don't buy 100% of the stock amount back, but pretty close.

Everything in investing nowadays seems to be geared to maxing out every sort of retirement account for "the future". No-one knows if they are going to get even one day of retirement so doing some at-risk investing for gain outside of retirement accounts and (gasp) spending some of it when young and active on things you need or desire doesn't seem like such a bad idea. And as it turned out this "non-retirement" fund is following us into retirement later this year and should continue to come in very handy.

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Re: Sell me on the benefits of an emergency fund

Post by digit8 » Mon Feb 19, 2018 11:27 am

On a logical level, there is a point where emergency funds aren't a requirement.

On an emotional level, however, being able to write a check and be done with the financial piece of a major crisis can be a lifesaver. In my experience, when the basement is flooded or the car is crashed or the kid is in the hospital, the very last thing I'm up for is the self-inflicted additional problem of figuring out tax consequences, or moving funds from A to B before transferring to C.
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Re: Sell me on the benefits of an emergency fund

Post by MnD » Mon Feb 19, 2018 12:07 pm

digit8 wrote:
Mon Feb 19, 2018 11:27 am
On an emotional level, however, being able to write a check and be done with the financial piece of a major crisis can be a lifesaver. In my experience, when the basement is flooded or the car is crashed or the kid is in the hospital, the very last thing I'm up for is the self-inflicted additional problem of figuring out tax consequences, or moving funds from A to B before transferring to C.
I've never had to come up with a check or cash on a short-term basis for any of these things, most or all of which in your example are insured issues that take weeks or months to determine share of cost and individual liability. Millennials often don't even have checks or carry much if any cash so just about every kind of unexpected expense service provider accept cards now in order to survive economically. And if they take debit cards they take credit cards.

We had 80K worth of hail damage to home and vehicles last May and payments for numerous services were typically made many months later, as often as possible with cash-back reward credit cards even when we were reimbursed directly via check by insurance.

maybe we lead a charmed life but I don't ever seem to come up against these "need hoards of cash right now" situations.

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Re: Sell me on the benefits of an emergency fund

Post by nisiprius » Mon Feb 19, 2018 12:23 pm

echidna wrote:
Mon Feb 19, 2018 9:30 am
...And BTW, you do realize (as I and later radiowave have pointed out) that with recent inflation and rates of return on VMMXX (or similar funds), you are currently "losing money" by your own definition?
No, my own definition of "losing money" is "decreasing number of dollars," and I think that is most peoples'.

No, it hasn't kept up with inflation recently, and there have been times when other assets didn't keep up with inflation. If you just mean sometimes cash haven't keep up with inflation, sometimes haven't, and sometimes neither have stocks. For example, stocks lost to inflation over the full ten-year period 2000-2009, and of course lost more than that if you consider taxes. Over a year or two or ten anything can happen.

But the often-expressed idea that inflation will certainly grind and whittle your "cash" down to virtually nothing over the decades is specious. Not if you put your "cash" anywhere sensible.
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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Re: Sell me on the benefits of an emergency fund

Post by bling » Mon Feb 19, 2018 1:08 pm

nisiprius wrote:
Mon Feb 19, 2018 12:23 pm
But the often-expressed idea that inflation will certainly grind and whittle your "cash" down to virtually nothing over the decades is specious. Not if you put your "cash" anywhere sensible.
i think to have a meaningful discussion we need to agree on what "cash" means.

the definition i'm using is same-day access, which means a checkings or savings account. i don't think high-yield savings accounts have been able to keep up with inflation over time.

by the same definition, things like tax-exempt money market funds, CDs, and other safe fixed income products are not "cash". maybe no-penalty CDs give same-day access, but typically the rates are about the same as a high yield savings.

i also think this definition aligns with what most people use to store emergency funds -- checkings/savings accounts.

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Re: Sell me on the benefits of an emergency fund

Post by itsgot8 » Mon Feb 19, 2018 1:12 pm

MnD wrote:
Mon Feb 19, 2018 10:20 am


Everything in investing nowadays seems to be geared to maxing out every sort of retirement account for "the future". No-one knows if they are going to get even one day of retirement so doing some at-risk investing for gain outside of retirement accounts and (gasp) spending some of it when young and active on things you need or desire doesn't seem like such a bad idea. A
I feel this point is lost on many people in the forums.

With holding an EF in a taxable account, people mention the downside of having to withdraw and sell at a loss but wouldn't the bright side be that you can TLH?

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Re: Sell me on the benefits of an emergency fund

Post by stocknoob4111 » Mon Feb 19, 2018 1:34 pm

My view on it is that it totally depends on your situation. If you have debts, mortgage or kids then I think it makes more sense. I am single, no dependents and zero debt but I still have 8 months in an emergency fund because it just makes me feel better to have 100% liquid cash available, it's a psychological thing. I have my Emergency Fund in a 1.5% high yield savings account so it's not too shabby, inflation at least according to the CPI is somewhere around 2% even so I would not sweat too much about keeping up with it.

stocknoob4111
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Re: Sell me on the benefits of an emergency fund

Post by stocknoob4111 » Mon Feb 19, 2018 1:54 pm

bling wrote:
Mon Feb 19, 2018 8:41 am
and in the former, you can study how you played the hand wrong and correct your mistakes for future hands, whereas in the market you are literally have no control over what happens -- you just need to ride it out.
And there is really no guarantee that the markets will ever come back, although based on history this may be a very small risk - but we are not in a time typical of history - we have astronomical amount of debt, unfunded liabilities and an aging population so a reduction in workforce and deficits increasing like it's going out of style! Logically this seems like a recipe for absolute disaster but people seem to think we can somehow grow out of this problem magically. I am more skeptical. If you look at Japan as an example, the Nikkei has still not recovered from the 1989 crash and it's been 30 YEARS!!!

I know people always say the market will rebound but there is really no guarantee especially with the government taking a path of national bankruptcy.

MnD
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Re: Sell me on the benefits of an emergency fund

Post by MnD » Mon Feb 19, 2018 2:02 pm

itsgot8 wrote:
Mon Feb 19, 2018 1:12 pm
MnD wrote:
Mon Feb 19, 2018 10:20 am


Everything in investing nowadays seems to be geared to maxing out every sort of retirement account for "the future". No-one knows if they are going to get even one day of retirement so doing some at-risk investing for gain outside of retirement accounts and (gasp) spending some of it when young and active on things you need or desire doesn't seem like such a bad idea. A
I feel this point is lost on many people in the forums.

With holding an EF in a taxable account, people mention the downside of having to withdraw and sell at a loss but wouldn't the bright side be that you can TLH?
And not only that, you can simultaneously replace the equity sold by selling fixed income or stable value in retirement accounts and buying a corresponding amount of equity in those accounts, thus maintaining your AA while realizing the loss. And the tax loss benefit applies any time you have a tax loss position in taxable, not just when you need or want to expend funds out of taxable and equity positions are doing poorly. Almost all best-in-class index funds have have a competitor fund that's equally good but not exactly identical.

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