Emergency Fund - why not VTSAX?

[Pitagoras]

Hi, I keep reading about emergency fund in a savings account, and I am worrying about getting something wrong...why not keep it in one of the VSTAX or some other fund the like? Why do people insist in having it in savings account? Is it do have it immediately available? Or is it related to transaction costs...? Just wondering, thanks.

[simplesimon]

Hi, I keep reading about emergency fund in a savings account, and I am worrying about getting something wrong...why not keep it in one of the VSTAX or some other fund the like? Why do people insist in having it in savings account? Is it do have it immediately available? Or is it related to transaction costs...? Just wondering, thanks.

It's to reduce the risk of having a lower amount than you need when you need it.

[ExitStageLeft]

Many folks have their EF in a money market fund at their brokerage, such as VMMXX. The often allows a slightly better return than in a high yield savings account, but it lacks FDIC deposit coverage.

[MotoTrojan]

Because often times a financial emergency (job loss) coincides with a down market. There are some people who invest more aggressively (but more like 30-40% equity, not 100%) and then just hold some extra margin over what they may need (Betterment suggest doing this with 30% more than you need) but that is all mental accounting. If your portfolio is big enough you don't need an emergency fund at all. Let's say you want $20K available, but have $1M invested 60/40 in equity/bonds; no need for an emergency fund really since you have $400K in relatively safe bonds.

[260chrisb]

You're not getting anything wrong; VMMXX is fine if you want to keep it in your brokerage account or simply keep it in your checking or savings account. My biggest struggle used to be the lack of growth I was getting. The idea is to have liquidity and avoid risk and as your investment accounts get bigger it becomes a smaller part of your overall holdings. That helped me get over it. It's savings for an emergency and not an investment to grow wealth that is subject to normal higher risk.

[guitarman555]

I think it's fine to use VTSAX as an emergency fund, I'm currently feeding it with everything I can in my taxable account at Vanguard trying to make up for lost time. However, I do keep 7k in a high yield savings (Ally) as the "first tier" so to speak for the emergency fund. Everything else goes to VTSAX and cross fingers! Also, I am making sure my HSA, Roth and SEP are filled to their limits as well.

[UpperNwGuy]

If I were to start using VTSAX as an emergency fund, I would increase the amount to account for possible market declines.

[Phineas J. Whoopee]

As long as a person keeps more than double the value of their intended emergency reserve in a total stock fund, they should be mostly alright even in a stock market downturn should an emergency arise.

An equity mutual fund does not work like a savings account.

PJW

[UpsetRaptor]

Totally fine OP. Just build a taxable account twice as high as your EF to cover any emergency cash needs even taking into account a market crash, and you're covered, while incurring better long term gains. So you get to have your cake and eat it too. I've always disliked the default emergency fund advice often given out here, especially to youngsters.

[Patzer]

I don't think it is okay to hold your emergency fund in stocks. Even if you hold 2x you are putting yourself in a situation when you have to sell stocks when the market is at it's bottom.

[Phineas J. Whoopee]

I don't think it is okay to hold your emergency fund in stocks. Even if you hold 2x you are putting yourself in a situation when you have to sell stocks when the market is at it's bottom.

Assets are assets. Why would it be better to remove assets from a savings account rather than a stock index fund when stocks are down? The bottom line number, the important one, works out the same.

PJW

[Nate79]

Stocks dropped -85% in the Great Depression. Better have a greatly oversized emergency fund to overcome an 85% drop.

[Olemiss540]

Depends on your overall asset allocation. If you are all stock, then you better have a solid risk appetite for selling stocks at the bottom and severely impacting your long term financial future in an emergency. If you have a decent allocation to bonds SOMEWHERE (like in a 401k), than you can always exchange your bonds for stocks in a corresponding move making it a net zero while receiving preferential tax treatment of stocks (over bonds) in a taxable account and putting the larger expected growth asset in a post tax account.

[KlangFool]

OP,

Before you go that route, let me asked you a question:

Have you ever been unemployed in a recession with a market downturn?

On 1/1/2009, my employer laid off 50% of its employees at my location.

A) If you are one of the laid-off employees, you will be working hard to look for a new job. The stress level is high enough. Now, you want to add on the stress of having to sell your stock at a big loss every month in order to feed your family. How do you know you can handle this?

