Recommendations for a 2nd tier emergency fund

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jb3
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Recommendations for a 2nd tier emergency fund

Post by jb3 »

What do the wise folks on Bogleheads suggest for a second tier ER fund in taxable? I hate the thought of falling behind inflation and can stomach some additional risk beyond just cash. I would still keep at least 50% of my ER in cash in Ally.

Some suggestions I've seen:
Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)

See this thread where the concept of tiered ER fund is discussed:
viewtopic.php?f=10&t=309472

Please consider the potential of rising interest rates on these funds. Thanks!
Last edited by jb3 on Mon Jul 19, 2021 10:53 am, edited 4 times in total.
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RickBoglehead
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Re: Recommendations for a 2nd tier emergency fund

Post by RickBoglehead »

No such thing (2nd tier emergency fund). No need for such a thing. Invest your money per your AA.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
tashnewbie
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Re: Recommendations for a 2nd tier emergency fund

Post by tashnewbie »

I would just decide how much you want in your EF, and then invest the rest according to your IPS.
phinanciallyfit
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Re: Recommendations for a 2nd tier emergency fund

Post by phinanciallyfit »

If you have access to a governmental 457b, that could be an option. The more conservative portion of my AA is in my 457b, which I'll have access to if I lose my job, so it can serve as a back up emergency fund.
Onlineid3089
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Re: Recommendations for a 2nd tier emergency fund

Post by Onlineid3089 »

I keep as much in cash as I want, then VTSAX and chill with the rest in taxable. Depending on how much your allocation drifts you may want to make adjustments in your tax advantaged accounts.
Topic Author
jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

I understand this can be considered mental accounting or bucketing. But I find it helpful. I would not need to rebalance or add to these funds and they are completely separate from my other funds so I know not to touch them.

I'm not looking to argue the concept of tiered ER funds but to understand what my tiered fund options are.
IowaFarmWife
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Re: Recommendations for a 2nd tier emergency fund

Post by IowaFarmWife »

I have three tiers to my EF:
Cash in my checking account earning a whopping 1% interest
I bonds through TD https://www.bogleheads.org/wiki/I_savings_bonds
Brokerage account invested in total stock market
“The quickest way to double your money is to fold it in half and put it in your back pocket.” —Will Rogers
EnjoyIt
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Re: Recommendations for a 2nd tier emergency fund

Post by EnjoyIt »

jb3 wrote: Mon Jul 19, 2021 9:13 am I understand this can be considered mental accounting or bucketing. But I find it helpful. I would not need to rebalance or add to these funds and they are completely separate from my other funds so I know not to touch them.

I'm not looking to argue the concept of tiered ER funds but to understand what my tiered fund options are.
If you need a certain amount in an emergency fund, then it should be in cash or cash like investments such as CDs, high yield savings accounts, short term bonds/treasuries. If you need less then invest the rest as per your desired asset allocation.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
EnjoyIt
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Re: Recommendations for a 2nd tier emergency fund

Post by EnjoyIt »

There are plenty of investors here, myself included who don’t have an emergency fund. Our portfolio can be tapped at any time for needed cash. We dropped out emergency fund when our taxable brokerage account could sustain such emergencies even after a down market.

We keep 1-3 months of expenses in our checking account. Once the account gets below 1 month, we replenish.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
02nz
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Re: Recommendations for a 2nd tier emergency fund

Post by 02nz »

I like I bonds as a second-tier EF (although I wouldn't keep $100K in the first-tier EF). Currently earning 3.54%, adjusted semiannually with inflation. Note that you can only redeem after 1 year, and you lose 3 mos interest if redeeming before 5 years.
sycamore
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Re: Recommendations for a 2nd tier emergency fund

Post by sycamore »

jb3 wrote: Mon Jul 19, 2021 9:13 am I understand this can be considered mental accounting or bucketing. But I find it helpful. I would not need to rebalance or add to these funds and they are completely separate from my other funds so I know not to touch them.

