Emergency fund and your wealth

lmpmd · Post by **lmpmd** » Sat May 07, 2011 9:45 am

Emergency fund becomes less and less important as you become more wealthy. Once you have a million in investments, you don't need one if your invested conservatively.

True or false. What are your thoughts?

ofcmetz · Post by **ofcmetz** » Sat May 07, 2011 9:58 am

True.

If you have reached "critical mass" and you are living on say 4% of your wealth then your portfolio contains your emergency fund. So, say you are 40% stocks, 50% bonds, and 10% cash. As long as your cash position has enough in it to cover expenses for a couple of years then you should feel OK.

sscritic · Post by **sscritic** » Sat May 07, 2011 10:06 am

ofcmetz wrote:True.

If you have reached "critical mass" and you are living on say 4% of your wealth then your portfolio contains your emergency fund. So, say you are 40% stocks, 50% bonds, and 10% cash. As long as your cash position has enough in it to cover expenses for a couple of years then you should feel OK.

I can also sell the bonds if I have an emergency. If 10% in cash covers 2 years, then 50% in bonds covers 10 years, for a total of 12 years worth of emergency. Now if it were a real emergency, I would sell the stocks as well for 20 years worth of emergency. What is the exact emergency you are worried about?

P.S. If your 10% cash covers 3 years, then your portfolio covers 30 years. If 4, then 40, if 5, then 50, etc.

digit8 · Post by **digit8** » Sat May 07, 2011 10:08 am

True.

The tipping point is different for everyone, but it's there. It will always make sense to keep some operating expenses handy. But if I've got, say, 10 years worth of paychecks tucked away, holding another 6 months earning minimal interest is unlikely to be earning much benefit and definitely suffering some opportunity cost.

ResNullius · Post by **ResNullius** » Sat May 07, 2011 10:29 am

Regardless of how much you have, you never really want to sell stocks or bonds at a loss in order to generate short-term cash to get you over a bad market swing.

allsop · Post by **allsop** » Sat May 07, 2011 10:30 am

We do have an emergency fund in cash in high-interest accounts, but it is part of the overall asset allocation and not separate.

Edit: Optimal asset location is very much determined by laws in which country you live in, so some of the Boglehead recommendations are only valid for USA. For example, a ROTH is nice a nice place to put an emergency fund since contributions can be withdrawn with no penalty. Taxation of mutual funds is another as some countries only tax capital gains when the investor is selling, if at all, after some years.

scrabbler1 · Post by **scrabbler1** » Sat May 07, 2011 10:35 am

I agree, even if you have less than $1M.

As an early retiree, I have a monthly cash inflow from dividends from various bond funds. Therefore, I continue to not have any large cash holdings in my portfolio, only a small amount in my bank's checking account to avoid monthly fees.

I have about $40k in an intermediate-term muni bond fund as my next layer of reasonably secure, easily accessible funds to cover anything large and unforeseen (nothing over $2,000 so far).

amarone · Post by **amarone** » Sat May 07, 2011 10:50 am

ResNullius wrote:Regardless of how much you have, you never really want to sell stocks or bonds at a loss in order to generate short-term cash to get you over a bad market swing.

If I had to sell something to generate cash I would want to be selling assets at a loss so I can get the tax-loss harvesting benefits.

sscritic · Post by **sscritic** » Sat May 07, 2011 11:20 am

I agree with amarone.

Consider this scenario:
you have $1 million. There is a market drop. You now have $750k. You need $50k for an emergency. You now have $700k. If you used cash for the $50k, is the remaining $700k worth more than the $700k you would have left if you had used stocks for the $50k? I always thought $700k was the same as $700k.

So where could you have obtained the $50k?

1) sell $50k of stocks with a basis of zero. Pay cap gains tax on $50k gain.
2) sell $50k of stocks with a basis of $50k. Pay no tax.
3) use $50k of cash. Pay no tax.
4) sell $50k of stocks with a basis of $150k. Use the $100k of losses on your tax returns for thousands worth of savings over the years.
5) sell $250k of stocks with a basis of $350k. Spend the $50k and reinvest the remaining $200k in suitable stocks that are not identical. Use the $100k of losses on your tax returns for thousands worth of savings over the years.

