Reasonable Approch To Emergency Fund?

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am
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Reasonable Approch To Emergency Fund?

Post by am »

Save up a years worth of expenses in high yield savings american express. Want to have more than a years worth of emergency fund and potential other cost (tail insurance) if I lose my current job so rest goes into intermediate term muni vanguard fund. Losing job is a relatively low prob. event.

Tax rate 33%, allocation 60% stocks/40% bonds. Adding money to interm. muni will not change allocation.
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Scott S
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Post by Scott S »

You're asking if we think it's reasonable? Sounds excessive to me, especially if losing your job is truly a "low-probability event."

- Scott
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am
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Post by am »

low prob compared to mr middle manager, or IT guy at the local company. Physicians have relatively good job security but the market in my current field is poor. Also, my current job is not the most stable as far as the future is concerned. Tail insurance for my specialty will be 70k!
Middle
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Post by Middle »

A year's worth of emergency fund is certainly more than the conventional wisdom would suggest (6 months most commonly) especially if you feel that losing your job is a low probability.

I also personally don't think that all that money needs to be so liquid. It's a year's worth, why not put some of that money to work? Cash is paying so little right now.

But whatever makes you sleep well at night.
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CrankyManager
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Post by CrankyManager »

AM,

I myself am a firm believer in having a solid but possibly "excessive" emergency fund. A year is ideal for me personally, while less might be ideal for someone else. The worst that ever happens is I simply move funds I consider "excess" to my taxable account, or make an IRA contribution.

Like your long-term AA, it's all a matter of finding a place to exist within your personal comfort zone.

One thought I would have is to consider using ultra-short or short-term munis in your account for the sake of added diversification. For anything that would extend beyond my 6 months of living expenses, I also own a few CDs with laddered maturities.
"Does not Dionysius seem to have made it sufficiently clear that there can be nothing happy for the person over whom some fear always looms?" -- Cicero
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Scott S
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Post by Scott S »

So it's not such a "low-probability event", then? I'm getting mixed messages.

I'm thinking that your AA is too aggressive, and that's why you feel the need for additional "safe" assets in order to sleep at night. Bonds are supposed to fulfill that role -- consider changing your AA to 50/50. You're not going to need that whole year's worth of EF at once, so you might as well put it to work.

- Scott
livesoft
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Post by livesoft »

Suppose you have a 7-figure taxable account and plenty in your retirement accounts. How would you configure your emergency fund? Would you still have money in a savings account?
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am
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Post by am »

Suppose you have a 7-figure taxable account and plenty in your retirement accounts. How would you configure your emergency fund? Would you still have money in a savings account?



I do not have 7 figure taxable, but more like low 6 figure taxable on top of emergency fund and IRAs. I would hate to touch taxable that if we were in a correction or bear. Most of my bond funds currently are in tax deferred space.

I have about 6 months of living expenses in cash, if I had to pay my tail insurance which would be about 70-80k payment. I would have to pay this if I could not find another job with the same insurance carrier within the most a year. It is also possible that I may owe some money for my portion of debt for the corporation.

So my situation is somewhat complex. At best if I did not have to pay the tail, then I would have more than a years worth of expenses saved up. At worst I guess, I may have close to nothing left in the emergency fund and be at the mercy of my taxable account which is mostly stocks.
letsgobobby
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Post by letsgobobby »

your employer will not pay your tail? that sucks.

we're in a similar situation though my specialty is in high demand right now. I keep 6-9 months as an emergency fund, and I wouldn't have to pay a tail. So I don't think you're being excessive, but that's just me. And yes, I have a big taxable account and I just prefer to have the EF in cash.
jmbkb4
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Post by jmbkb4 »

am wrote:low prob compared to mr middle manager, or IT guy at the local company. Physicians have relatively good job security but the market in my current field is poor. Also, my current job is not the most stable as far as the future is concerned. Tail insurance for my specialty will be 70k!
I am a physician and understand your points. Others will not. I also have upped my emergency fund to a year or more of expenses.

I think you're being wise in doing so.

The market is not going to double in the next 2 years like it has from its March 2009 low. Did I just make a prediction? Uh-oh.
livesoft
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Post by livesoft »

I see no problem with a large emergency fund. I would not want to pay any taxes on it and would want to get a decent yield as well. That's why I put my emergency fund (such as it is) in my tax-advantaged accounts where it is virtually instantly available without penalty yet I pay no taxes on the gains.

This has been discussed many times, so much so that there is this wiki-article about it: http://www.bogleheads.org/wiki/Placing_ ... ed_Account
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Watty
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Post by Watty »

<I>...Save up a years worth of expenses in high yield savings american express. ....</I>

I doubt that that is keeping up with inflation after taxes.

An alternative that would have some tax advantages would be iBonds.

They are paying a pretty good interest rate for at least the next six months, the taxes are deferred and free of state taxes. If you have any kids, you may be able to cash some of them when they are in college and get a tax break for their tuition. Depending on your age you might be able to hold on to them until you are retired and cash then when you are in a lower tax bracket.

These can't be cashed for the first year and you can only put a limited amount in each year, $10K for an individual $20K for a couple, so it would take a few years to build up a significant amount but once you do they could compount for decades and the tax derferral could make a huge differnece.


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letsgobobby
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Post by letsgobobby »

you persuaded me of this before, I don't disagree it works, and I still don't do it. I keep my EF in a bank account (currently a rewards checking earning 3% before taxes). Could it be more efficient? I guess. At this point, I don't care.
digit8
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Post by digit8 »

I'm a big believer in disregarding convential wisdom about EF amounts if you're erring on the side of overkill for personal comfort.

The only proviso I would throw in is, don't forget the fungible nature of your overall financial picture. Your EF funds won't be set in stone after disaster strikes(i.e., if you deplete your EF fund and need more, you won't say "I guess I'll lose my home because this taxable index fund and IRA aren't specifcally for emergencies"), so there is no reason it should be locked away irreversably before one, either.
esetter
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Post by esetter »

Consider a 5 year Ally Bank CD (or you could break it up into smaller denomination 5 year CDs for more flexibility). It pays a relatively high interest rate and you only incur a 2 month interest penalty if you redeem it early. You're likely to get a better return than a money market account.
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