I'm not looking to argue the concept of tiered ER funds but to understand what my tiered fund options are.
Some options are discussed in the Boglehead wiki Emergency fund article. Examples: CDs, high-yield savings accounts, I Bonds, short-term bond fund.

In my view, stocks (or balanced funds) aren't appropriate for an emergency fund because money truly needed in a year or two doesn't belong in stocks- there's a real risk you won't have the money when you need it.

You may also find the article on Placing cash needs in a tax-advantaged account interesting.
Doc7
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Re: Recommendations for a 2nd tier emergency fund

Post by Doc7 »

i Bonds for sure!
02nz
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Re: Recommendations for a 2nd tier emergency fund

Post by 02nz »

OP, don't forget that in a pinch Roth IRA can also be a source of emergency funds, as contributions can be withdrawn at any time/age, for any reason, without penalty. Obviously not ideal, maybe think of it as your 4th tier rather than 2nd tier, but keeping this in mind can help you become comfortable with a smaller primary EF.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
mbasherp
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Re: Recommendations for a 2nd tier emergency fund

Post by mbasherp »

If you're looking at tiers, I see it this way:

1) "High yield" savings account (we keep this to only sinking funds + $10k now)
2) Series I Savings Bonds - the best vehicle for any dedicated, long term emergency fund (tops off our 6 months of full expenses)
3) Taxable brokerage account invested according to our asset allocation (currently >2 years of expenses, all in equities)

Don't get too seduced by the "safety" of #1. It's more of a convenience that you're paying a price for... the price is lost purchasing power.
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Re: Recommendations for a 2nd tier emergency fund

Post by AHK-Hero »

After reading through a number of BH's threads like these, it's clear that emergency funds and cash holdings are very personal topics. Many conclusions are valid. I think as long as you have an upper limit to ensure you don't keep too much money on the sidelines you can do what's right for you. During the accumulation phase, anything more than a year's worth strikes me as excessive.

I plan to have a tiered emergency fund for my peace of mind, although I do agree with the notion that once your assets reach a certain threshold it becomes less and less necessary. This is my plan which I'm still working towards. Each bucket gets bigger as you progress down the list:

1.) Basic Checking
2.) High-Yield Savings (EF Tier I)
3.) VASIX (EF Tier II)

Once the buckets are full any surplus cash flow goes to indexing.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

AHK-HERO, do you worry about how VASIX will perform if interest rates rise?
pasadena
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Re: Recommendations for a 2nd tier emergency fund

Post by pasadena »

Right now I have 6 months of expenses earning 0.5% in a savings account. I keep thinking it's too much (my liquid portfolio currently has > 3 years of expenses in it, 7 months of that being in bonds, and that's without Roth IRA conversions). But I also know that in a crisis, 6 months is what lets me sleep at night. So, tiers?

I just decided to take $10k out of that money and buy i-bonds. I'll be locking that for a year, but I guess that's fine. I think a 3rd tier would be overkill.

So at the end of this month, my EF will be:

1) 3.5 months of expenses in a savings account @ 0.5%
2) 2.5 months of expenses in I-Bonds (currently @ 3.54% for the next 3 months)
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climber2020
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Re: Recommendations for a 2nd tier emergency fund

Post by climber2020 »

jb3 wrote: Mon Jul 19, 2021 8:52 am What do the wise folks on Bogleheads suggest for a second tier ER fund in taxable?
80% cash and 20% VTSAX.
RXfiles
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Re: Recommendations for a 2nd tier emergency fund

Post by RXfiles »

adjust your overall AA if you cant with stand an emergency and need an 2nd tier emergency fund. That's all your doing anyway by allocating more money to another EF.
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

OP,

I have about 3 years of expense in CASH and about 400K to 500K of stock index funds in my taxable account. My overall portfolio's AA is 60/40.

I do not see why do you need anything besides CASH and Stock index funds in your taxable account.

