VTSAX as Emergency Fund?

[ceej]

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

[bloom2708]

Make the Emergency Fund 9 months.

Buy Total US with the rest.

I do not recommend all or nothing. Keep some cash.

[geerhardusvos]

I have been doing this for the last five years and it has paid off handsomely. Will the next five years be so kind? Maybe not. It’s really down to your necessity for an emergency fund. How solid is your employment? How flexible are your living expenses? How many years of expenses do you already have saved up? In my case I’m getting closer to 20 X my base living expenses invested in my portfolio, and over half of that is in my taxable account. So I don’t have the need for cash, but you don’t have a lot of taxable savings, so I would probably keep at least six months in cash until you have a larger portfolio. But it’s not unreasonable to keep your savings account in VTSAX if you understand the risks.

[Tamalak]

VTSAX as Emergency Fund?

Is this what euphoria looks like?

[geerhardusvos]

VTSAX as Emergency Fund?

Is this what euphoria looks like?

What’s the worst case scenario? You “lose” half your EF due to stock declines, and at the same time become unemployed? How likely is that scenario for OP? Only they can answer that. If OP understands the risk and is willing to take that risk, it’s not unreasonable at all. The larger your portfolio, the less you need you have for cash outside of your allotted asset allocation. It really all depends on the person and the scenario.

https://earlyretirementnow.com/2016/05/ ... ency-fund/

[anon_investor]

I'd cut the EF down to 6 months and invest the rest in VTSAX.

[livesoft]

VTSAX would make a fine emergency fund. Just make sure that your emergency fund is double the dollar amount of what you would use if it was in a savings account.

Also, don't forget that you have to start somewhere, so having double the amount needed usually does not happen instantly.

See also:
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
and
https://www.bogleheads.org/wiki/Placing ... ed_account

[whodidntante]

I have been doing this for the last five years and it has paid off handsomely. Will the next five years be so kind? Maybe not. It’s really down to your necessity for an emergency fund. How solid is your employment? How flexible are your living expenses? How many years of expenses do you already have saved up? In my case I’m getting closer to 20 X my base living expenses invested in my portfolio, and over half of that is in my taxable account. So I don’t have the need for cash, but you don’t have a lot of taxable savings, so I would probably keep at least six months in cash until you have a larger portfolio. But it’s not unreasonable to keep your savings account in VTSAX if you understand the risks.

Agreed.

One needs a plan for emergencies, which may or may not include an emergency fund.

[ChiKid24]

OP, here are my suggestions to help yourself answer your question.

1) Get a clearer picture of your finances so you can make an informed decision. "about 12-18 months of emergency funds" is a pretty big range. Is it 12, is it 18? Pull together a budget and figure out how much you actually have.

2) Figure out what made you initially decide to reserve 12-18 months of expenses in cash, then determine if that determination has changed

3) If no for #2, stay the course. If yes for #2, ask yourself what circumstances have changed. Seeing VTSAX doing well and feeling like you are leaving money on the table is not an acceptable answer. Improved job security, better health, more flexible lifestyle to allow you to pull levers on the budget could be a reason to hold less cash. Just know that VTSAX doesn't always go up and you could see a rapid 30%+ drop plus loss in employment and deterioration in health, kind of like what happened in March. Only you can decide if you are comfortable with that.

[retire57]

Nobody "plans on" touching his/her emergency fund.

Go with the conventional wisdom - keep enough cash to tide you over between jobs should you lose your income and invest the rest. How will you feel if VTSAX drops 10% in one week?

BTW, congrats on getting out if debt and being so disciplined with your saving and investing at such a young age!

[roth evangelist]

This bull market will come to an end. Maybe next week, maybe next month, maybe in two years. You might be glad you kept money in cash when that time comes.

[brokendirtdart]

Whatever makes you comfortable after you consider your uses for the emergency fund and the potential negatives of your choice OP.

I went conservative and chose VWIAX as my e fund. I am not very disciplined in keeping it managed with an X # of months, Y cost of a repair, or Z a specific dollar amount, but it does what I need it to do.

[Brianmcg321]

Keep 6 months of expenses in cash at your bank.

Invest the rest according to your asset allocation.

[abuss368]

You could. However, I do not believe in additional funds and complexity and have no desire for an emergency fund. We simply have one cash account which is a money market at Vanguard. I have found that nothing else is needed.

