Figuring out where to park "backup" emergency fund

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Topic Author
SlurpleBrain
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Joined: Sat Jun 08, 2024 9:43 am

Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

Hi folks, longtime listener, first time caller.

My wife and I are 30 years old and we are working to better organize our budgeting and daily finances. We both work full time and have no kids. Together we make roughly $120k/year. Retirement accounts are adequately funded.

I have something of an odd question. So at my wife's insistence, we have two emergency funds, each containing 3 months expenses, about $15k each. According to her, one is to be actually used for unexpected large household expenses or in the case of one of us losing a job. The second is to only ever be tapped if the first emergency fund is depleted. In essence she wants us to pretend the 2nd one doesn't even exist. She does not want us to combine them. I guess you can think of it as 2 "tiers".

We have had to use our 1st emergency fund a couple times since we bought our house due to some big expenses that have come up with the house.

So aside from retirement accounts we have 3 bank accounts:

Checking: contains roughly $8-$10k+ at any given time. This account is with our credit union and has a fairly generous 3% interest rate up to balances of $25k as long as certain conditions are met (certain amount of direct deposits and purchases per month)

Emergency fund 1: $15k in "high yield savings" 1.3% interest

Emergency fund 2 : $15k in "high yield savings" 1.3% interest

I want to keep more in the checking account but my wife does not want us to transfer any funds into it from the savings accounts. It helps her to see the savings accounts with full balances. Also, we need the first tier emergency fund readily available because we do have expenses that come up relatively often.

So, I'm thinking it's not the best idea for the 2nd tier emergency fund to just sit only earning 1.3% interest when it may never be touched.

I am thinking of moving it to either Fidelity or Schwab and place it into a Money Market Fund or a short term Treasury fund, or whatever is relatively low risk and liquid. I'm not very well versed in bonds and such so the main thing is that we want to preserve principal and secondly earn more interest than a typical bank savings account. I also want it to be as "hands off" as possible. Not interested in a ladder.

If I do this, I have more questions and possible opportunities that have come up.

1. I've researched both Fidelity and Schwab and they sound to be relatively equal. One question I have though that I can't find an answer to: what happens to earned interest in Schwab accounts? I heard somewhere they automatically go into a Schwab checking account and you have to manually reinvest it. If true that sounds very inconvenient for me. Is there anyway to set up a Schwab MMF or Treasury mutual fund that automatically reinvests? If not I think I will go with Fidelity.

2. Obviously this 2nd emergency fund will eventually start accumulating enough that it holds much more than 3 months of expenses. I am thinking it doesn't make sense for it just to sit at low interest so shouldn't I take the excess and invest that into a total stock market index? I think so and I even got my wife to agree as long as it continues to hold 3 months of expenses in a low risk fund. Does this make sense or should I be putting this "excess" somewhere else?

Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!

Sorry for the long post. I'm sure this sounds very stupid to some of you but this is the situation I'm in.
CoAndy
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Re: Figuring out where to park "backup" emergency fund

Post by CoAndy »

We keep a few thousand in savings and the rest in laddered CD's, earning 5%+, though just renewed one yesterday for 6 months at 4.75% (rates are coming down a bit). This way we earn a bit of interest on our bigger chunk of money. If for some reason we have to tap a CD, we just forfeit a few months of interest. This money in CD's also is our future car fund, vacation fund, emergency fund, possible new HVAC, etc.
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Rocinante Rider
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Re: Figuring out where to park "backup" emergency fund

Post by Rocinante Rider »

A "high yield savings" at 1.3% interest sounds like a low yield savings account to me. Because of their ultra low expense ratios, Vanguard has the highest yielding money market funds that I know of. VUSXX 7 day yield is currently 5.27%. If for whatever reason you want to have more than one account to hold your emergency funds, you can do much better than 1.3% current interest.
BirdFood
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Re: Figuring out where to park "backup" emergency fund

Post by BirdFood »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Emergency fund 1: $15k in "high yield savings" 1.3% interest

Emergency fund 2 : $15k in "high yield savings" 1.3% interest
Is your wife set on precisely which bank the savings account are at? Zero chance she would tolerate a genuine high yield savings account?
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bd7
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Re: Figuring out where to park "backup" emergency fund

Post by bd7 »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!
Many people resort to psychological tricks to manage themselves and their money, especially when they've been through a financial trauma of some sort. In this case the second EF is sort of like fire extinguisher--"break glass in case of emergency". Nothing wrong with that if it makes her more comfortable.

I'd recommend Fidelity for what you want to do. You can open two brokerage accounts if you like (they don't seem to mind) and select SPAXX as your core position. Deposit $15k into each and you'll immediately start getting about 5% interest from SPAXX. To implement your investment plan, you just buy $15k of a different MMF--SPRXX or alternatively, FDLXX if you have significant state income tax. Once you do that, you go into account features/dividends and capital gains and make sure the setting for SPRXX or FDLXX is set to "deposit to core account". The position will stay at $15k and every month the interest will be deposited back into your core position where you can then purchase an index fund or whatever.
Last edited by bd7 on Sat Jun 08, 2024 11:21 am, edited 1 time in total.
adave
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Re: Figuring out where to park "backup" emergency fund

Post by adave »

I’d probably put it in bonds. While money can be lost in bond funds ala 2022 it is a fairly rare event.
Topic Author
SlurpleBrain
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Re: Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

Thank you. Exactly it is pretty much just a "psychological trick" for her and she even admits it. However I'm just glad I'm married to someone who is fiscally conservative rather than the alternative!

I appreciate this advice. Fidelity SPAXX fund seems like a decent way to go. Thank you
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ApeAttack
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Re: Figuring out where to park "backup" emergency fund

Post by ApeAttack »

bd7 wrote: Sat Jun 08, 2024 11:09 am
SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!
Many people resort to psychological tricks to manage themselves and their money, especially when they've been through a financial trauma of some sort. In this case the second EF is sort of like fire extinguisher "break glass in case of emergency". Nothing wrong with that if it makes her more comfortable.

