Do you count e-fund as part of your fixed allocation?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
llmgwc
Posts: 77
Joined: Sat Aug 29, 2015 6:41 am

Do you count e-fund as part of your fixed allocation?

Post by llmgwc »

Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
User avatar
TomatoTomahto
Posts: 11607
Joined: Mon Apr 11, 2011 1:48 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by TomatoTomahto »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
I do. I mean, cash is similar to a really crappy bond.
I get the FI part but not the RE part of FIRE.
KlangFool
Posts: 18952
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by KlangFool »

OP,


I don't. Hence, I do not have to rebalance my portfolio whenever I spend a big sum of money from my emergency fund.


KlangFool
Jack FFR1846
Posts: 13048
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Do you count e-fund as part of your fixed allocation?

Post by Jack FFR1846 »

The cash portion.... no.

The savings bond portion.... yes.

I can take a savings bond and turn it into cash money just as fast as I can go to my credit union and take cash money out of my checking account. That's why I consider it part of my e fund.
Bogle: Smart Beta is stupid
User avatar
TomatoTomahto
Posts: 11607
Joined: Mon Apr 11, 2011 1:48 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by TomatoTomahto »

TomatoTomahto wrote: Tue Oct 27, 2020 2:34 pm
llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
I do. I mean, cash is similar to a really crappy bond.
I should mention that I use a Liability Matching Portfolio so I don’t rebalance. Cash is considered part of my “safe” assets.
I get the FI part but not the RE part of FIRE.
fishnhunt
Posts: 105
Joined: Tue Jan 29, 2019 8:53 am

Re: Do you count e-fund as part of your fixed allocation?

Post by fishnhunt »

No. An emergency fund is just that, a liquid fund for emergencies that I can access within minutes by going to the credit union and withdrawing if needed. It is not there for long term planning or counted towards my FI number. Everyone has a different opinion on this. Personally, I sleep much better having ~4 months of living expenses sitting in cash for an emergency that could happen at any time.
User avatar
ruralavalon
Posts: 20126
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Do you count e-fund as part of your fixed allocation?

Post by ruralavalon »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
We don't have a dedicated emergency fund. Retired, we are age 75, have a significant taxable account, and our living expenses are covered by Social Security and Required Minimum Distributions (RMDs). Any emergency can be met by high limit credit cards or sales of fund shares in our joint taxable account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
humblecoder
Posts: 259
Joined: Thu Aug 06, 2020 8:46 am

Re: Do you count e-fund as part of your fixed allocation?

Post by humblecoder »

I know that this is a subject of intense debate every time somebody asks this question (and, yes, if you search, you will see that this is a topic that has been beaten to death, resurrected as a zombie, beaten to death again, buried, unburied, burned to ashes, ashes scattered, ashes swept up again with a dustpan, and then thrown in the garbage).

Some people include it. Some people don't. You'll see arguments for both point of view when this thread expands to 10 pages of fighting, so you'll need to figure out for yourself what makes sense to you. And that's really what matters.

For my part, I don't include it. I keep it separate. Actually, I keep several asset allocation "buckets" if you will.

BUCKET #1: Emergency fund (HYSA)

BUCKET #2: Known short/medium term expense fund(s). This is for items that I am going to expect to spend money on within the next 1-3 years. For example, I know I am going to need a new central air unit in the next few years since the one I have is beyond its normal lifespan, so I have money set aside for that eventual expense. I put this in either a HYSA, CD's, or short term bond fund, depending on the yield.

BUCKET #3: College savings for my son. This is a relatively known expense so I set my asset allocation based upon the time horizon for when he will be attending college. This is in a glide path fund. And no, I don't want this thread to devolve into "why don't you just cash flow college" that seems to be popular around here so I beg people NOT to comment on this and turn what already will be a 10 page thread into a 20 page thread

BUCKET #4: General taxable savings. This is money above and beyond my retirement savings that I don't have earmarked and am investing longer term. I think of this as an extended emergency fund/cushion/extra retirement savings. Since I might want to access it earlier than my tax advantaged retirement savings, I invest it more conservatively than my retirement savings, but less conservative than e-fund and short term savings.