Keep live simple.

Tony

[Robert20]

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

I have 40% in VTEB and 30% in VTIP ..(emergency fund).. I use credit cards to make all purchases and pay off every month..

[abuss368]

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

Here is another approach I use to keep it simple. I do not use any type of allocation, percentage, or number of months that must be in cash. I simple build cash nonstop over time. Every pay period, I simple deposit the same amount. Cash builds. When I need cash it is there.

This has worked well and eliminated any need for spreadsheets and other unnecessary complexity.

Tony

[abuss368]

This bull market will come to an end. Maybe next week, maybe next month, maybe in two years. You might be glad you kept money in cash when that time comes.

And if one losses a job or has an immediate cash need, you will be thankful.

There is an old saying of “cash is king” and for good reason.

Tony

[wintermute]

Put 100% in ibonds. Save an extra 20% and put that in VTSAX. If it goes to 0, you still have 100% of your efund.

The past total return is similar to intermediate corp bonds, iirc. That 20% is 100% equity, so taking it from your retirement doesn't lower your total equality and returns.

[Triple digit golfer]

It's a horrible emergency fund.

That doesn't mean your plan is bad. But as an emergency fund, VTSAX is a horrible choice.

[ceej]

Nobody "plans on" touching his/her emergency fund.

Go with the conventional wisdom - keep enough cash to tide you over between jobs should you lose your income and invest the rest. How will you feel if VTSAX drops 10% in one week?

BTW, congrats on getting out if debt and being so disciplined with your saving and investing at such a young age!

Thank you!

[6bquick]

It's a horrible emergency fund.

That doesn't mean your plan is bad. But as an emergency fund, VTSAX is a horrible choice.

Because of what it is specifically (a total market index) or generally (equities)?

[Chadnudj]

I've noticed we talk a lot about emergency funds as being for job loss, which they obviously are. But they're also for other high cost emergencies -- having to buy a new furnace or car, replace the roof, an expensive dental emergency, etc.

I'd find a number that covers what you could foresee as a major expensive emergency -- you can decide what that would be for you (I'd figure at least $10k, maybe more) -- and leave that in cash. Then I'd dollar-cost average in the rest of your emergency fund into VTSAX (while you add your extra excess money/cash flow as well), one month at a time each month. The reason I'd say do it that way is it's an emergency fund -- yes you'd like it to make more money for you, but if you're going to invest it the priority is to not lose a bunch of it quickly. Better to DCA it if you're going to go this route.

[qwertyjazz]

The basic answer is that emergency fund sounds like it has a simple definition. It does not. Everyone considers it differently. VTSAX could lose half at the wrong time. Depending on your definition, that could be life altering catastrophic. It could also be irrelevant. So I am going to say your question is poorly defined and impossible to answer. So start with, why do you have an emergency fund? What expenses - then how likely are you going to need it? Probability of bad outcome
Then youse pays youse moneys and takes youse chances ...

[Triple digit golfer]

It's a horrible emergency fund.

That doesn't mean your plan is bad. But as an emergency fund, VTSAX is a horrible choice.

Because of what it is specifically (a total market index) or generally (equities)?

Generally.

[bugleheadd]

I keep my emergency fund in TSLA

[Harry Livermore]