I'd recommend Fidelity for what you want to do. You can open two brokerage accounts if you like (they don't seem to mind) and select SPAXX as your core position. Deposit $15k into each and you'll immediately start getting about 5% interest from SPAXX. To implement your investment plan, you just buy $15k of a different MMF--SPRXX or alternatively, FDLXX if you have significant state income tax. Once you do that, you go into account features/dividends and capital gains and make sure the setting for SPRXX or FDLXX is set to "deposit to core account". The position will stay at $15k and every month the interest will be deposited back into your core position where you can then purchase an index fund or whatever.
This is a good solution. My emergency fund currently is in a Fidelity brokerage account and invested in SPAXX. It was very easy to set up.

I also have a savings account at Ally in case they offer better interest rates than SPAXX in the future. Ally is currently at 4.2% and SPAXX is currently around 5%, so the emergency fund is at Fidelity for now.
May all your index funds gain +0.5% today.
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cchrissyy
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Re: Figuring out where to park "backup" emergency fund

Post by cchrissyy »

you're misinformed about schwab MM not being able to automatically reinvest. mine sure do, and i have a couple different MMs in various account types like brokerage and IRAs

i would move to schwab - or fidelity - and use a MM fund. i would probably pick 2 funds in one account for the artifical distinction she wants ot make but ok, you could also do the same fund in two accounts.

i disagree that given enough time at 5% interest your untouched fund will grow too big for 3 months expenses. the reason we are getting that interest rate is related to current inflation. so i think of it as youa re keeping up with the gradual rise of your cost of living.
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ApeAttack
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Re: Figuring out where to park "backup" emergency fund

Post by ApeAttack »

cchrissyy wrote: Sat Jun 08, 2024 11:18 am i disagree that given enough time at 5% interest your untouched fund will grow too big for 3 months expenses. the reason we are getting that interest rate is related to current inflation. so i think of it as youa re keeping up with the gradual rise of your cost of living.
It's possible that most of OP's expenses are related to items that are fixed or rise very slowly over time (e.g., mortgage, property tax if they live in CA). But yeah, in general, people's expenses rise over time and an emergency fund needs to keep up.
May all your index funds gain +0.5% today.
exodusNH
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Re: Figuring out where to park "backup" emergency fund

Post by exodusNH »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Hi folks, longtime listener, first time caller.

My wife and I are 30 years old and we are working to better organize our budgeting and daily finances. We both work full time and have no kids. Together we make roughly $120k/year. Retirement accounts are adequately funded.

I have something of an odd question. So at my wife's insistence, we have two emergency funds, each containing 3 months expenses, about $15k each. According to her, one is to be actually used for unexpected large household expenses or in the case of one of us losing a job. The second is to only ever be tapped if the first emergency fund is depleted. In essence she wants us to pretend the 2nd one doesn't even exist. She does not want us to combine them. I guess you can think of it as 2 "tiers".

We have had to use our 1st emergency fund a couple times since we bought our house due to some big expenses that have come up with the house.

So aside from retirement accounts we have 3 bank accounts:

Checking: contains roughly $8-$10k+ at any given time. This account is with our credit union and has a fairly generous 3% interest rate up to balances of $25k as long as certain conditions are met (certain amount of direct deposits and purchases per month)

Emergency fund 1: $15k in "high yield savings" 1.3% interest

Emergency fund 2 : $15k in "high yield savings" 1.3% interest

I want to keep more in the checking account but my wife does not want us to transfer any funds into it from the savings accounts. It helps her to see the savings accounts with full balances. Also, we need the first tier emergency fund readily available because we do have expenses that come up relatively often.

So, I'm thinking it's not the best idea for the 2nd tier emergency fund to just sit only earning 1.3% interest when it may never be touched.

I am thinking of moving it to either Fidelity or Schwab and place it into a Money Market Fund or a short term Treasury fund, or whatever is relatively low risk and liquid. I'm not very well versed in bonds and such so the main thing is that we want to preserve principal and secondly earn more interest than a typical bank savings account. I also want it to be as "hands off" as possible. Not interested in a ladder.

If I do this, I have more questions and possible opportunities that have come up.

1. I've researched both Fidelity and Schwab and they sound to be relatively equal. One question I have though that I can't find an answer to: what happens to earned interest in Schwab accounts? I heard somewhere they automatically go into a Schwab checking account and you have to manually reinvest it. If true that sounds very inconvenient for me. Is there anyway to set up a Schwab MMF or Treasury mutual fund that automatically reinvests? If not I think I will go with Fidelity.

2. Obviously this 2nd emergency fund will eventually start accumulating enough that it holds much more than 3 months of expenses. I am thinking it doesn't make sense for it just to sit at low interest so shouldn't I take the excess and invest that into a total stock market index? I think so and I even got my wife to agree as long as it continues to hold 3 months of expenses in a low risk fund. Does this make sense or should I be putting this "excess" somewhere else?

Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!

Sorry for the long post. I'm sure this sounds very stupid to some of you but this is the situation I'm in.
You can get 5.3% FDIC insured from Vio Bank.
fulltilt
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Re: Figuring out where to park "backup" emergency fund

Post by fulltilt »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am ...

I have something of an odd question. So at my wife's insistence, we have two emergency funds, each containing 3 months expenses, about $15k each. According to her, one is to be actually used for unexpected large household expenses or in the case of one of us losing a job. The second is to only ever be tapped if the first emergency fund is depleted. In essence she wants us to pretend the 2nd one doesn't even exist. She does not want us to combine them. I guess you can think of it as 2 "tiers".

...

Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!

Sorry for the long post. I'm sure this sounds very stupid to some of you but this is the situation I'm in.
Not stupid at all.