B) Now, compare this with someone with 1 year of the emergency fund. He/she know that he/she can last at least one year without selling the stock at a loss.

I had been through multiple recessions/economy crises over the past 30+ years. There are many folks that capitulated because they overestimated their ability to handle stress. They never experienced any of those situations. They believe they can handle it until they face the real situation.

I am prepared for 5 years of recession/unemployment/market downturn. There will be a fair amount of capitulation over the next recession after 10+ years of the bull market. Let's make sure that you are not one of them.

KlangFool

[Patzer]

I don't think it is okay to hold your emergency fund in stocks. Even if you hold 2x you are putting yourself in a situation when you have to sell stocks when the market is at it's bottom.

Assets are assets. Why would it be better to remove assets from a savings account rather than a stock index fund when stocks are down? The bottom line number, the important one, works out the same.

PJW

Scenario 1:
200K Investments (100% Stock) 20K Emergency Fund (Cash)
Market crashes
Investments now worth 100K, Emergency Fund still worth 20K
You withdraw 20K for Emergency.
Total Holdings 100K
Market Recovers
Total Holdings 200K

Scenario 2:
180K Investments (100% Stock) 40K Emergency Fund (Stock)
Market crashes
Investments now worth 90K, Emergency Fund now worth 20K
You withdraw 20K for Emergency.
Total Holdings 90K
Market Recovers
Total Holdings 180K

[Phineas J. Whoopee]

I don't think it is okay to hold your emergency fund in stocks. Even if you hold 2x you are putting yourself in a situation when you have to sell stocks when the market is at it's bottom.

Assets are assets. Why would it be better to remove assets from a savings account rather than a stock index fund when stocks are down? The bottom line number, the important one, works out the same.

PJW

Scenario 1:
200K Investments (100% Stock) 20K Emergency Fund (Cash)
Market crashes
Investments now worth 100K, Emergency Fund still worth 20K
You withdraw 20K for Emergency.
Total Holdings 100K
Market Recovers
Total Holdings 200K

Scenario 2:
180K Investments (100% Stock) 40K Emergency Fund (Stock)
Market crashes
Investments now worth 90K, Emergency Fund now worth 20K
You withdraw 20K for Emergency.
Total Holdings 90K
Market Recovers
Total Holdings 180K

The problem with the math is you're not including your emergency reserve in your total assets. It's a part. In your scenario 1 you start off with a total value of $220,000. You take out $20,000, leaving $100,000. Then the market doubles, in your word recovers, and you have $200,00.

In scenario 2 you start off with a value of $220,000. You take out $20,000, leaving $100,000. Then the market doubles, in your word recovers, and you have $200,000.

You have, however, correctly described sequence of return risk, but that applies in any scenario.

PJW

[1789]

Because stock market can tank 50% in a recession and people can lose their job in that period. You need money to pay for your daily expenses, mortgage payments, etc... Thats why checking accounts or money market accounts like VMMXX is a good place to keep cash.

[Pitagoras]

Waw, thanks all for so many answers, they help a lot. I am currently are holding about 30k in my chase account and was about to move it all to VSTAX. But certainly I am also attracted to open an account in Capital One and move it over, they yield generous returns compared to Chase and it is still a saving account.

Thanks a lot for the tips and insights.

[averagedude]

I'm not a big believer in having your emergency fund in stocks. However, if you can check all of these boxes it could be a good idea.
1. Your house is paid for. If you need a roof, air condition unit, or some other emergency, you can tap into your equity in your home if the stock market is in the toilet.
2. You have a high savings rate at 20% or higher. If you happen to borrow money, you should be able to pay it off quickly.
3. You and your spouses job are very stable.
4. You have adequate insurance that will cover any financial catastrophe.
5. You have a high risk tolerance to stocks.
6. You are on track to accomplishing your retirement and future goals.

I check all of these boxes and I invest my emergency savings in a high yield savings account, although in hindsight I would had been better off investing my emergency savings in stocks.

[Nate79]

Waw, thanks all for so many answers, they help a lot. I am currently are holding about 30k in my chase account and was about to move it all to VSTAX. But certainly I am also attracted to open an account in Capital One and move it over, they yield generous returns compared to Chase and it is still a saving account.