Hint: TLH works even when you need money.

sscritic · Post by **sscritic** » Sat May 07, 2011 11:22 am

P.S. Another scenario:

You only feel comfortable with $100k in cash. You have an emergency and spend $50k of your cash. You now need $50k more in cash to feel comfortable. You must sell $50k of stocks to get your cash back up.

What's the difference between selling the stocks for the emergency and selling the stocks 2 days after the emergency to replenish your cash?

Sidney · Post by **Sidney** » Sat May 07, 2011 11:30 am

amarone wrote:
ResNullius wrote:Regardless of how much you have, you never really want to sell stocks or bonds at a loss in order to generate short-term cash to get you over a bad market swing.
If I had to sell something to generate cash I would want to be selling assets at a loss so I can get the tax-loss harvesting benefits.

or maybe another way to put it is that if you have a loss, most of the time you should sell. The only thing that the cash need changes is how much you buy back.

livesoft · Post by **livesoft** » Sat May 07, 2011 11:39 am

Tax-loss harvesting has 2 parts:
(a) selling the loser, and
(b) buying replacement shares.

I have no qualms with selling a loser in an emergency, but I sure would want to buy replacement shares soon thereafter. Of course, sometimes selling a loser now is a good way to avoid some near-term future losses. But who knows?

Furthermore if one is judicious practicing tax-loss harvesting in their taxable accounts, then they will not have much in the way of losers every January.

letsgobobby · Post by **letsgobobby** » Sat May 07, 2011 11:47 am

sscritic wrote:P.S. Another scenario:

You only feel comfortable with $100k in cash. You have an emergency and spend $50k of your cash. You now need $50k more in cash to feel comfortable. You must sell $50k of stocks to get your cash back up.

What's the difference between selling the stocks for the emergency and selling the stocks 2 days after the emergency to replenish your cash?

I'll bite.

I'm comfortable with (say) $100k in cash on an ongoing basis. I use $50k for the emergency. Now my EF is depleted... but I can live with that on an intermediate basis while I replete it over X number of months. I don't have to sell anything.

My "comfort zone" EF is large enough to allow spending some of it down without getting anxious. If my EF is only, say $20,000, and I have to spend $20,000, then I won't sleep and I'll have to sell stocks to replace - probably (in my way of thinking) at a loss, just when I least want to sell them.

Sidney · Post by **Sidney** » Sat May 07, 2011 12:54 pm

I have about 10 years of expenses invested in intermediate muni fund. The fund has returned 4.5% over the last three years. The average NAV has fluctuated ~8% +/-. My emergency fund is the first 92% of that investment.

sport · Post by **sport** » Sat May 07, 2011 1:08 pm

The biggest emergency for most people is loss of job. That is the reason for the advice to have 6 months or one year expenses in an emergency fund. For retirees, that emergency cannot exist, by definition. Therefore, a retirees emergency fund should address more minor emergencies, like a big car repair bill, or a new roof for the house. Medical emergency expenses can be very large, but that should be covered by insurance. Accordingly, a retiree's emergency fund can be much smaller, if he/she feels that they even need to have one.

Jeff

pete82 · Post by **pete82** » Sat May 07, 2011 1:21 pm

an emergency is "a serious, unexpected, and often dangerous situation requiring immediate action."

the best you can do is contemplate the possibilities and potential cash requirements. then put aside the funds in a highly-liquid account. it's my "sleep like a baby fund".

letsgobobby · Post by **letsgobobby** » Sat May 07, 2011 1:29 pm

I think of my emergency fund as needing to cover an unexpectedly large expense (such as buying a new car when my old one dies) on very short notice, without having to borrow/finance, and without having to sell other assets that may be selling at low values. It's not exactly to provide liquidity, but to reduce the costs of selling at a loss or borrowing at a high rate.

Is this wrong?

allwin · Post by **allwin** » Sat May 07, 2011 1:47 pm

I feel that when you have a million in (taxable) investments, having or not having an emergency fund does very little to your overall risk/return. So, it comes down to your personal preference.