For the second emergency fund, have you looked at ibonds? Tax on interest is deferred until you cash them in so you'll likely pay less taxes on the interest if you cash them after a job loss.
Walk a single path, becoming neither cocky with victory nor broken with defeat, without forgetting caution when all is quiet or becoming frightened when danger threatens. -- Jigoro Kano
am
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Re: Figuring out where to park "backup" emergency fund

Post by am »

Whats a step up from mm risk?
Topic Author
SlurpleBrain
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Re: Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

ApeAttack wrote: Sat Jun 08, 2024 11:23 am
cchrissyy wrote: Sat Jun 08, 2024 11:18 am i disagree that given enough time at 5% interest your untouched fund will grow too big for 3 months expenses. the reason we are getting that interest rate is related to current inflation. so i think of it as youa re keeping up with the gradual rise of your cost of living.
It's possible that most of OP's expenses are related to items that are fixed or rise very slowly over time (e.g., mortgage, property tax if they live in CA). But yeah, in general, people's expenses rise over time and an emergency fund needs to keep up.
Expenses are pretty fixed but yeah I guess I'm just a wishful thinker :D
snowday2022
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Re: Figuring out where to park "backup" emergency fund

Post by snowday2022 »

If you have a Roth IRA, the contributions can be withdrawn tax and penalty free. This is a great backup emergency fund in case of catastrophe.
ladycat
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Re: Figuring out where to park "backup" emergency fund

Post by ladycat »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Hi folks, longtime listener, first time caller.
...
..
We have had to use our 1st emergency fund a couple times since we bought our house due to some big expenses that have come up with the house.

So aside from retirement accounts we have 3 bank accounts:

Checking: contains roughly $8-$10k+ at any given time. This account is with our credit union and has a fairly generous 3% interest rate up to balances of $25k as long as certain conditions are met (certain amount of direct deposits and purchases per month)

Emergency fund 1: $15k in "high yield savings" 1.3% interest

Emergency fund 2 : $15k in "high yield savings" 1.3% interest

I want to keep more in the checking account but my wife does not want us to transfer any funds into it from the savings accounts. It helps her to see the savings accounts with full balances. Also, we need the first tier emergency fund readily available because we do have expenses that come up relatively often.

So, I'm thinking it's not the best idea for the 2nd tier emergency fund to just sit only earning 1.3% interest when it may never be touched.

I am thinking of moving it to either Fidelity or Schwab and place it into a Money Market Fund or a short term Treasury fund, or whatever is relatively low risk and liquid. ...
Sounds to me like you have
1. a checking account you use for regular expenses
2. an "emergency fund #1" that isn't a true emergency fund. It's a fund that you use regularly for lumpy expenses (bolded above)
3. a true emergency fund

You might consider adjusting your budgeting mindset to match your actual behavior:
1. checking for regular spending - both mandatory and discretionary items (housing, insurance, food, utilities, personal care)
2. A true savings account that pays higher interest (closer to 4 or 5%) - for larger expenses like home repair, new refrigerator .. things that don't occur regularly, but you know will happen.
3. A true emergency fund - job loss, unexpected major expense

I'd go with Fidelity for your true emergency fund. I have both Schwab and Fidelity - neither has a checking account, so I'm not sure about earned interest being deposited into checking. But the cash management in Fidelity is easy. Choose a money market for your settlement fund and earned interest is deposited into it. You can also invest in brokered CDs or Treasury bills from your Fido settlement MM fund.
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dogagility
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Re: Figuring out where to park "backup" emergency fund

Post by dogagility »

For the second emergency fund, have you looked at ibonds?
Agree with using I Bonds for an emergency fund. Inflation-protected balance. No need to worry about fluctuation of the value. Mind the initial one year selling period.
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TravellingTechOnFire
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Re: Figuring out where to park "backup" emergency fund

Post by TravellingTechOnFire »

A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
ladders11
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Re: Figuring out where to park "backup" emergency fund

Post by ladders11 »

.....
Last edited by ladders11 on Sun Jun 09, 2024 10:48 am, edited 2 times in total.
ScubaHogg
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Re: Figuring out where to park "backup" emergency fund

Post by ScubaHogg »

It might not be optimized, but I keep our EF, and only our EF, in ibonds. It’s not an account I ever have to interact with otherwise and I have zero worries about it not keeping up with inflation.

A fire and forget sort of EF solution.
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Wiggums
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Re: Figuring out where to park "backup" emergency fund

Post by Wiggums »

I’d put the money in whatever gets the highest interest rate. The last treasury bill I purchased last week was 5.4% and is very liquid.

My DW likes to track some money, but we just out the amount and where it’s invested. That way we can combine with other money.
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Dandy
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Re: Figuring out where to park "backup" emergency fund

Post by Dandy »

One bank to consider is Discover Bank. Savings currently 4.25% Money Market 4%. I would advise always having a checking or money market at any bank so that savings can be transferred into it and a check written quickly if needed.
Iorek
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Re: Figuring out where to park "backup" emergency fund

Post by Iorek »

I would put the 1st tier e fund in a HYSA like Ally (or Vanguards money market fund). I would put the second tier efund in ibonds.
balbrec2
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Re: Figuring out where to park "backup" emergency fund

Post by balbrec2 »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Hi folks, longtime listener, first time caller.

My wife and I are 30 years old and we are working to better organize our budgeting and daily finances. We both work full time and have no kids. Together we make roughly $120k/year. Retirement accounts are adequately funded.

I have something of an odd question. So at my wife's insistence, we have two emergency funds, each containing 3 months expenses, about $15k each. According to her, one is to be actually used for unexpected large household expenses or in the case of one of us losing a job. The second is to only ever be tapped if the first emergency fund is depleted. In essence she wants us to pretend the 2nd one doesn't even exist. She does not want us to combine them. I guess you can think of it as 2 "tiers".

We have had to use our 1st emergency fund a couple times since we bought our house due to some big expenses that have come up with the house.

So aside from retirement accounts we have 3 bank accounts:

Checking: contains roughly $8-$10k+ at any given time. This account is with our credit union and has a fairly generous 3% interest rate up to balances of $25k as long as certain conditions are met (certain amount of direct deposits and purchases per month)

Emergency fund 1: $15k in "high yield savings" 1.3% interest

Emergency fund 2 : $15k in "high yield savings" 1.3% interest

I want to keep more in the checking account but my wife does not want us to transfer any funds into it from the savings accounts. It helps her to see the savings accounts with full balances. Also, we need the first tier emergency fund readily available because we do have expenses that come up relatively often.