As a self-employed person whose livelihood has been directly impacted by the restrictions on gathering due to COVID, I have been thankful to have salted away 12 months' worth of expenses in a plain old savings account at my main bank. Cash drag? Absolutely. Missed opportunity? Sure. But I knew the day would come when something (a broken leg, car crash, downturn in my business) would render me unemployed. COVID was a bit of a Black Swan for me... I had not considered this as a possibility! Other posters have pointed out that sometimes, unexpectedly, the oil burner cracks, or the car's transmission fails. The same pot of money lets you smooth over life's bumps in a way that might not be possible out of monthly cashflow.
I made roughly 70% LESS in 2020 than a "normal" year. I sure was glad to have cash at the ready.
Now, as a guy who was 100% equities right up into his 40s, I also have many tax deferred and taxable accounts. One such account is VTSAX in taxable. It's roughly one additional year of expenses. I started putting money there as a nebulous, "in case the kids' college funds are not big enough" flexible account (yes, I mentally bucket, so sue me) but in recent years, as it became clear that we will probably be fine taking care of college, I had started to think of that taxable account as a source of living expenses in "pre-retirement", if my wife and I have part time work or other income. Now that the pandemic has dragged on, I have dipped into VTSAX a little to replenish the emergency fund somewhat (I have not drawn down the emergency fund one-to-one each month, as I have had SOME income) But I was able to wait until after the recovery, not use it in a panic in March (and I am as surprised as any here how we are at all-time highs again) I also had a couple of months in my Etrade sweep account, and I took some gains this fall on some individual equities, and moved some of that $$$ into the plain old savings account. If things got bad enough, I have more than a years' (maybe two) worth of expenses in equities there; I could sell that and pay the tax. I also have an iBond stash that I assumed was going to fund some travel in retirement, but I could use that for a few more months. I have physical cash and a bunch of silver, fairly accessible.
After that, I could start selling rental real estate I guess... but by then I'd likely be "retired", whatever that means...
What is the point of my long-winded tale? That no one can really answer this question for you. My situation is complex, with lots of moving parts each month: 2 mortgages, 2 college bills, fixed business expenses, all flowing out every month; some business income, rental real estate income, wife's salary, all flowing in. Each month is different, and I have to steel myself each month, pay the bills, and be careful in our spending for the time being.
Your situation may also be complicated, or simpler. Your risk tolerance comes into play.
I would suggest you have some layers, or tiers, as others have suggested here. A certain number of months' cash. Yes, sure, some in VTSAX. Be prepared that whatever you have there may be worth half what you think it's worth, just when you need it the most. How about some iBonds too?
Or more bluntly, don't try to wring "a return" out of every last dime. Don't get too cute.
Cheers

[ceej]

As a self-employed person whose livelihood has been directly impacted by the restrictions on gathering due to COVID, I have been thankful to have salted away 12 months' worth of expenses in a plain old savings account at my main bank. Cash drag? Absolutely. Missed opportunity? Sure. But I knew the day would come when something (a broken leg, car crash, downturn in my business) would render me unemployed. COVID was a bit of a Black Swan for me... I had not considered this as a possibility! Other posters have pointed out that sometimes, unexpectedly, the oil burner cracks, or the car's transmission fails. The same pot of money lets you smooth over life's bumps in a way that might not be possible out of monthly cashflow.
I made roughly 70% LESS in 2020 than a "normal" year. I sure was glad to have cash at the ready.
Now, as a guy who was 100% equities right up into his 40s, I also have many tax deferred and taxable accounts. One such account is VTSAX in taxable. It's roughly one additional year of expenses. I started putting money there as a nebulous, "in case the kids' college funds are not big enough" flexible account (yes, I mentally bucket, so sue me) but in recent years, as it became clear that we will probably be fine taking care of college, I had started to think of that taxable account as a source of living expenses in "pre-retirement", if my wife and I have part time work or other income. Now that the pandemic has dragged on, I have dipped into VTSAX a little to replenish the emergency fund somewhat (I have not drawn down the emergency fund one-to-one each month, as I have had SOME income) But I was able to wait until after the recovery, not use it in a panic in March (and I am as surprised as any here how we are at all-time highs again) I also had a couple of months in my Etrade sweep account, and I took some gains this fall on some individual equities, and moved some of that $$$ into the plain old savings account. If things got bad enough, I have more than a years' (maybe two) worth of expenses in equities there; I could sell that and pay the tax. I also have an iBond stash that I assumed was going to fund some travel in retirement, but I could use that for a few more months. I have physical cash and a bunch of silver, fairly accessible.
After that, I could start selling rental real estate I guess... but by then I'd likely be "retired", whatever that means...
What is the point of my long-winded tale? That no one can really answer this question for you. My situation is complex, with lots of moving parts each month: 2 mortgages, 2 college bills, fixed business expenses, all flowing out every month; some business income, rental real estate income, wife's salary, all flowing in. Each month is different, and I have to steel myself each month, pay the bills, and be careful in our spending for the time being.
Your situation may also be complicated, or simpler. Your risk tolerance comes into play.
I would suggest you have some layers, or tiers, as others have suggested here. A certain number of months' cash. Yes, sure, some in VTSAX. Be prepared that whatever you have there may be worth half what you think it's worth, just when you need it the most. How about some iBonds too?
Or more bluntly, don't try to wring "a return" out of every last dime. Don't get too cute.
Cheers

My favorite answer yet — thanks so much. I think I now understand how to proceed in my situation. Layering!