BUCKET #5: Trust/ABLE account savings for special needs child. This is general money that I invest for the benefit of my special needs daughter and her future support. Currently, the asset allocation matches Bucket #4, since this is both for shorter term items and long term support. That said, I have been mostly cash flowing her short term items, so I might adjust the asset allocation to be more aggressive.

BUCKET #6: Tax advantaged retirement savings. This is technically multiple accounts (IRA, 401k, HSA) but combined they maintain my retirement savings asset allocation.

Yes, I know I could have one asset allocation bucket called "money" (money is fungible, yada yada yada). Yes, I know that this is just mental accounting. Yes, I know that there may be some tax inefficiencies. But it is MY mental accounting and it works for me!
tonyclifton
Posts: 96
Joined: Sat Feb 08, 2020 5:25 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by tonyclifton »

We count cash as a different asset class than fixed income investments. Our household's major asset classes are: US equities, non-US equities, home equity, fixed income and cash.
User avatar
nisiprius
Advisory Board
Posts: 42535
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Do you count e-fund as part of your fixed allocation?

Post by nisiprius »

No. The reason is that an emergency fund might get spent; it's purpose is to get spent if needed; and therefore it is not seriously intended to be a long-term holding.

In the past, traditionally, retirement savings portfolios contained a cash allocation that was an integral part of the portfolio, intended to be held to and through retirement; the "normal" pie chart had three slices for stocks, bonds, and cash. The clearest illustration of this is that at inception and for many years, the Vanguard LifeStrategy funds actually had a three-slice pie chart. The third slice was labeled "short-term reserves" and it wasn't literally cash, it was short-term bonds, but it was close. This near-cash was obviously not usable as an emergency fund--there was no way to tap it separately from the other assets held in the fund.

What I personally did do was to distinguish between different cash and near-cash holdings based on my future intentions, and I literally used separate accounts (in theory you could do this with mental accounting or a spreadsheet but I certainly do not have a sufficiently disciplined mind to make that work). Accounts that I seriously intended to hold until retirement and not to tap for emergencies were part of the retirement portfolio--but as I say, they were part of the "cash"/"short-term reserves" allocation, not part of the "bonds"/"fixed income" allocation. Typically, these were in a brokerage account, or a bank CD, traditional IRA, Roth IRA, or 401(k), or series I savings bonds. They couldn't be quickly or easily tapped, and in some cases there would be some kind of penalty involved for doing so.

The emergency fund was usually the checking account or a higher-interest bank savings account that could be instantly transferred to the checking account.

Of course we all recognize that the boundaries are not perfectly solid, and that an emergency is an emergency and if you must, you tap whatever you have.

But I believe it is double-counting and kidding yourself to think of the same holding as being both an emergency fund and a long-term investment.
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.
User avatar
Kenkat
Posts: 6862
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Do you count e-fund as part of your fixed allocation?

Post by Kenkat »

I do not.
ivgrivchuck
Posts: 479
Joined: Sun Sep 27, 2020 6:20 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by ivgrivchuck »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
E-fund yes, cash no, cars no.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Kookaburra
Posts: 486
Joined: Thu Apr 02, 2020 11:14 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by Kookaburra »

TomatoTomahto wrote: Tue Oct 27, 2020 2:34 pm
llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
I do. I mean, cash is similar to a really crappy bond.
Nowadays, bonds are crappy and cash is equivalent to the best bond funds available.
Kookaburra
Posts: 486
Joined: Thu Apr 02, 2020 11:14 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by Kookaburra »

nisiprius wrote: Tue Oct 27, 2020 6:09 pm No. The reason is that an emergency fund might get spent; it's purpose is to get spent if needed; and therefore it is not seriously intended to be a long-term holding.