So, I'm thinking it's not the best idea for the 2nd tier emergency fund to just sit only earning 1.3% interest when it may never be touched.

I am thinking of moving it to either Fidelity or Schwab and place it into a Money Market Fund or a short term Treasury fund, or whatever is relatively low risk and liquid. I'm not very well versed in bonds and such so the main thing is that we want to preserve principal and secondly earn more interest than a typical bank savings account. I also want it to be as "hands off" as possible. Not interested in a ladder.

If I do this, I have more questions and possible opportunities that have come up.

1. I've researched both Fidelity and Schwab and they sound to be relatively equal. One question I have though that I can't find an answer to: what happens to earned interest in Schwab accounts? I heard somewhere they automatically go into a Schwab checking account and you have to manually reinvest it. If true that sounds very inconvenient for me. Is there anyway to set up a Schwab MMF or Treasury mutual fund that automatically reinvests? If not I think I will go with Fidelity.

2. Obviously this 2nd emergency fund will eventually start accumulating enough that it holds much more than 3 months of expenses. I am thinking it doesn't make sense for it just to sit at low interest so shouldn't I take the excess and invest that into a total stock market index? I think so and I even got my wife to agree as long as it continues to hold 3 months of expenses in a low risk fund. Does this make sense or should I be putting this "excess" somewhere else?

Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!

Sorry for the long post. I'm sure this sounds very stupid to some of you but this is the situation I'm in.
money is fungible, she needs to know that. you don't need two accounts.
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SlurpleBrain
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Re: Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

TravellingTechOnFire wrote: Sat Jun 08, 2024 2:29 pm A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
Ok thanks that sounds like a good option.

Do I have to buy I Bonds direct from the government and rebuy manually as they pay out or is there some sort of I Bond fund or automated thing I can use? I like to be as hands off as possible, especially with savings.
ScubaHogg
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Re: Figuring out where to park "backup" emergency fund

Post by ScubaHogg »

SlurpleBrain wrote: Sat Jun 08, 2024 4:18 pm
TravellingTechOnFire wrote: Sat Jun 08, 2024 2:29 pm A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
Ok thanks that sounds like a good option.

Do I have to buy I Bonds direct from the government and rebuy manually as they pay out or is there some sort of I Bond fund or automated thing I can use? I like to be as hands off as possible, especially with savings.
You’ve got to create an account with treasury direct. In your situation likely two (one for your wife, one for you) because there are annual purchase limits

But then once you’ve got the account and get your ef in there, you don’t have to do anything for decades

https://www.bogleheads.org/wiki/I_savings_bonds
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ApeAttack
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Re: Figuring out where to park "backup" emergency fund

Post by ApeAttack »

SlurpleBrain wrote: Sat Jun 08, 2024 4:18 pm
TravellingTechOnFire wrote: Sat Jun 08, 2024 2:29 pm A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
Ok thanks that sounds like a good option.

Do I have to buy I Bonds direct from the government and rebuy manually as they pay out or is there some sort of I Bond fund or automated thing I can use? I like to be as hands off as possible, especially with savings.
You have to buy and hold them in the Treasury Direct website. The site is old and clunky, but it works.

I-Bonds are an interesting product and I used to have I-Bonds as part of my EF, but eventually liquidated them to simplify my finances (one less account to keep track of). I also didn't like the 1 year lock-up period after purchasing I-Bonds since EFs should be immediately available if needed.
May all your index funds gain +0.5% today.
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Re: Figuring out where to park "backup" emergency fund

Post by BirdFood »

SlurpleBrain wrote: Sat Jun 08, 2024 4:18 pm
TravellingTechOnFire wrote: Sat Jun 08, 2024 2:29 pm A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
Ok thanks that sounds like a good option.

Do I have to buy I Bonds direct from the government and rebuy manually as they pay out or is there some sort of I Bond fund or automated thing I can use? I like to be as hands off as possible, especially with savings.
In your position, i would take $15K from somewhere other than the emergency funds, use it to buy iBonds (there's a limit of $10K/person/year, so ten for you and five for your wife, or vice versa) and let them age for a year, because they're not liquid at all for the first year. After that, you can drain the second emergency fund, and the iBonds will fill its role. They will earn their fixed coupon rate plus inflation for thirty years, so you can just let them sit there.
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Re: Figuring out where to park "backup" emergency fund

Post by Hacksawdave »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am I'm sure this sounds very stupid to some of you but this is the situation I'm in.
Splitting an emergency fund between banks or other financial entities is good practice, and I do this with two banks and one credit union for redundancy/security should one institution have an outage or service interruption. Your other ‘sorta emergency’ fund that has gone to house items (maintenance/repairs) should be accounted for in a regular budget as a budget item. That could be established as an even separate account based upon frequency of withdrawals.

You should have immediate liquidity between two insured institutions for the true ‘must spit out cash now’ kind of emergencies. If your employer allows for multiple direct deposits, this makes it easy. Simply decide on a small amount to deposit from each check every pay period. When I was working, I had three direct deposits. One deposit for $300 to the secondary bank, then $75 to the credit union, and the remainder to the primary bank. It does not get any easier than that.

For the lumpier expenses, I would invest in other higher yielding instruments that others have suggested, and then either park that into a settlement fund earning a good rate or pick a treasury MMF as these would not be tapped too often. If the low paying bank funds outgrow the must have cash, then direct the overflow to the settlement fund or treasury money market.

Having the bulk of funds that can be transferred to the primary bank within a couple of days in higher yielding assets makes sense but keep enough immediately liquid cash in the bank. I would avoid instruments that require penalties, fees, lengthy transactions, paperwork, or process delays to ‘break the piggy bank.
bombcar
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Re: Figuring out where to park "backup" emergency fund

Post by bombcar »

Change your tax withholding to over withhold. Get paper I-bonds back. Stick them somewhere safe.