Thanks a lot for the tips and insights.

I think you mean VTSAX. You should correct your thread title.

[jrbdmb]

Of course the choices are not binary, 100% VTSAX or CDs / MM savings. I have a taxable fund as my EF, first bucket is all short-term bonds, and after that a 40% stock / 60% bond split (actual split at the moment is 24% stock). I feel comfortable with that setup.

[jrbdmb]

Stocks dropped -85% in the Great Depression. Better have a greatly oversized emergency fund to overcome an 85% drop.

During that time, many who avoided stocks but kept their money at the local bank lost 100%. And most gold was confiscated in 1933. Unfortunately, you can't plan for everything.

[Blake7]

Look at an emergency fund as insurance, rather than an investment. The returns are secondary to its intended purpose (to be there when you need it, regardless of what’s going on in the investment world).

[gmc4h232]

None of these threads ever talk about replenishing the emergency fund. If you keep your E-fund in VTSAX, I guess it's assumed that none of the shares that were sold in an emergency situation were bought back until after VTSAX has fully recovered any losses.

[pkcrafter]

Hi, I keep reading about emergency fund in a savings account, and I am worrying about getting something wrong...why not keep it in one of the VSTAX or some other fund the like? Why do people insist in having it in savings account? Is it do have it immediately available? Or is it related to transaction costs...? Just wondering, thanks.

I'm pretty sure you are thinking of VTSAX, total stock market. If your emergency fund (EF) is in VTSAX, then you don't have an emergency fund. An emergency fund is supposed to provide readily available money when you need it for an emergency. If the market crashes and you need money, the EF is there so you don't have to sell equities when they are down.

Paul

[radiowave]

Waw, thanks all for so many answers, they help a lot. I am currently are holding about 30k in my chase account and was about to move it all to VSTAX. But certainly I am also attracted to open an account in Capital One and move it over, they yield generous returns compared to Chase and it is still a saving account.

Thanks a lot for the tips and insights.

One recommended online bank is ally (https://www.ally.com/ ). they have competitive savings and CD rates especially compared to a brick and mortar bank. The Vanguard money market is also competitive and very liquid. So a strategic set of funds and banks can help develop a diversified emergency fund strategy.

[Pitagoras]

Thanks all again, and thanks for pointing out, off course I meant VTSAX.

Yes, I was considering a stable stock market, since it would take a few days to make the money liquid again. Never tried, but I suppose.

Will keep studying the alternatives, thanks.

[MotoTrojan]

Thanks all again, and thanks for pointing out, off course I meant VTSAX.

Yes, I was considering a stable stock market, since it would take a few days to make the money liquid again. Never tried, but I suppose.

Will keep studying the alternatives, thanks.

What is a stable stock market?

[fwellimort]

What kind of "stable stock market" drops 85% in value and has a recession almost every 10 years.

And last time we had a recession, didn't the 'stable stock market' drop over half?
Professionals aren't fools. There's a reason the bond market is larger than the stock market.

Plenty of equity indexes out there have dropped and never really recovered even in 2019 (look International. Sideways forever now in some countries such as Korea/Japan or 90% drop from peak on countries like Greece).
There's so much evidence that the equity market is volatile. I don't see anything stable about it. Unless you really trust the US and you are sure you won't be touching your emergency fund in the next 25 years (why have an emergency fund then?), I think it is foolish to gamble such a small amount of money for 'a bit more'.

The upside is low but the downside is big.

[Pitagoras]

Exactly, that is what I mean. I was not considering that the stock market is NOT stable while thinking it as a potential EF holder.

[nisiprius]

1) In 2008-2009, the stock market dropped and was down by about -50% at about the same time as I lost my job. It took me six months to find another one. The stock market is never "stable," and, worse, stock market crashes are often associated with economic crises that create financial emergencies. So it is not rare for financial emergencies to coincide with stock market crashes.

2) If I had needed to liquidate VTSAX in 2008-2009, every dollar I needed to spend on the emergency represented a loss of two of the dollars I thought I had in 2007, and hoped to get back eventually.