KlangFool
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Re: Recommendations for a 2nd tier emergency fund

Post by AHK-Hero »

jb3 wrote: Mon Jul 19, 2021 10:26 am AHK-HERO, do you worry about how VASIX will perform if interest rates rise?
I'm still very much a student on this forum, and interest rate risk is a complex topic so I won't profess to offer anything but my current opinion. I too had this concern until read some of these threads on the topic of BND which is somewhat comparable to what comprises most of VASIX. Nisprius had some enlightening posts in there and a good White Coat Investor Article was cited:

BND risky?
viewtopic.php?t=297644

Correlation between BND and raising interest rates
viewtopic.php?t=324538

Bond Investors Should Not Fear Rising Interest Rates
https://www.whitecoatinvestor.com/bond- ... est-rates/

VASIX seems right for my risk tolerance. A lot of insulation from a major downward equity market moves with a large bond portion but just enough for a bit of the growth risk premium. Hopefully, I wouldn't need the funds in several years to help smooth out the effects of rising rates. The average duration of BND, another intermediate-term fund is about 7 years which seems reasonable. If someone wanted more equity risk, it almost feels like that money should just be fully invested in the index fund of their choice.

Of course, taking any risk isn't necessary with an emergency fund but this feels right to me. If I had to use the funds at a loss I would still feel good about the decision.

*Corrected, VTBIX is different VBTLX (BND) but I think the points still stand.
Last edited by AHK-Hero on Mon Jul 19, 2021 11:50 am, edited 2 times in total.
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Wiggums
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Re: Recommendations for a 2nd tier emergency fund

Post by Wiggums »

jb3 wrote: Mon Jul 19, 2021 9:13 am I understand this can be considered mental accounting or bucketing. But I find it helpful. I would not need to rebalance or add to these funds and they are completely separate from my other funds so I know not to touch them.

I'm not looking to argue the concept of tiered ER funds but to understand what my tiered fund options are.
We no longer have an emergency fund, but we have Roth conversions and other special money needs. We use a spreadsheet to document these anticipated items, and dollar amount and the timeframe when the funds would be needed. The money is invested (fixed or equities) as appropriate to the timeframe.
pasadena
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Re: Recommendations for a 2nd tier emergency fund

Post by pasadena »

KlangFool wrote: Mon Jul 19, 2021 11:35 am OP,

I have about 3 years of expense in CASH and about 400K to 500K of stock index funds in my taxable account. My overall portfolio's AA is 60/40.

I do not see why do you need anything besides CASH and Stock index funds in your taxable account.

KlangFool
Do you keep all your cash in savings accounts or money market funds?
Last edited by pasadena on Mon Jul 19, 2021 11:50 am, edited 1 time in total.
rich126
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Re: Recommendations for a 2nd tier emergency fund

Post by rich126 »

jb3 wrote: Mon Jul 19, 2021 9:13 am I understand this can be considered mental accounting or bucketing. But I find it helpful. I would not need to rebalance or add to these funds and they are completely separate from my other funds so I know not to touch them.

I'm not looking to argue the concept of tiered ER funds but to understand what my tiered fund options are.
I do a similar thing just because it is easier for me to think of money for separate tasks.
For example:
1. Core account : my ~4% SWR in retirement
2. Bridge money to social security: Currently in a couple of MYGA annuities since I may retire in ~18 months
3. Backup/emergency funds: Money that I had left in my TSP account
4. Emergency/emergency money: stock funds (smaller amount)
5. HSA: I've only recently had access to one and I can't combine it with other money so it will sit here in index funds until needed down the road.

This will likely get streamlined (at least account #4 will go away) but since I recently got married I wanted to wait until my wife got all of her ID documents updated (ss account/card, drivers license, etc.). I was afraid if we started down the road of changing things too quickly we might get an account stuck in some weird status awaiting documents.