In the past, traditionally, retirement savings portfolios contained a cash allocation that was an integral part of the portfolio, intended to be held to and through retirement; the "normal" pie chart had three slices for stocks, bonds, and cash. The clearest illustration of this is that at inception and for many years, the Vanguard LifeStrategy funds actually had a three-slice pie chart. The third slice was labeled "short-term reserves" and it wasn't literally cash, it was short-term bonds, but it was close. This near-cash was obviously not usable as an emergency fund--there was no way to tap it separately from the other assets held in the fund.

What I personally did do was to distinguish between different cash and near-cash holdings based on my future intentions, and I literally used separate accounts (in theory you could do this with mental accounting or a spreadsheet but I certainly do not have a sufficiently disciplined mind to make that work). Accounts that I seriously intended to hold until retirement and not to tap for emergencies were part of the retirement portfolio--but as I say, they were part of the "cash"/"short-term reserves" allocation, not part of the "bonds"/"fixed income" allocation. Typically, these were in a brokerage account, or a bank CD, traditional IRA, Roth IRA, or 401(k), or series I savings bonds. They couldn't be quickly or easily tapped, and in some cases there would be some kind of penalty involved for doing so.

The emergency fund was usually the checking account or a higher-interest bank savings account that could be instantly transferred to the checking account.

Of course we all recognize that the boundaries are not perfectly solid, and that an emergency is an emergency and if you must, you tap whatever you have.

But I believe it is double-counting and kidding yourself to think of the same holding as being both an emergency fund and a long-term investment.
Many do seriously intend for it to be a long-term holding, and only keep it on the short end of the FI spectrum and liquid just in case intentions don’t go as planned. It seems very reasonable to me to nest EF in the FI portion of one’s AA.
dru808
Posts: 1278
Joined: Sat Oct 15, 2011 2:42 pm
Location: mid pac

Re: Do you count e-fund as part of your fixed allocation?

Post by dru808 »

No I count retirement, savings and e fund all separately.
User avatar
anon_investor
Posts: 4271
Joined: Mon Jun 03, 2019 1:43 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by anon_investor »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
I count my emergency fund (I Bonds, no penalty CDs and a dedicate savings account) as part of my fixed income allocation; however I do not count my other "cash" (in checking and savings accounts) earmarked for upcoming bills and near term anticipated expenses.
Outer Marker
Posts: 1298
Joined: Sun Mar 08, 2009 8:01 am

Re: Do you count e-fund as part of your fixed allocation?

Post by Outer Marker »

Yes. I have 24 months in cash/equivalents, but no separate emergency fund. Overall, 70/30.
User avatar
SmileyFace
Posts: 6241
Joined: Wed Feb 19, 2014 10:11 am

Re: Do you count e-fund as part of your fixed allocation?

Post by SmileyFace »

Like Klang - not sure I understand your question. By "allocation" do you mean my "retirement" Asset Allocation? If so - the answer is No. My e-fund is for emergency spending and large purchases before retirement - why would I then count it towards retirement? It may not be there for retirement.
My e-fund ranges as I also use the same bucket to save for the next new car, big vacation, home improvement, etc. I also know it is there if I were to have an unexpected expense or lose my job so don't make the next big purchase until it us overfunded. I certainly do not count on it for retirement.
I have lived/planned with 3 buckets - my emergency/large-purchase fund, kids college savings, and retirement savings. I know some folks mix these all together - I would find that too complex. They all have different target balances and asset allocations so I do not combine them.
MikeG62
Posts: 3422
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Do you count e-fund as part of your fixed allocation?

Post by MikeG62 »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
I don't have an emergency fund per se (never really have). I have historically and continue to maintain a well diversified portfolio that is sufficiently liquid enough to provide ready access to cash for any likely emergency.