[Tamalak]

VTSAX as Emergency Fund?

Is this what euphoria looks like?

What’s the worst case scenario? You “lose” half your EF due to stock declines, and at the same time become unemployed?

Yes. And for most of us, that's a pretty likely scenario. Market returns are correlated with the economy and therefore with our personal financial situation. Times when you least want to sell your stocks are likeliest to be the times when you're going to be forced to.

I don't believe in "dry powder" in the sense of market timing but I absolutely believe in it in the sense of insurance.

[digit8]

I follow a version of this strategy myself with good results overall. But don't forget a draw down on a taxable equity account is potentially, well, taxable. I had to pay out about four times my usual to the IRS a few years ago after a major crisis and it was a bad cap to a bad year.

Keep something tucked away. If not as a separate emergency fund (I don't) as a cushion on your checking account(I do) or something along those lines. A little something for lower level problems so you can just write a check and be done with it, no other paperwork required, and a little something to cover yourself from making a big draw down.

[g2morrow]

VTSAX would make a fine emergency fund. Just make sure that your emergency fund is double the dollar amount of what you would use if it was in a savings account.

Also, don't forget that you have to start somewhere, so having double the amount needed usually does not happen instantly.

See also:
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
and
https://www.bogleheads.org/wiki/Placing ... ed_account

this is what I do - just make sure you know the risks - as it grows a downturn risk becomes less

[Dude2]

Most people would not want to sell stocks at a loss when they needed cash. Many people are so attached to their stocks that they wouldn't even want to sell them at a gain -- because selling them at all means they are missing out on the opportunity for even more gains. Are you one of those people, i.e. 100% stock types? If so, and you want an emergency fund, the only thing that makes sense is to hold it in something that is not stock, like cash or bonds.

On the other hand, if you have some bonds in your portfolio, then you can do the dance that Livesoft links to above.

[Nate79]

VTSAX as Emergency Fund?

Is this what euphoria looks like?

What’s the worst case scenario? You “lose” half your EF due to stock declines, and at the same time become unemployed? How likely is that scenario for OP? Only they can answer that. If OP understands the risk and is willing to take that risk, it’s not unreasonable at all. The larger your portfolio, the less you need you have for cash outside of your allotted asset allocation. It really all depends on the person and the scenario.

https://earlyretirementnow.com/2016/05/ ... ency-fund/

So you think a 50% drop in stocks is worst case? Um, ok.

[dbr]

I think a better response to the idea of VTSAX as an emergency fund is that doing that really means you don't have an emergency fund in the usual sense of what is meant by that here.

That said " . . . not that there is anything wrong with that . . . "

It is up to you to decide if your resources are such and your likelihood of having an emergency is such that not having a conventional emergency fund is fine for you.

In more precise terms the issue is trading off the risk of having to liquidate the asset at a bad time against the hoped for return of a more risky investment where part of the risk picture is the likelihood that the fund will not have to be liquidated. Most emergency funds are never liquidated. Remember risk means chances of coming out ahead as well as chances of being hurt.

[geerhardusvos]

Market returns are correlated with the economy and therefore with our personal financial situation.

Becoming unemployed and stock market returns have been shown to have actually a pretty weak correlation. This can depend on what kind of industry or profession you are in, and it’s hard to know which profession(s) will get hit in the next recession, but the correlation is weaker than you think.

[btq96r]

I would use savings or a solid bond fund (I use VUBFX) for the true emergency fund. Mine is six months of salary replacement...easy to calculate, and if I lose my job, I might have expenses that exceed current ones as I would need to possibly travel for job interviews.

Once you get enough set aside, the excess you have starts your taxable account (VTSAX works nicely) and you just build that up after maxing out IRA and 401k. Rinse, lather, repeat. You can use the taxable account to pre-fund things like vacations and car purchases so you aren't using debt.

[UpperNwGuy]

VTSAX would make a fine emergency fund. Just make sure that your emergency fund is double the dollar amount of what you would use if it was in a savings account.

+1

[Grt2bOutdoors]

Market returns are correlated with the economy and therefore with our personal financial situation.