Yeah, buckets/different accounts are just something that I think is easier for some people to deal with.
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

pasadena wrote: Mon Jul 19, 2021 11:41 am
KlangFool wrote: Mon Jul 19, 2021 11:35 am OP,

I have about 3 years of expense in CASH and about 400K to 500K of stock index funds in my taxable account. My overall portfolio's AA is 60/40.

I do not see why do you need anything besides CASH and Stock index funds in your taxable account.

KlangFool
Do you keep all your cash in savings accounts or money market funds?
Checking A/C and Money Market Fund.

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Re: Recommendations for a 2nd tier emergency fund

Post by MathWizard »

jb3 wrote: Mon Jul 19, 2021 8:52 am What do the wise folks on Bogleheads suggest for a second tier ER fund in taxable? I hate the thought of falling behind inflation and can stomach some additional risk beyond just cash. I would still keep at least 50% of my ER in cash in Ally.

Some suggestions I've seen:
Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)

See this thread where the concept of tiered ER fund is discussed:
viewtopic.php?f=10&t=309472

Please consider the potential of rising interest rates on these funds. Thanks!
Are you maxing your IRAs?

If you are not, Roth IRA contributions can be a 2nd tier EF.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

Yes, I am maxing Roth iras. But it's possible I may need those to help with kids college costs, TBD.

Any feedback on these in taxable, from both a tax perspective and if interest rates should rise?

Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)
KlangFool
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

jb3 wrote: Mon Jul 19, 2021 1:24 pm Yes, I am maxing Roth iras. But it's possible I may need those to help with kids college costs, TBD.

Any feedback on these in taxable, from both a tax perspective and if interest rates should rise?

Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)
jb3,

I still do not see a reason why CASH and 100% stock index funds would not work. And, that is the best combination in term of tax and if interest rates should rise.

<<Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)>>

They are all bad in terms of tax efficiency.

What is the size of your taxable account?

KlangFool
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Topic Author
jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

100k EF cash in ally now. 25% to 50% of that will go in taxable acct.
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

jb3 wrote: Mon Jul 19, 2021 1:45 pm 100k EF cash in ally now. 25% to 50% of that will go in taxable acct.
jb3,

CASH + VTSAX (Total Stock Market Index Fund) + VTIAX (Total International Index Fund) should work fine. What is wrong with that?

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sycamore
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Re: Recommendations for a 2nd tier emergency fund

Post by sycamore »

KlangFool wrote: Mon Jul 19, 2021 1:34 pm ...
<<Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)>>

They are all bad in terms of tax efficiency.
...
They aren't ideal or optimal for sure. I would say whether they're "bad" for the OP depends on how much OP is willing to pay for their benefits of simplicity and automatic rebalancing. OP, suggest you calculate
1) how much extra you'll pay in expense ratio for using the LS fund and
2) how much extra you'll pay in taxes by using an LS fund (the VASIX distributes a small amount of qualified stock divs, mostly unqualified bond distributions taxed as income)

I found it helps to know the dollar amount involved so I can decide if it's worth the cost. Which is an annual cost, to be clear.
esteen
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Re: Recommendations for a 2nd tier emergency fund

Post by esteen »

I think it's hard to answer because, as you mentioned, it is a form of mental accounting and not a widely-used one at that. I would want my true emergency fund, i.e. for emergencies, to be cash or cash equivalent with principal protection. Anything beyond that I could consider as "usable for unexpected cases funds" and who cares if they go up and down a bit. For those I would invest in stocks, at this point in my accumulation phase.
Topic Author
jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

All my cash in ally is being taxed as income now, correct?

If so, any of those funds will improve on that...
KlangFool
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

jb3 wrote: Mon Jul 19, 2021 2:24 pm All my cash in ally is being taxed as income now, correct?

If so, any of those funds will improve on that...
jb3,

1) All (100%) interest income in your CASH are taxed as ordinary income. You are exchanging 100% to 65% or 80% depending on fund. With VTSAX and VTIAX, it is near 0%. What is your marginal tax rate?