Bam second emergency fund, annoying enough to access and easy enough to forget.
upwind
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Re: Figuring out where to park "backup" emergency fund

Post by upwind »

SlurpleBrain wrote: Sat Jun 08, 2024 4:18 pm
TravellingTechOnFire wrote: Sat Jun 08, 2024 2:29 pm A third vote for Ibonds, at least for the 2nd tier money.

1) Fidelity MMF
2)Ibonds for long term inflation protection that a MMF isn't likely to give.
Ok thanks that sounds like a good option.

Do I have to buy I Bonds direct from the government and rebuy manually as they pay out or is there some sort of I Bond fund or automated thing I can use? I like to be as hands off as possible, especially with savings.
I am all for a long term position in I-bonds essentially as part of retirement planning. However, I am surprised at the all the I-bond recommendations given OPs current assets, point in life, and other options in the current environment.

1. The “emergency fund” is modest and has been spent down by half repeatedly. The second tier needs to remain immediately available. I-bonds cannot be redeemed during the first year at any cost. Years 2-5 have an interest penalty.

2. OP is young. I-bonds might make more sense at a later time. They may have other financial milestones that make more sense to focus.

3. Money Market and HYS interest rates are good now. For an emergency fund or near term expenses might as well ride the wave while it lasts. When one is really ready to start a second tier (instead of what I would call pseudo second tier at moment) can reconsider options.

For the emergency funds of 30-40K or less use a HYS or Money Market as long as rates look good. At least that is what I would do. As that grows could look to put some of it in to short term treasuries or CDs if rates are favorable. Eventually yes even look at I-Bonds if interested. They can be useful at any stage of life since they have some interesting characteristics. There strongest use case is inflation protection in retirement which is why they might make more sense for a lot of people say after 40 rather than 20s and 30s. But it really depends on individual circumstances of course.

Right now you’re getting little in interest and losing to inflation. Fix that first in way that keeps the funds sufficiently available to your comfort level.
“Investing is the intersection of economics and psychology.” - Seth Klarman
BirdFood
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Re: Figuring out where to park "backup" emergency fund

Post by BirdFood »

upwind wrote: Sat Jun 08, 2024 8:50 pm I am all for a long term position in I-bonds essentially as part of retirement planning. However, I am surprised at the all the I-bond recommendations given OPs current assets, point in life, and other options in the current environment.

1. The “emergency fund” is modest and has been spent down by half repeatedly. The second tier needs to remain immediately available. I-bonds cannot be redeemed during the first year at any cost. Years 2-5 have an interest penalty.
Well, I did suggest that they replace the second emergency fund with the iBonds AFTER the first year. The three- month interest penalty doesn't worry me much.
upwind wrote: Sat Jun 08, 2024 8:50 pm 2. OP is young. I-bonds might make more sense at a later time. They may have other financial milestones that make more sense to focus.
This, I don't follow. OP being young doesn't change the fact that they need an emergency fund, and it would be nice if it were earning something. The later phrase, "...even look at I-Bonds..." suggests that iBonds are somehow an extreme strategy, and that confuses me. What's wrong with them?
upwind wrote: Sat Jun 08, 2024 8:50 pm 3. Money Market and HYS interest rates are good now. For an emergency fund or near term expenses might as well ride the wave while it lasts. When one is really ready to start a second tier (instead of what I would call pseudo second tier at moment) can reconsider options.

For the emergency funds of 30-40K or less use a HYS or Money Market as long as rates look good. At least that is what I would do. As that grows could look to put some of it in to short term treasuries or CDs if rates are favorable. Eventually yes even look at I-Bonds if interested. They can be useful at any stage of life since they have some interesting characteristics. There strongest use case is inflation protection in retirement which is why they might make more sense for a lot of people say after 40 rather than 20s and 30s. But it really depends on individual circumstances of course.

Right now you’re getting little in interest and losing to inflation. Fix that first in way that keeps the funds sufficiently available to your comfort level.
upwind
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Re: Figuring out where to park "backup" emergency fund

Post by upwind »

BirdFood wrote: Sat Jun 08, 2024 9:33 pm
upwind wrote: Sat Jun 08, 2024 8:50 pm 2. OP is young. I-bonds might make more sense at a later time. They may have other financial milestones that make more sense to focus.
This, I don't follow. OP being young doesn't change the fact that they need an emergency fund, and it would be nice if it were earning something. The later phrase, "...even look at I-Bonds..." suggests that iBonds are somehow an extreme strategy, and that confuses me. What's wrong with them?
Well we apparently both agree that for the current funds they probably don’t want to put that into ibonds due to the one year lock out. That was my central thought.

Right now MM, HYS, short term treasuries are all beating I-bonds. They would give up a chunk of that already lower return between years 2-5 if they need to access those funds. I’d take the higher yield while it lasts especially for money that has a realistic chance of needing to be accessed.

It is one more thing to manage. A small position just might not be worth it to a lot of people.

We don’t know their financial situation and financial goals beyond the desire for better return on emergency fund but it doesn’t sound like they currently have a brokerage account. If they aren’t doing an annual Roth already I’d put that before I-bonds. That can even be a second tier emergency fund if necessary instead of ibonds. Starting an after tax equity investment account might also be desired.

I like I-bonds but I just see where other options might take precedence. If interest rates drop back to near zero I-Bonds become more interesting for a stable fund even in OPs likely current circumstances.