3) Let's consider past statistics, assuming that you decide to use VTSAX for money you might need in 12 months. This is just the past, the future might be different. And only you can decide whether this represents an acceptable level of risk. But, this is what would have happened in the past, on the average, if you had used the Total Stock Market Index Fund like a "savings account" and had put $10,000 into it, this is what would have happened. The comparisons are to the Vanguard Prime Money Market Fund, VMMXX, which is quite similar in its characteristics to the best and most competitive bank savings accounts. The actual fund used is VTSMX because Admiral shares were not available initially.

• The time period covered is from inception of VTSMX, 6/1992, through 6/2019.
• During this time period there were 314 overlapping twelve-month periods.
• In 71 out of 314 periods, 22.6% of the time, VTSMX underperformed the money market fund.
• In 61 out of 314 periods, 19.4% of the time, VTSMX lost money--you started with $10,000 and had less than $10,000 a year later.
• On the average, you made $832.52 more in VTSMX than you would have made in VMMXX.
• On the average, looking only at 71 periods when you would have lost money, the average amount of the loss would have been -$1613.55.
• The worst twelve-month period was 3/2008 through 2/2009. Over that time period, you would have lost -$4551.13.

[Pitagoras]

Thanks, very educational.

The comparisons are to the Vanguard Prime Money Market Fund, VMMXX, which is quite similar in its characteristics to the best and most competitive bank savings accounts.

Would VMMXX be then a better choice then?

[Ferdinand2014]

For every $1 you need as an emergency fund, put $2 away in VTSAX as your emergency fund. I personally use 100% 4 week T-bills set to auto-roll at Fidelity as my emergency fund and entire fixed income. It has an expense ratio of zero, transaction cost of zero and is the safest, most liquid investment in the world. Everything else goes into equities (S&P 500 index). My asset allocation of T-bills is 'enough to sleep well', no more and no less.

[HEDGEFUNDIE]

2) If I had needed to liquidate VTSAX in 2008-2009, every dollar I needed to spend on the emergency represented a loss of two of the dollars I thought I had in 2007, and hoped to get back eventually.

This is misleading. How much of the “two dollars” that you had in 2007 represented gains on principal?

• The time period covered is from inception of VTSMX, 6/1992, through 6/2019.
• During this time period there were 314 overlapping twelve-month periods.
• In 71 out of 314 periods, 22.6% of the time, VTSMX underperformed the money market fund.
• In 61 out of 314 periods, 19.4% of the time, VTSMX lost money--you started with $10,000 and had less than $10,000 a year later.
• On the average, you made $832.52 more in VTSMX than you would have made in VMMXX.
• On the average, looking only at 71 periods when you would have lost money, the average amount of the loss would have been -$1613.55.
• The worst twelve-month period was 3/2008 through 2/2009. Over that time period, you would have lost -$4551.13.

This is even more misleading. Comparing 12 month periods in isolation completely ignores the compounding effect we all count on in the equity markets. Your numbers here show that the average delta is 8% CAGR. It doesn’t take many years of that compounding to cushion any impending stock crash and still keep you ahead of the return on cash.

[lostdog]

Thanks, very educational.

The comparisons are to the Vanguard Prime Money Market Fund, VMMXX, which is quite similar in its characteristics to the best and most competitive bank savings accounts.

Would VMMXX be then a better choice then?

Yes or the Vanguard Federal Money Market. If you have a brokerage account at Vanguard, the sweep account uses the Federal Money Market fund.

[cashboy]

OP,

link to the wiki article (if you have not seen it); basic, but a good point of reference to start with.

https://www.bogleheads.org/wiki/Emergency_fund

also, consider searching this BH site for 'emergency fund'. a lot of threads and opinions on the subject (in addition to the replies you have received in this thread).

me? i have mine in cds and high interest accounts - local and ally bank. i keep it separate from investments - i consider it insurance (in some ways) and do not need to make money off of it; i just want to keep pace with inflation (more or less).

why? that decision is based upon the amount of money i have invested and the amount i need for my emergency fund. by keeping my emergency fund separate from my investments i can watch the value of my investments rise and fall and not be concerned (other than in general). others may feel differently based upon their circumstances, and that is ok - this is what works for me.