This might not be true if you have 5-10 years of emergency fund

, but in that case you should probably re-think your approach.

amarone · Post by **amarone** » Sat May 07, 2011 2:23 pm

letsgobobby wrote:I think of my emergency fund as needing to cover an unexpectedly large expense (such as buying a new car when my old one dies) on very short notice, without having to borrow/finance, and without having to sell other assets that may be selling at low values. It's not exactly to provide liquidity, but to reduce the costs of selling at a loss or borrowing at a high rate.

Is this wrong?

I think part of it is wrong. What do you mean by "low values"? Low relative to what? If to what you paid for it, that is of no relevance other than the tax consequences, which are more favorable than if you sold highly appreciated assets.

What are the "costs of selling at a loss"? Selling at a loss gives tax benefits. You may realize a loss that is currently unrealized, but that is merely highlighting a cost that you have already incurred. You have not really lost anything other than possible future gain on those assets. And do you know which of your assets will give the best future gains and therefore should not be sold? If you do, you do not need an emergency fund - your investing skills will see you through (and into a highly paid job, if you want).

sport · Post by **sport** » Sat May 07, 2011 2:26 pm

letsgobobby wrote:I think of my emergency fund as needing to cover an unexpectedly large expense (such as buying a new car when my old one dies) on very short notice, without having to borrow/finance, and without having to sell other assets that may be selling at low values. It's not exactly to provide liquidity, but to reduce the costs of selling at a loss or borrowing at a high rate.

Is this wrong?

Personally, I would not consider needing a car to be an unexpected emergency. I think that should be expected, but you just don't know when. Accordingly, I like a "car fund" separate from other considerations. An emergency fund would be something different. Otherwise, when you need a car, your emergency fund is largely gone, and you may need it as well for something unexpected. Others may disagree.

Jeff

pjstack · Post by **pjstack** » Sat May 07, 2011 2:44 pm

jsl11 wrote:The biggest emergency for most people is loss of job. That is the reason for the advice to have 6 months or one year expenses in an emergency fund. For retirees, that emergency cannot exist, by definition. Therefore, a retirees emergency fund should address more minor emergencies, like a big car repair bill, or a new roof for the house. Medical emergency expenses can be very large, but that should be covered by insurance. Accordingly, a retiree's emergency fund can be much smaller, if he/she feels that they even need to have one.

Jeff

Very well put.

letsgobobby · Post by **letsgobobby** » Sat May 07, 2011 6:25 pm

amarone wrote:
letsgobobby wrote:I think of my emergency fund as needing to cover an unexpectedly large expense (such as buying a new car when my old one dies) on very short notice, without having to borrow/finance, and without having to sell other assets that may be selling at low values. It's not exactly to provide liquidity, but to reduce the costs of selling at a loss or borrowing at a high rate.

Is this wrong?
I think part of it is wrong. What do you mean by "low values"? Low relative to what? If to what you paid for it, that is of no relevance other than the tax consequences, which are more favorable than if you sold highly appreciated assets.

What are the "costs of selling at a loss"? Selling at a loss gives tax benefits. You may realize a loss that is currently unrealized, but that is merely highlighting a cost that you have already incurred. You have not really lost anything other than possible future gain on those assets. And do you know which of your assets will give the best future gains and therefore should not be sold? If you do, you do not need an emergency fund - your investing skills will see you through (and into a highly paid job, if you want).

I mean selling stocks when stocks are down.

Let me give a concrete example to help me walk through this and perhaps explain my thinking.

Say a married individual, still working, with a mortgage and various other fixed expenses, normally has $500,000 taxable stocks and $500,000 tax-protected bonds. No emergency fund.

After a few months, the stock market has swooned and he now has $400,000 taxable stocks and $550,000 tax-protected bonds. To rebalance he has to sell $75,000 tax-protected bonds to buy $75,000 tax-protected stocks:

$400k taxable stocks
$75k tax-protected stocks
$475k tax-protected bonds

Now for whatever reason he has to come up with $25,000 stat. At that point he has to sell $25k stocks. He can claim a loss, then has to buy back $12.5k stocks in his tax-protected account:

$375k taxable stocks
$87.5k tax-protected stocks
$462.5k tax-protected bonds

Is this right?