To the second part of your question, I consider CD's (whether traditional or no penalty) as part of my fixed income allocation (the short-end obviously). Cash in online savings accounts I consider as just cash. I try to keep that amount as low as possible to take advantage of higher yielding places for that cash. Sadly, those are getting harder and harder to find.
Real Knowledge Comes Only From Experience
gonefishing01
Posts: 169
Joined: Wed Aug 19, 2015 9:09 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by gonefishing01 »

I have a years worth of expenses in a money market at my credit union currently. I do consider it, because i hold fewer bonds right now than i would feel comfortable without it.
dcabler
Posts: 1705
Joined: Wed Feb 19, 2014 11:30 am

Re: Do you count e-fund as part of your fixed allocation?

Post by dcabler »

I don't actually hold anything I call an emergency fund. I keep a certain amount of "working capital" in my checking account. It's certainly more than is needed for our regular expenditures, but is always there for the occasional big ticket items (like the new roof we're about to get). I don't consider it when calculating my AA as I would never rebalance into or out of it. If a true emergency arises, I'd likely use credit cards first and pay that off from whatever's in my checking account. Otherwise I would liquidate enough assets from my taxable investments to cover the emergency. If I were at the beginning of my career instead of the end, I'd build up my e-fund first, then start saving but I still wouldn't consider the e-fund when calculating my AA. But that's just me...
User avatar
simplesimon
Posts: 4007
Joined: Mon Feb 25, 2008 8:53 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by simplesimon »

I do.

I currently have a bulk of it sitting in Ally's 1.75% NPCD's that mature in February. I'll have to see what the environment is like then to decide where the proceeds will go, but currently I'm thinking I-bonds and Total Bond.
Dandy
Posts: 6425
Joined: Sun Apr 25, 2010 7:42 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by Dandy »

I always counted all financial assets as part of my allocation.
In an emergency you make a decision as to what action to take. Many times you use your E fund. You might charge it and use liquid assets later to pay it off. At one time you could use your home equity line of credit and get a tax deduction. For a replacement car you might choose a no or very low interest loan from the dealer. You might sell some taxable assets at a loss. For a large medical bill you might be able to negotiate to pay it off with equal payments over a year*. I did that.

In an emergency technically all your assets are in play not just your E fund. Just because you have a current emergency need doesn't mean there won't be another just around the corner. An E fund is just a guess at what you might need and how quickly you might need it. If you can, you should consider a variety of options to cover an emergency expense need.

*A suggestion if you agree to equal payments. Don't make them equal. e.g. You owe $1200 and agree to pay it off in 12 months. First payment is $101, Second payment is $102, etc. Last payment makes the total $1200. If at the end they say you still owe something you can see what payment the misapplied. If you make all payments equal how do you do that?? Also, you can always say you paid the bill in full and ahead of the plan.
stan1
Posts: 9528
Joined: Mon Oct 08, 2007 4:35 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by stan1 »

Short answer: Yes, I include cash as fixed income not a separate asset class. You can do what you want though. No need to be accountable to anyone other than yourself and your family for your asset allocation decisions. The IRS just cares that you pay your taxes; they don't care what your asset allocation is.

We do have two checking accounts that we pay bills out of that I do not bother including in our asset allocation because balance is always less than 1% of portfolio.
Coltrane75
Posts: 219
Joined: Wed Feb 06, 2019 2:32 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by Coltrane75 »

I don't include my e-fund as part of an overall asset allocation that includes all money.
I use asset allocation specific to duration; I have about 3 buckets: short, mid and long term.
E-fund is short term reserves.
Topic Author
llmgwc
Posts: 77
Joined: Sat Aug 29, 2015 6:41 am

Re: Do you count e-fund as part of your fixed allocation?

Post by llmgwc »

I have lived/planned with 3 buckets - my emergency/large-purchase fund, kids college savings, and retirement savings. I know some folks mix these all together - I would find that too complex. They all have different target balances and asset allocations so I do not combine them.
What AA do you use for your emergency/large-purchase fund?
balbrec2
Posts: 394
Joined: Mon Nov 13, 2017 3:03 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by balbrec2 »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
In a word, no!
User avatar
AerialWombat
Posts: 1975
Joined: Tue May 29, 2018 1:07 pm
Location: Cash Canyon / Cashville

Re: Do you count e-fund as part of your fixed allocation?