[Phineas J. Whoopee]

None of these threads ever talk about replenishing the emergency fund. If you keep your E-fund in VTSAX, I guess it's assumed that none of the shares that were sold in an emergency situation were bought back until after VTSAX has fully recovered any losses.

In investment terms that would work out poorly, but has nothing to do with keeping access to enough funds, even in the event of a market downturn, to meet one's emergency expenditures. Naturally faced with the occasion having occurred one could decide how, when, and if at all, to replenish.

PJW

[Phineas J. Whoopee]

2) If I had needed to liquidate VTSAX in 2008-2009, every dollar I needed to spend on the emergency represented a loss of two of the dollars I thought I had in 2007, and hoped to get back eventually.

This is misleading. How much of the “two dollars” that you had in 2007 represented gains on principal? ...

Equities have no principal. You may be conflating them with savings accounts.

PJW

[g2morrow]

just my opinion but its fine to use VTSAX as your emergency fund - just have 2X the amount and recognize the sequence of return risk

[Presintense]

I don’t see anything wrong with putting your emergency fund in VTSAX as long as you put your investments in a savings account.

[Northern Flicker]

Hi, I keep reading about emergency fund in a savings account, and I am worrying about getting something wrong...why not keep it in one of the VSTAX or some other fund the like? Why do people insist in having it in savings account? Is it do have it immediately available? Or is it related to transaction costs...? Just wondering, thanks.

I guess it’s been a while since we’ve had a deep, painful bear market for equities with the stock market down 50%.

The emergency fund is for when you lose your job while the investment portfolio is down sharply. If your asset allocation is conservative, you may not need much of an emergency fund, drawing on the bond allocation at times of emergency.

[Chrono Triggered]

Too many people here are confusing emergency funds with asset allocation. I consider "emergency funds" as part of my fixed income, personally. I also sell equities in taxable if I need to, regardless if they are down or not. When I sell equities in taxable, I sell bonds in my tax advantaged accounts and purchase equities to maintain my allocation. That way I keep tax efficient funds in my taxable account. How long I can do that depends on my asset allocation and not what my "emergency funds" are invested in.

Read: https://www.bogleheads.org/wiki/Placing ... ed_account

[Mr.BB]

To me the whole purpose of an emergency fund is to have the money available for emergencies. Part of that emergency description is to have it available immediately if needed. We keep ours in the credit union account, we were getting about 2% (not bad for a supplemental savings account)and of course I can get my hands on it without any penalty immediately if needed. The reason I don't believe that keeping it a VGTSAX account is that it is subject to the stock market volatility, and that is not part of the safety of a emergency fund.

[Fishing50]

Cash drag of an emergency fund isn’t necessary with sufficient taxable assets.
Big ERN has zero emergency fund. https://earlyretirementnow.com/2016/05/ ... ency-fund/

[mega317]

One problem with the idea of selling stocks "when they're down" is that at the time you think they are "down" they might be at the highest price they'll be for the rest of your life or maybe much longer.

[guitarman555]

Here's another post against a cash emergency fund.

https://www.investopedia.com/articles/p ... d-idea.asp

[nolesrule]

Essentially, one needs a sufficiently large emergency fund in order to not need an emergency fund.

What constitutes "sufficiently large" is going to depend on the individual's circumstances.

[itsgot8]

Here's another post against a cash emergency fund.

https://www.investopedia.com/articles/p ... d-idea.asp

No one is advocating for a purely cash EF. Obviously, it should be held in a high-yield savings account or CD, both FDIC insured. That article title is click-baity and misleading.

[StandingRock]

To me the whole purpose of an emergency fund is to have the money available for emergencies.

I agree... I think personal finance minded people conflate emergency funds with general cash reserves for whatever reason... If you need money this instant are you going to sell VTSAX and move the money around, are you going to use a credit card, are you going to borrow from someone else, what are you going to do?

[guitarman555]

Here's another post against a cash emergency fund.

https://www.investopedia.com/articles/p ... d-idea.asp

No one is advocating for a purely cash EF. Obviously, it should be held in a high-yield savings account or CD, both FDIC insured. That article title is click-baity and misleading.

I agree. I'm not endorsing the article per sey, just pointing out another completely different train of thought. I ran across that when I was reading everything I could about emergency funds. It did make me think. There are a lot of different ways to go about things.