Personally I am building a long term I-bond position so it’s not that I am against I-bonds but I also know that for me at 30 under the prevailing circumstances of the time they would not have been a financial priority given limited resources available.
“Investing is the intersection of economics and psychology.” - Seth Klarman
BirdFood
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Re: Figuring out where to park "backup" emergency fund

Post by BirdFood »

upwind wrote: Sat Jun 08, 2024 10:59 pm
BirdFood wrote: Sat Jun 08, 2024 9:33 pm
upwind wrote: Sat Jun 08, 2024 8:50 pm 2. OP is young. I-bonds might make more sense at a later time. They may have other financial milestones that make more sense to focus.
This, I don't follow. OP being young doesn't change the fact that they need an emergency fund, and it would be nice if it were earning something. The later phrase, "...even look at I-Bonds..." suggests that iBonds are somehow an extreme strategy, and that confuses me. What's wrong with them?
Well we apparently both agree that for the current funds they probably don’t want to put that into ibonds due to the one year lock out. That was my central thought.

Right now MM, HYS, short term treasuries are all beating I-bonds. They would give up a chunk of that already lower return between years 2-5 if they need to access those funds. I’d take the higher yield while it lasts especially for money that has a realistic chance of needing to be accessed.

It is one more thing to manage. A small position just might not be worth it to a lot of people.

We don’t know their financial situation and financial goals beyond the desire for better return on emergency fund but it doesn’t sound like they currently have a brokerage account. If they aren’t doing an annual Roth already I’d put that before I-bonds. That can even be a second tier emergency fund if necessary instead of ibonds. Starting an after tax equity investment account might also be desired.

I like I-bonds but I just see where other options might take precedence. If interest rates drop back to near zero I-Bonds become more interesting for a stable fund even in OPs likely current circumstances.

Personally I am building a long term I-bond position so it’s not that I am against I-bonds but I also know that for me at 30 under the prevailing circumstances of the time they would not have been a financial priority given limited resources available.
Ah, I may be following now.

I'm operating on the assumption that where that money goes now is fairly likely to be where it stays for a decade or more. The HYSA is earning more now, but that will likely go down. So for most of that theoretical decade, I suspect that the iBond scheme would result in it earning more.

Of course, a flaw in my plan is that in that plan the emergency money is not in fact going to go to the iBonds "now"--it's going to go there in a year, after the iBonds are ripe.

I still think I like my plan--they (1) buy $15K of iBonds, and (2) put the secondary emergency fund into an HYSA that is actually an HYSA, as you suggest. Both chunks of money nap for a year. Then the emergency fund goes into investments and/or a Roth or somewhere more interesting, and the iBonds take over forever after. (Well, for thirty years.)

But I see your point that I have an extra $15K napping for a year.
WeakOldGuy
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Re: Figuring out where to park "backup" emergency fund

Post by WeakOldGuy »

I think the idea of having two separate accounts for "emergency funds" in savings accounts that earn less than your regular checking account is completely insane.

However, I am also married to a wonderful woman whose first instinct is to have a separate account for everything. I have a lot of accounts, but we would have a lot more if my wife went with her first instincts. The key is to NEVER tell my wife that her ideas are completely insane! (yeah, I've learned a couple things after being married to her for 43 years.)

You might consider putting your Tier 1 funds into a HYSA if you can find one that has the ability to quickly and easily transfer money to your checking account. I have a savings account that is now getting 4.6% at my brick and mortar bank and we have $20-$25K in that account to cover short term unexpected expenses. It is nice because it would even cover overdrafts automatically from our checking account. If your Credit Union doesn't have a savings account that has any better interest rates than your checking, you could see about opening a second checking account with the same credit union. 3% is good for a checking account and is much better than your current 1.3% savings account. Now, those interest rates will come down but likely the differential will stay pretty consistent.

Then I would look at opening a brokerage account with Schwab or Fidelity. You can put your second tier emergency fund into a MM fund there and get competitive returns. It would be separate from your other bank accounts which would meet the psychological needs of your wife for having separate accounts for the two tiers. It is also very liquid in that you can have it electronically transferred in your credit union account in a couple of days. Having a brokerage account it also then makes it easy for you to start to invest in broad market stock funds which would be a good option at your age if all your retirement accounts are maxed. Every month you can point to the money market holdings in your taxable brokerage account and see that your Tier 2 emergency fund is safe and growing.
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
zero_coupon
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Re: Figuring out where to park "backup" emergency fund

Post by zero_coupon »

am wrote: Sat Jun 08, 2024 11:53 am Whats a step up from mm risk?
Short-term bond funds?
Topic Author
SlurpleBrain
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Re: Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

ladycat wrote: Sat Jun 08, 2024 12:14 pm
I'd go with Fidelity for your true emergency fund. I have both Schwab and Fidelity - neither has a checking account, so I'm not sure about earned interest being deposited into checking. But the cash management in Fidelity is easy. Choose a money market for your settlement fund and earned interest is deposited into it. You can also invest in brokered CDs or Treasury bills from your Fido settlement MM fund.
Ok I don't want to get into all the points you made but I do want to point out that Schwab most definitely offers checking accounts. They advertise them constantly.

I thought I read here that they automatically sign you up for a very low interest checking account and use that as the settlement fund. Maybe I am missing something but if you or anyone wants to chime in here, please let me know. I am researching their website myself too.
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Re: Figuring out where to park "backup" emergency fund

Post by jebmke »

zero_coupon wrote: Sun Jun 09, 2024 12:37 am
am wrote: Sat Jun 08, 2024 11:53 am Whats a step up from mm risk?
Short-term bond funds?
that's what we used exclusively during our high equity risk years. When I geared down the equity prior to retirement we moved bond duration out some to "re-balance" the overall portfolio duration.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: Figuring out where to park "backup" emergency fund

Post by ladycat »

SlurpleBrain wrote: Sun Jun 09, 2024 7:41 am
ladycat wrote: Sat Jun 08, 2024 12:14 pm
I'd go with Fidelity for your true emergency fund. I have both Schwab and Fidelity - neither has a checking account, so I'm not sure about earned interest being deposited into checking. But the cash management in Fidelity is easy. Choose a money market for your settlement fund and earned interest is deposited into it. You can also invest in brokered CDs or Treasury bills from your Fido settlement MM fund.
Ok I don't want to get into all the points you made but I do want to point out that Schwab most definitely offers checking accounts. They advertise them constantly.