Becoming unemployed and stock market returns have been shown to have actually a pretty weak correlation. This can depend on what kind of industry or profession you are in, and it’s hard to know which profession(s) will get hit in the next recession, but the correlation is weaker than you think.

I think you corroborated what Tamalak posted. Essentially you don’t know when/if personal financial calamity will hit you and you don’t know when the market will tank, but we can all agree the volatility of equities is higher than some other financial instruments. Assuming you agree that volatility is higher on any given day, then naturally the risk is higher especially if ones “efund” is not sufficiently large enough to cover X months of expenses. In the case of the OP, let’s say he has 12 months of expenses in cash. If he places it all in VTSAX and we have a 1929-1931 event, he can see 86 percent of his money evaporate. It may not be likely that such an event occur, we came close when Lehman failed - so don’t say it’s not probable. Back then, the only thing that saved us was cash. Not tbills, not bonds and not equities. There are somethings going on in the markets today that can cause a little ripple to become a tsunami. If you wonder what happened back in March 2020? Mass sell off of equities and a flight to cash - companies drew down all their lines of credit and held cash. Those who already held enough liquidity, they stayed the course and continued to make investments in people, r&d, buying back cheaply priced stock.

Now I know the post is about individuals but the inference is the same - liquidity allows you to live another day, sleep soundly at night and you won’t be thinking about financial returns.

[SimplicityNow]

We always kept 12-18 months expenses in an emergency fund and kept it as cash. Yes it was a cash drag but for our situation and the size of our portfolio it didn't really matter. The peace of mind it gave whether real or illusory was important to us.

One of daughters needed major surgery that our insurance wouldn't cover (said it was 'experimental'). So a 100K expense we didn't plan on.
Fortunately for us, it didn't present a financial hardship. But just because it didn't for us, doesn't''t mean it won't for all.
Having your EF 100% in VTSAX is great for maximizing return when the market is heading north but add the potential for quick and large declines along with a job loss and a personal emergency and things can turn ugly very quickly.

Yes you can say I'll just sell the VTSAX when I need it even at a loss and take the hit. But the wrong sequence here could be devastating. A 30% decline and you say, I'll hold on till it recovers, it drops again, you lose your job and medical insurance then a tragedy strikes. And what was 1 years worth of expenses can disappear in a few months.

For scenarios like that, having the EF in cash might be the difference between riding it out and having to make difficult choices.

I don't think there is anything wrong with keeping it in all equities if you have other backstops to weather the storm. My concern is that some of the people who might follow that strategy to maximize returns are the ones least financially equipped to do so.

Just my 2 cents.

[ruralavalon]

Congratulations on being debt free and making maximum annual contributions to both your 401k and IRA.

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

Reduce your emergency fund in the high yield savings account to 3-6 months worth of basic core living expenses (more or less depending on on your job stability).

Then in a taxable brokerage account at Vanguard invest the rest in Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).

At some point consider adding a diversified bond with a low expense ratio in your 401k account, and using your Roth IRA for a diversified low expense stock fund.

You can also consider an allocation to international stocks.

[dratkinson]

Suggested EF structure.

You need multiple tiers to your EFs, from more-safe shorter-term investments to more-risk/reward longer-term investments.

Keep 1yr of living expenses in insured checking, savings, CDs. Use the "ABP by CC technique" to earn ~2%/yr tax free on this money so you avoid the "fear of missing out". (Don't chase teaser rates and account opening bonuses, they'll distract you from more important things and waste your time. But some do... and that's okay for them.)

Your EFs could use a bond tier in taxable. Begin buying VWITX or VWLTX in your taxable account.* Why? Since you're maxing your 401k and IRA, assume you're in a high enough tax bracket to use muni bond funds. And since you're relatively young---have more human capital---you can withstand more risk.
--In 12/15% tax bracket, VWLTX returns more after-tax income than TBM (US total bond market index fund).
--In 12/15% tax bracket, VWITX returns more after-tax income than HY savings and CDs, but not always TBM.
--The muni benefit gets better in higher tax brackets. (Remember tax code sunset in ~2025.)
--After you have 2yrs of living expenses in munis, then buy tax-efficient equities (VTSAX,...) in taxable.

* Depending upon your complete financial situation, you might benefit a little more by including a single-state muni fund. But for that, you'll need to request a forum review. See sticky "Asking Portfolio Questions" to know what information is required. Start a new topic to request your review.