2) That may not be a problem now. But, as the fund gets bigger, you would pay more taxes.

3) By the way, my taxable account used to 50% VSMGX (60/40) and 50% Wellington Fund (65/35). But, then, it became 400K to 500K. The problem became so big that I have to change into 100% stock index funds.

KlangFool
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

I am in the 12% tax rate FYI.
NuBogleHead
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Re: Recommendations for a 2nd tier emergency fund

Post by NuBogleHead »

EnjoyIt wrote: Mon Jul 19, 2021 9:19 am There are plenty of investors here, myself included who don’t have an emergency fund. Our portfolio can be tapped at any time for needed cash. We dropped out emergency fund when our taxable brokerage account could sustain such emergencies even after a down market.

We keep 1-3 months of expenses in our checking account. Once the account gets below 1 month, we replenish.
What's different from having 3 months spread across your checking/savings account and having an emergency fund?
Onlineid3089
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Re: Recommendations for a 2nd tier emergency fund

Post by Onlineid3089 »

jb3 wrote: Mon Jul 19, 2021 2:45 pm I am in the 12% tax rate FYI.
Decide how much you're comfortable having in stocks. Put that in VTSAX and keep the rest in cash. If you're in the 12% bracket you'd be at 0% capital gains. Use your 0% capital gains tax rate to harvest gains while you can, pairing VTSAX with VFIAX or something similar.
tomsense76
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Re: Recommendations for a 2nd tier emergency fund

Post by tomsense76 »

IowaFarmWife wrote: Mon Jul 19, 2021 9:14 am I have three tiers to my EF:
Cash in my checking account earning a whopping 1% interest
I bonds through TD https://www.bogleheads.org/wiki/I_savings_bonds
Brokerage account invested in total stock market
Where are you finding 1%?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
calwatch
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Re: Recommendations for a 2nd tier emergency fund

Post by calwatch »

T-Mobile Money is paying 1% in an FDIC insured account.
My "emergency funds" are in T-Mobile Money, Porte savings up to the $15k cap for 3% interest, and a few remaining 5% NetSpend accounts (max $1,000, and paying 0.5% after that point). Then I Bonds if I want to buy a new car or make a down payment on a bigger house.
IowaFarmWife
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Re: Recommendations for a 2nd tier emergency fund

Post by IowaFarmWife »

tomsense76 wrote: Mon Jul 19, 2021 2:58 pm
IowaFarmWife wrote: Mon Jul 19, 2021 9:14 am I have three tiers to my EF:
Cash in my checking account earning a whopping 1% interest
I bonds through TD https://www.bogleheads.org/wiki/I_savings_bonds
Brokerage account invested in total stock market
Where are you finding 1%?
A regional bank here in Iowa and Nebraska, but has excellent online services, too.
https://bankfirstonline.com/welcome/about-us/
“The quickest way to double your money is to fold it in half and put it in your back pocket.” —Will Rogers
EnjoyIt
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Re: Recommendations for a 2nd tier emergency fund

Post by EnjoyIt »

NuBogleHead wrote: Mon Jul 19, 2021 2:47 pm
EnjoyIt wrote: Mon Jul 19, 2021 9:19 am There are plenty of investors here, myself included who don’t have an emergency fund. Our portfolio can be tapped at any time for needed cash. We dropped out emergency fund when our taxable brokerage account could sustain such emergencies even after a down market.

We keep 1-3 months of expenses in our checking account. Once the account gets below 1 month, we replenish.
What's different from having 3 months spread across your checking/savings account and having an emergency fund?
The difference is that I deplete that cash and replenish quarterly. It isn’t a fund for emergencies. It is a fund for spending. I basically pay myself quarterly for simplicity.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
etfan
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Re: Recommendations for a 2nd tier emergency fund

Post by etfan »

The objections to using "tax inefficient" funds (such as VASIX Life Strategy) as an EF need to take into consideration that most people use a Savings account as an EF, which is taxable. I'd rather generate more than 0.5% in interest on my EF and I'm OK paying taxes on that.
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Beensabu
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Re: Recommendations for a 2nd tier emergency fund

Post by Beensabu »

I use VSCGX in my Roth for the stated purpose. For me, "2nd tier EF" is in case cash is depleted and not replenished by the time I need it for a major expense.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

I'm not understanding all of the negative responses.