Post by AerialWombat »

llmgwc wrote: Tue Oct 27, 2020 2:32 pm Had a comment in another thread that got me thinking.

Do most of you count your e-fund, as well as other cash you may be holding for a variety of reasons, as part of your fixed asset allocation?
Yes.
Aelron
Posts: 27
Joined: Wed Oct 07, 2020 6:49 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by Aelron »

I agree with many that there's no objective right or wrong answer. I'm less than a year away from financially independent self-directed activity, and I've started thinking about investing, withdrawals, and spending more and more. I think there's a decent argument for separating money into two groups.

1. Investments, with a particular asset allocation (eg, 60/40) matching a person's risk tolerance and life situation. This group would be rebalanced based upon an individual's investment policy.

2. Withdrawn funds, using a selected withdrawal strategy. These would be considered "already spent" and thus not part of the main portfolio. The withdrawn funds could be thought of in terms of months of expenses rather than absolute dollar amount, and then the choice of investments for these could be used to match a time horizon of based upon the total number of months represented by the funds (less than one year in money market and ultrashort bonds, longer in short bonds, longer in intermediate bonds, ...). An emergency fund could then be considered part of this "withdrawn funds" bucket and match time horizon appropriately without being considered part of the main investment portfolio.
megabad
Posts: 3314
Joined: Fri Jun 01, 2018 4:00 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by megabad »

No. but it shouldn't matter. E-fund should be a small part of your assets anyway for 99.9% of everyone. If it isn't, you are doing something wrong or it isn't really an emergency fund.
student
Posts: 5305
Joined: Fri Apr 03, 2015 6:58 am

Re: Do you count e-fund as part of your fixed allocation?

Post by student »

I do.
Money_Badger
Posts: 65
Joined: Thu Jul 02, 2020 11:05 pm
Location: Raleigh NC

Re: Do you count e-fund as part of your fixed allocation?

Post by Money_Badger »

megabad wrote: Wed Oct 28, 2020 7:15 pm No. but it shouldn't matter. E-fund should be a small part of your assets anyway for 99.9% of everyone. If it isn't, you are doing something wrong or it isn't really an emergency fund.
Me thinks you are ignoring those younger investors who are just getting started, and those who are late to the game and trying to catch up.

A 6 month emergency fund could be a huge part of total assets for those folks. And I assure you, that percentage is a whole lot greater than .1%.
ThePrince
Posts: 436
Joined: Sun Aug 20, 2017 9:15 pm
Location: U.S.A.

Re: Do you count e-fund as part of your fixed allocation?

Post by ThePrince »

KlangFool wrote: Tue Oct 27, 2020 2:35 pm OP,


I don't. Hence, I do not have to rebalance my portfolio whenever I spend a big sum of money from my emergency fund.


KlangFool
+1
megabad
Posts: 3314
Joined: Fri Jun 01, 2018 4:00 pm

Re: Do you count e-fund as part of your fixed allocation?

Post by megabad »

Money_Badger wrote: Wed Oct 28, 2020 11:00 pm
megabad wrote: Wed Oct 28, 2020 7:15 pm No. but it shouldn't matter. E-fund should be a small part of your assets anyway for 99.9% of everyone. If it isn't, you are doing something wrong or it isn't really an emergency fund.
Me thinks you are ignoring those younger investors who are just getting started, and those who are late to the game and trying to catch up.

A 6 month emergency fund could be a huge part of total assets for those folks. And I assure you, that percentage is a whole lot greater than .1%.
Though I don’t really agree with your statement for most people, perhaps what I should have said is that over the course of your entire lifespan, it will be a small portion of your portfolio so I don’t think considering it in AA should be much of a concern. In fact, I would say that if e-fund is relatively large, than you shouldn’t be worrying about asset allocation at all anyway.
Post Reply