Above gives you this EF structure---ST more-safety, to LT more-risk/reward:
--1st-tier EFs. 1yr in insured cash earning ~2%/yr tax-free due to "ABP by CC technique". (Search forum.)
--2nd-tier EFs. 2yrs in munis earning more than CD or TBM---your choice---EF if needed, or retirement if not.
--3rd-tier EFs. Tax-efficient equities (VTSAX,...) earning the market return. And suffering market gyrations.*
--4th-tier EFs (doomsday scenario). 401k and IRA earning more-risk/reward LT tax-advantaged market return.

Notice above has very little cash drag. And each tier has a purpose:
--1yr in cash delays the hassle of needing to sell/report a taxable event (selling bonds/equities).
--2yrs in bonds provide more NAV stability than equities, and delays need to sell equities in down market.*
--Add tax-efficient equities to taxable, after filling annual tax-advantaged space, and have fat EFs.

* You really don't want to risk being forced to sell equities in a down market. And since you need some bonds, taxable is a good place to put some for their multi-duty benefits: extended-EF tier (more after-tax return than cash, more stability than equities), home projects, new car, dry powder,... retirement bonds.

N.B. Since bonds can lose 5-15% during a bond crash, you'll want to overfill bonds to ~120% (=1/(1-.15)) of the anticipated need if used to save for a future purpose (home down payment,...).

Plan for the worst. Hope for the best.

[arivera]

Suggested EF structure.

You need multiple tiers to your EFs, from more-safe shorter-term investments to more-risk/reward longer-term investments.

Keep 1yr of living expenses in insured checking, savings, CDs. Use the "ABP by CC technique" to earn ~2%/yr tax free on this money so you avoid the "fear of missing out". (Don't chase teaser rates and account opening bonuses, they'll distract you from more important things and waste your time. But some do... and that's okay for them.)

Your EFs could use a bond tier in taxable. Begin buying VWITX or VWLTX in your taxable account.* Why? Since you're maxing your 401k and IRA, assume you're in a high enough tax bracket to use muni bond funds. And since you're relatively young---have more human capital---you can withstand more risk.
--In 12/15% tax bracket, VWLTX returns more after-tax income than TBM (US total bond market index fund).
--In 12/15% tax bracket, VWITX returns more after-tax income than HY savings and CDs, but not always TBM.
--The muni benefit gets better in higher tax brackets. (Remember tax code sunset in ~2025.)
--After you have 2yrs of living expenses in munis, then buy tax-efficient equities (VTSAX,...) in taxable.

* Depending upon your complete financial situation, you might benefit a little more by including a single-state muni fund. But for that, you'll need to request a forum review. See sticky "Asking Portfolio Questions" to know what information is required. Start a new topic to request your review.

Above gives you this EF structure---ST more-safety, to LT more-risk/reward:
--1st-tier EFs. 1yr in insured cash earning ~2%/yr tax-free due to "ABP by CC technique". (Search forum.)
--2nd-tier EFs. 2yrs in munis earning more than CD or TBM---your choice---EF if needed, or retirement if not.
--3rd-tier EFs. Tax-efficient equities (VTSAX,...) earning the market return. And suffering market gyrations.*
--4th-tier EFs (doomsday scenario). 401k and IRA earning more-risk/reward LT tax-advantaged market return.

Notice above has very little cash drag. And each tier has a purpose:
--1yr in cash delays the hassle of needing to sell/report a taxable event (selling bonds/equities).
--2yrs in bonds provide more NAV stability than equities, and delays need to sell equities in down market.*
--Add tax-efficient equities to taxable, after filling annual tax-advantaged space, and have fat EFs.

* You really don't want to risk being forced to sell equities in a down market. And since you need some bonds, taxable is a good place to put some for their multi-duty benefits: extended-EF tier (more after-tax return than cash, more stability than equities), home projects, new car, dry powder,... retirement bonds.

N.B. Since bonds can lose 5-15% during a bond crash, you'll want to overfill bonds to ~120% (=1/(1-.15)) of the anticipated need if used to save for a future purpose (home down payment,...).

Plan for the worst. Hope for the best.

I really love this EF tiered approach. Super helpful. Thank you!

[neverpanic]

The 1950s-era "emergency fund" concept does not make a lot of sense today. Rates were low back then, but these people were still reeling from effects of the Depression. So, people kept cash in savings and in their closets. Fast-forward into the 80s, high interest rates on basic savings and CDs made it a no-brainer to use those vehicles to store emergency funds.