I thought I read here that they automatically sign you up for a very low interest checking account and use that as the settlement fund. Maybe I am missing something but if you or anyone wants to chime in here, please let me know. I am researching their website myself too.
Yes, Schwab has checking accounts, I was just saying I don't have a checking account associated to my investment accounts so I'm not familiar with how earned interest might be automatically deposited into it. The default "cash" settlement account in a brokerage account is very low interest.
bombcar
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Re: Figuring out where to park "backup" emergency fund

Post by bombcar »

It should probably be mentioned that if the emergency fund has already been hit that often for the house, that your wife is right.

It’s NOT an emergency fund, it’s a house fund. The second emergency fund is the real emergency fund.

House expenses and maintenance should be budgeted for so that the only things that hit the emergency fund are actual emergencies that will involve the insurance adjuster.

At least that’s the way I’d see it.
WeakOldGuy
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Re: Figuring out where to park "backup" emergency fund

Post by WeakOldGuy »

I think the idea of having two separate accounts for "emergency funds" in savings accounts that earn less than your regular checking account is completely insane.

However, I am also married to a wonderful woman whose first instinct is to have a separate account for everything. I have a lot of accounts, but we would have a lot more if my wife went with her first instincts. The key is to NEVER tell my wife that her ideas are completely insane! (yeah, I've learned a couple things after being married to her for 43 years.)

You might consider putting your Tier 1 funds into a HYSA if you can find one that has the ability to quickly and easily transfer money to your checking account. I have a savings account that is now getting 4.6% at my brick and mortar bank and we have $20-$25K in that account to cover short term unexpected expenses. It is nice because it would even cover overdrafts automatically from our checking account. If your Credit Union doesn't have a savings account that has any better interest rates than your checking, you could see about opening a second checking account with the same credit union. 3% is good for a checking account and is much better than your current 1.3% savings account. Now, those interest rates will come down but likely the differential will stay pretty consistent.

Then I would look at opening a brokerage account with Schwab or Fidelity. You can put your second tier emergency fund into a MM fund there and get competitive returns. It would be separate from your other bank accounts which would meet the psychological needs of your wife for having separate accounts for the two tiers. It is also very liquid in that you can have it electronically transferred in your credit union account in a couple of days. Having a brokerage account it also then makes it easy for you to start to invest in broad market stock funds which would be a good option at your age if all your retirement accounts are maxed. Every month you can point to the money market holdings in your taxable brokerage account and see that your Tier 2 emergency fund is safe and growing.
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
3000
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Re: Figuring out where to park "backup" emergency fund

Post by 3000 »

Now I understand a lot of this doesn't seem logical to many of you and I have no argument there. The fact is my wife wants 2 emergency funds and that's what we will have to do. It's just up to me to manage them and that's what I'm seeking help with. If you have other ideas my ears are wide open!

Sorry for the long post. I'm sure this sounds very stupid to some of you but this is the situation I'm in.
Don't worry about this. Before moving everything out of my local credit union I kept $3,000 in a savings account that earned 0.05% because I felt I should have money locally for very easy access. We all do things to make ourselves feel better/comfortable.

Emergency fund 1: $15k in "high yield savings" 1.3% interest
Also, we need the first tier emergency fund readily available because we do have expenses that come up relatively often.
Ally Bank's Money Market Account earns 4.20% on all balances and the account comes with a debit card and checks. There is a limit of 10 withdrawals per statement cycle.
Emergency fund 2 : $15k in "high yield savings" 1.3% interest
I suggest a Fidelity brokerage account and I would split the $15k into two 4-week T-bills on auto roll.

First 4-week bill $8k, wait two weeks, second 4-week bill 7k. Fidelity keeps your money fully invested in bills and the interest will build up in SPAXX (Fidelity Government Money Market Fund) which has a current yield of 4.96%.

The interest T-bills earn is fully state tax exempt if you live in a state with income tax. And if you ever need the money you can turn off the auto roll feature and on the maturity date money is available to withdraw. I have had EFTs initiated sent from Fidelity show up in an external account the same day depending on the time of day you make the transfer.

My emergency fund is in my Fidelity brokerage account split between two 4-week T-bills.
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SlurpleBrain
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Re: Figuring out where to park "backup" emergency fund

Post by SlurpleBrain »

ladycat wrote: Sun Jun 09, 2024 10:09 pm

Yes, Schwab has checking accounts, I was just saying I don't have a checking account associated to my investment accounts so I'm not familiar with how earned interest might be automatically deposited into it. The default "cash" settlement account in a brokerage account is very low interest.
OK, I mistook the cash settlement account for their checking accounts.

So, to be clear, the earned interest in a MMF fund would automatically reinvest, or would it go into the settlement fund?

Please excuse my ignorance. While I have studied investing, I am new to actually using brokerage accounts and taxable accounts in general. I currently only have all my investments in my company 401k so this is all new territory.
bombcar
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Re: Figuring out where to park "backup" emergency fund

Post by bombcar »

3000 wrote: Mon Jun 10, 2024 1:57 am Don't worry about this. Before moving everything out of my local credit union I kept $3,000 in a savings account that earned 0.05% because I felt I should have money locally for very easy access. We all do things to make ourselves feel better/comfortable.
It's also worth sometimes looking at dollar amounts instead of percentages. 5% is one hundred times better than 0.05%, but on $3k it is $150 a year, less than some spend on a single dinner.

Just know the costs and if it's worth it to you. Some credit unions even give you enough "perks" for having a certain amount in savings that it's worth the loss of theoretical maximum interest.
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Re: Figuring out where to park "backup" emergency fund

Post by muffins14 »

Rocinante Rider wrote: Sat Jun 08, 2024 11:01 am A "high yield savings" at 1.3% interest sounds like a low yield savings account to me.
Yes step 1 is to move this money elsewhere.