MY EF is a 100k in cash in an Ally savings account. It's probably more than I need. My wife has a very secure job.

MY EF also acts as a misc. fund for large purchases, eg a car or appliance, which I replenish from cash flow.

I'm making almost nothing from the 100k. Given that it's probably slightly over funded and it is extremely unlikely I would ever need all 100k at one time and urgently, it seems to make sense to put some of that 100k into something conservative but that can possibly return more than .05% at Ally.

I am in my late 40s in 12% tax bracket. I'm thinking of putting, say, 25k of that 100k cash into VASIX. While not totally tax optimized it feels reasonable to me.

I have nothing in taxable now except my Ally savings. All of my retirement accounts have Target Date funds and I would prefer to keep my portfolio simple.

The EF fund would be walled off from the rest of my portfolio and would rebalance itself. Over time if I spend some of my Ally cash for a car, etc., I could replenish those funds from cash flow. Leaving the 25k portion to grow on its own in VASIX.
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Re: Recommendations for a 2nd tier emergency fund

Post by Doctor Rhythm »

jb3 wrote: Tue Jul 20, 2021 12:29 pm I'm not understanding all of the negative responses.

MY EF is a 100k in cash in an Ally savings account. It's probably more than I need. My wife has a very secure job.

MY EF also acts as a misc. fund for large purchases, eg a car or appliance, which I replenish from cash flow.

I'm making almost nothing from the 100k. Given that it's probably slightly over funded and it is extremely unlikely I would ever need all 100k at one time and urgently, it seems to make sense to put some of that 100k into something conservative but that can possibly return more than .05% at Ally.

I am in my late 40s in 12% tax bracket. I'm thinking of putting, say, 25k of that 100k cash into VASIX. While not totally tax optimized it feels reasonable to me.

I have nothing in taxable now except my Ally savings. All of my retirement accounts have Target Date funds and I would prefer to keep my portfolio simple.

The EF fund would be walled off from the rest of my portfolio and would rebalance itself. Over time if I spend some of my Ally cash for a car, etc., I could replenish those funds from cash flow. Leaving the 25k portion to grow on its own in VASIX.
Like you, I have more cash (or cash equivalents) than realistically needed for emergencies, so I don’t use the term “emergency fund” but rather “cash buffer” or “cash reserve”. I use it to make the rare major purchase, and I draw from it regularly to invest in taxable accounts. However, it still represents a very small % of my portfolio, so I don’t worry about its opportunity cost and don’t feel the need to take any risk with it (yes, I consider it part of my portfolio, though that’s another topic).

I think the skepticism you’re encountering is the perception that you’re creating unnecessary complexity to satisfy mental accounting.
Topic Author
jb3
Posts: 247
Joined: Sun Jan 16, 2011 11:27 pm

Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

My EF / Buffer fund is 15% of my total portfolio. That's a lot to have with a negative return.

And as a I mentioned all of my retirement space use TR funds for simplicity. I'd rather not reconfigure all of that to be totally tax optimized in my taxable acct. Especially since I'm only in 12% bracket.

That is my thinking behind this...
Last edited by jb3 on Tue Jul 20, 2021 1:56 pm, edited 1 time in total.
Doctor Rhythm
Posts: 994
Joined: Mon Jan 22, 2018 3:55 am

Re: Recommendations for a 2nd tier emergency fund

Post by Doctor Rhythm »

jb3 wrote: Tue Jul 20, 2021 12:58 pm My EF / Buffer fund is 15% of my total portfolio. That's a lot to have with a negative return.