VTSAX for now. When bond rates return, move some there.

[HMSVictory]

6 months of your expenses in cash is a good emergency fund put the rest into VTSAX. Problem solved.

You don't want your emergency fund in stocks. They will go down 55% at exactly the wrong time - you aren't giving up much gains by keeping the funds in cash but you are protecting your ability to not be forced to sell at the exact wrong time.

[Ferdinand2014]

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

Decide what you need for an emergency fund. Double it. This is what you would need with VTSAX if the market tanked (dropped 50%) and you needed the money at the same time. Are you comfortable with that? Only you can decide.

[Bama12]

Here's my emergency fund. I did the Roth first and Taxable VTI second, when I was younger so it would grow a lot bigger.
Over the years I add VMFXX and Savings.


Job Lose--
3 Months Income Savings Local Bank
3 Months Income Vanguard Federal M.M-VMFXX
3 Months Income Vanguard Total Stock Market-VTI
3 Months Income Vanguard Wellesley Income-VWINX (Roth)


Things happen--
10,000 Savings local Bank

[marian]

I wouldn't use VTSAX, or any stock fund as my emergency fund. I think it's inherent in the definition of an emergency that you need extreme access to a known amount of cash.

Try to consider what you could need for emergencies, this is different for different people so consider the facts of your situation. If you find you have more cash than you think you'll need then maybe put the extra in VTSAX.

You wouldn't want to sell shares of VTSAX in an emergency, what if the market were down, you could take a loss.

I think of my emergency fund as a protection when odd things come up and job loss but also as a way to protect myself from being forced to sell my VTSAX.

[marian]

I wouldn't use VTSAX, or any stock fund as my emergency fund. I think it's important in an emergency that you need extreme access to a known amount of cash.

Try to consider what you could need for emergencies, this is different for different people so consider the facts of your situation. If you find you have more cash than you think you'll need then maybe put the extra in VTSAX.

You wouldn't want to sell shares of VTSAX in an emergency, what if the market were down, you could take a loss.

I think of my emergency fund as a protection when odd things come up and job loss but also as a way to protect myself from being forced to sell my VTSAX.

[jeremyl]

VTSAX would make a fine emergency fund. Just make sure that your emergency fund is double the dollar amount of what you would use if it was in a savings account.

Also, don't forget that you have to start somewhere, so having double the amount needed usually does not happen instantly.

See also:
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
and
https://www.bogleheads.org/wiki/Placing ... ed_account

We are in this stage. We have about 10 months in ally savings account and about 9 months in VTI. I started the VTI road (like Livesoft mentioned, have to start somewhere) and would move the cash to VTI but we're a 1 income household with a stable job (teacher) and are looking to buy a house this year. If it weren't for that, I'd move the cash to VTI because it is almost double what we need and job is stable.

[abuss368]

Hi all,

Going to try to make this short and sweet.

I am 27, have no debt, I max out my ROTH IRA and traditional 401K every year, and I am finally at a stage where I have extra cash that I am unsure what to do with.

401K assets:
VFIAX (85 % split)
VSMAX (15% split)

ROTH IRA asset:
VLXVX (Target Date): 100%

Taxable (brokerage) account: currently $0.

I have about 12-18 months of emergency funds saved up in a HYSE, however, should I consider moving this into my taxable account and into VTSAX (for nice gains and tax efficiency) since I do not plan on touching this money anyway?

I guess I am in a weird position where I do not know how to strategize my income with my taxable brokerage account (i.e., how to long to keep money in, how much to put in, how to not over allocate in similar funds, etc.). This part of investing is very new to me as I spent years paying down debt and trying to max out my retirement accounts.

Can someone please push me in the right direction! Thanks!

Decide what you need for an emergency fund. Double it. This is what you would need with VTSAX if the market tanked (dropped 50%) and you needed the money at the same time. Are you comfortable with that? Only you can decide.

Love this idea! There is an old saying that “cash is king” and for good reason.

Tony

[nisiprius]

If you need the money for something serious in the next four years, you cannot risk keeping it in stocks.

Jim Cramer wrote that. Jim Cramer, of "Mad Money."

So, do you think you might need money for an emergency in the next four years?