Any brokerage account has money market funds where you can get 3-5% after-tax, depending on your bracket. You are being held back with 1.3% by some greedy institution.
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Re: Figuring out where to park "backup" emergency fund

Post by muffins14 »

ladycat wrote: Sat Jun 08, 2024 12:14 pm
I'd go with Fidelity for your true emergency fund. I have both Schwab and Fidelity - neither has a checking account, so I'm not sure about earned interest being deposited into checking. But the cash management in Fidelity is easy. Choose a money market for your settlement fund and earned interest is deposited into it. You can also invest in brokered CDs or Treasury bills from your Fido settlement MM fund.
Yes perhaps it does not say “checking” on the box, but it has check writing
Mobile deposits
ATM access
Direct deposits
ACH and wire transfers

I use my fidelity brokerage for all of my “checking” needs
Crom laughs at your Four Winds
barnaclebob
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Re: Figuring out where to park "backup" emergency fund

Post by barnaclebob »

Emergency funds aren't necessary but emergency plans are.

I do my bucketing in excel but everything is in the same account. Medium term (next 10ish years) expected big expenses (cars, roof, driveway repaving etc) are added to our bond allocation. Once the timeline for making the purchase becomes pretty solid then the money gets transferred to something with zero risk.

I don't have an emergency fund. Any big unexpected emergencies will come from cash flow, credit cards, the $10k i keep in my credit union money market, or this "big expenses" allocation. Eating into those sources just means less money being saved that year for early retirement as we build it back up. For long term job loss, we'll start pulling any budget shortfall from the early retirement allocation.
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btq96r
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Re: Figuring out where to park "backup" emergency fund

Post by btq96r »

SlurpleBrain wrote: Sat Jun 08, 2024 10:28 am Hi folks, longtime listener, first time caller.

My wife and I are 30 years old and we are working to better organize our budgeting and daily finances. We both work full time and have no kids. Together we make roughly $120k/year. Retirement accounts are adequately funded.

I have something of an odd question. So at my wife's insistence, we have two emergency funds, each containing 3 months expenses, about $15k each. According to her, one is to be actually used for unexpected large household expenses or in the case of one of us losing a job. The second is to only ever be tapped if the first emergency fund is depleted. In essence she wants us to pretend the 2nd one doesn't even exist. She does not want us to combine them. I guess you can think of it as 2 "tiers".

I don't have my emergency fund split into two tiers, but I do have something not too far removed.

My emergency fund is in VUSXX: Vanguard Treasure Money Market Fund.
My next vehicle fund is in VMFXX: Vanguard Federal Money Market Fund. Just money specifically set aside for when the day comes that I need a new vehicle so I don't have to finance it. Once I use it, I'll refund it as I go to "pre-pay" what comes next.

Both money market funds are safe to an ineffable degree (if these funds fail, the US economy is burning), and currently paying me ~$350 each month in dividends for my prudence. I've been taking those dividends and putting them into my taxable VTSAX each month, but that's a situational bonus of our current times, not a long term planning factor. It's nice to know I could lose my job and have my truck crack in half on the same day, and I'd wouldn't have to panic or be set back outside of losing network in cash holdings. You may wish to add a third (or 4th if you split the emergency fund) for prepaying home maintenance and major upgrades like when you need a new water heater and the like. If/when I buy a home, I'll be doing that.

I say you just look for safe money market funds. I use Vanguard, but Fidelity and Schwab have the same style funds.
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Re: Figuring out where to park "backup" emergency fund

Post by ladycat »

SlurpleBrain wrote: Mon Jun 10, 2024 9:42 am
ladycat wrote: Sun Jun 09, 2024 10:09 pm

Yes, Schwab has checking accounts, I was just saying I don't have a checking account associated to my investment accounts so I'm not familiar with how earned interest might be automatically deposited into it. The default "cash" settlement account in a brokerage account is very low interest.
OK, I mistook the cash settlement account for their checking accounts.

So, to be clear, the earned interest in a MMF fund would automatically reinvest, or would it go into the settlement fund?

Please excuse my ignorance. While I have studied investing, I am new to actually using brokerage accounts and taxable accounts in general. I currently only have all my investments in my company 401k so this is all new territory.
I don't know what every MMF fund does (or what happens if you have multiple MMFs), so I can't answer the question the way you've asked it.

I think what's important is that Fidelity and Schwab are different in how they handle your "settlement" fund.

When you open a brokerage account at Fidelity, you select a MMF for what Fidelity calls your "CORE" account. This is where money you deposit goes, it's also where dividends from investments that are not set to auto reinvest are deposited. From that Core account (your Core MMF), you can invest in other MMFs, CDs, t-bills, mutual funds, ETFs.

At Schwab, your deposits and those same types of dividends would go to the "BANK SWEEP" account. This is a very low interest savings account. You must take action to move the money from the Bank Sweep account to your other investments (MMF, CDs, t-bills, mutual funds, ETFs). It requires constant attention if you don't want your dividends building up in the low-interest Bank Sweep account. The Bank Sweep account is not a place to keep your money for very long.

That's why many posters are recommending Fidelity over Schwab. Both are perfectly reasonable places to keep your investments, but Fidelity eliminates that step where your deposits or dividends need to be monitored and moved into some type of MMF or other investment.

I don't have a Vanguard account, so I can't comment or compare how it's handled there.
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btq96r
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Re: Figuring out where to park "backup" emergency fund

Post by btq96r »

ladycat wrote: Mon Jun 10, 2024 11:18 am I don't have a Vanguard account, so I can't comment or compare how it's handled there.
Pretty much just like Fidelity as you describe it for Vanguard. Not sure if they give you an option to change your settlement fund as they call it, but mine is VMFXX (Vanguard Federal Money Market Fund) for both my brokerage and Roth IRA brokerage, so I've never had an urge to. My only gripe is I can't redirect dividends that aren't reinvested in the fund that gave them for specific investments past the settlement fund automatically, I have to do it manually. If I could do that, I'd set my Money Market funds for my emergency and next vehicle funds to just bypass the settlement account and push to VTSAX. I also wish I had the option to direct from my brokerage to my Roth IRA brokerage just as easy. Maybe that exists and I'm missing it.
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