And as a I mentioned all of my retirement space use TR funds for simplicity. I'd rather not reconfigure all of that to be totally tax optimized in my taxable acct. Especially since I'm only in 12% bracket.

That is my thinking...
15% of your portfolio is a lot of cash drag, agree!

One way to approach this (may not work for you) is to ask what your minimum cash buffer should be in dollars. How much of that $100K do you need to have in cash to sleep well? Do that - and then anything in excess of that should be invested in stocks. If you’re going to get angsty if you drop below $100K, then you shouldn’t be looking into anything besides cash.
sycamore
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Joined: Tue May 08, 2018 12:06 pm

Re: Recommendations for a 2nd tier emergency fund

Post by sycamore »

(I see Doctor Rhythm answered at the same time I was typing in my reply...)
jb3 wrote: Tue Jul 20, 2021 12:58 pm My EF / Buffer fund is 15% of my total portfolio. That's a lot to have with a negative return.
Side note: For some Bogleheads, the negative return on the EF is just the "premium" to pay for the EF "insurance". If you don't like the price of insurance, you can pay less by raising the deductible, i.e., be willing to pay more when the emergency arrives. Maybe thinking of it as a trade off will help you decide how much EF to keep.

Back to looking for recommendations on the 2nd tier fund...

To help decide which fund(s) to pick, first decide how much of your EF you could afford to lose. Make a rough SWAG at your minimal expenses to be covered, and how long you'd need to cover them in the event of an emergency (i.e., no job income to pay for it). If your guess is $51k and your current EF is $60k, that means you're willing to lose up to (60-51)/60 = 15% by investing the EF in riskier assets.

Next consider how to split your EF allocation:
- you already said you'd keep 50% of it in your Ally.
- to limit your loss to 15%, you can invest up to 30% in stocks, assuming a stock market drop of 50% right before the emergency
- so that's 30% in stocks, 20% in other stable-ish holdings, 50% in Ally,

Finally pick the specific funds to reach your 30/20/50 stocks/bonds/cash allocation:
- 50% in ally

- Buy an all-in-one fund like VSCGX with a 60/40 allocation, which at 50% of total is the 30% in stocks and 20% bonds per above
OR
- Buy separate funds VTSAX at 30% and VBTLX at 20%. No international stocks or bonds, but you need to rebalance it

This is essentially the same thing as overfunding your EF and investing the difference in stocks.
260chrisb
Posts: 838
Joined: Wed Apr 28, 2010 7:26 pm

Re: Recommendations for a 2nd tier emergency fund

Post by 260chrisb »

RickBoglehead wrote: Mon Jul 19, 2021 8:53 am No such thing (2nd tier emergency fund). No need for such a thing. Invest your money per your AA.
Yes, this! I consider some or most investments in my taxable investment portfolio as an option in case of an emergency that my emergency fund can't cover. I've never had an emergency yet that couldn't be covered.
tashnewbie
Posts: 1697
Joined: Thu Apr 23, 2020 12:44 pm

Re: Recommendations for a 2nd tier emergency fund

Post by tashnewbie »

You can get better, risk-free return on your EF/cash reserves than 0.03% at Ally. Confirm that Ally is paying only 0.03%. I took a quick peek at their website, and it appears they're paying 0.1% or 0.3% on checking accounts, depending on balance, and 0.5% on savings accounts.

Here are some options:

--Rewards checking accounts (one of my local credit unions offers 5% on $10k if I have certain monthly direct deposits)
--Online "high" yield savings accounts (Ally has one, Capital One, Marcus, etc)
--Series I Savings bonds (paying 3.54% right now; rate adjusted biannually with inflation; can't be sold for first year; lose 3 months' interest if sold within first 5 years)
--No-penalty CDs (Ally has some); I think these are paying between 0.5% and 1% nowadays
--Online/fintech savings accounts. See a recent listing here: viewtopic.php?p=6127776#p6127776
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