I guess I can see how this works. But I thought it was conventional wisdom that you don't invest in the stock market with a short time horizon. If I know I need a new car in the next 6-24 months, that's a short time horizon. If I know I need a down payment for a house in the next 12 months, I shouldn't be investing in the stock market (with that money). Agreed?

stlrick · Post by **stlrick** » Sun May 08, 2011 11:25 am

jsl11 wrote:
letsgobobby wrote:I think of my emergency fund as needing to cover an unexpectedly large expense (such as buying a new car when my old one dies) on very short notice, without having to borrow/finance, and without having to sell other assets that may be selling at low values. It's not exactly to provide liquidity, but to reduce the costs of selling at a loss or borrowing at a high rate.

Is this wrong?
Personally, I would not consider needing a car to be an unexpected emergency. I think that should be expected, but you just don't know when. Accordingly, I like a "car fund" separate from other considerations. An emergency fund would be something different. Otherwise, when you need a car, your emergency fund is largely gone, and you may need it as well for something unexpected. Others may disagree.

Jeff

In 40 years, I've never needed my "emergency fund." Maybe the largest truly unexpected short-term expense was a major HVAC replacement in my home, and the $8,000-$10,000 could be put on a credit card.

What does come up constantly, however, are expenses much too large to be covered by monthly cash flow - a new car, a child's wedding, a child's college tuition, a major vacation, etc. I keep what looks like an emergency fund, 50k in a money market account at the bank where I have my checking account, to pay cash for these expenses. When they occur, I then rebuild that account before using excess cash flow for any other investment.

I don't think there is a right or wrong approach. It is what makes you comfortable.

Rick

dharrythomas · Post by **dharrythomas** » Sun May 08, 2011 3:41 pm

My wife and I sleep better when we've got some CASH in the Credit Union.

ShowMeThe... · Post by **ShowMeThe...** » Tue May 10, 2011 1:32 pm

Sounds like there are multiple levels of "Emergency Fund"

1) Long-term EF: Like, what if we're unemployed for 1-2 years? How to pay expenses then

2) Immediate emergency fund: Like, having liquid / immediately accessible funds around when your car's engine block decides to let loose on I-95

3) Weird but possible emergency: My in-laws used to live in a coastal island hurricane-prone area. Just in case the island was cut off for awhile and the ATMs not working, they kept a small cache of cash in the house ("hurricane money").

jmbkb4 · Post by **jmbkb4** » Tue May 10, 2011 1:35 pm

False. You should never be selling investments for emergencies.

You should always have an emergency fund.

Why not?

Zook13 · Post by **Zook13** » Tue May 10, 2011 1:39 pm

jmbkb4 wrote:False. You should never be selling investments for emergencies.

You should always have an emergency fund.

Why not?

Agree 100%...

If you have a million or more portfolio, is it really going to kill you to have an emergency fund? You may not need 12-months, but I say have at minimum 3-months just in case...

Scott S · Post by **Scott S** » Tue May 10, 2011 1:48 pm

lmpmd wrote:Emergency fund becomes less and less important as you become more wealthy. Once you have a million in investments, you don't need one if your invested conservatively.

True or false. What are your thoughts?

Totally, and I think a lot of people skipped over the bolded part.

- Scott

empb · Post by **empb** » Tue May 10, 2011 1:57 pm

letsgobobby wrote: I mean selling stocks when stocks are down.

Let me give a concrete example to help me walk through this and perhaps explain my thinking.

Say a married individual, still working, with a mortgage and various other fixed expenses, normally has $500,000 taxable stocks and $500,000 tax-protected bonds. No emergency fund.

After a few months, the stock market has swooned and he now has $400,000 taxable stocks and $550,000 tax-protected bonds. To rebalance he has to sell $75,000 tax-protected bonds to buy $75,000 tax-protected stocks:

$400k taxable stocks
$75k tax-protected stocks
$475k tax-protected bonds

Now for whatever reason he has to come up with $25,000 stat. At that point he has to sell $25k stocks. He can claim a loss, then has to buy back $12.5k stocks in his tax-protected account:

$375k taxable stocks
$87.5k tax-protected stocks
$462.5k tax-protected bonds

Is this right?

I guess I can see how this works. But I thought it was conventional wisdom that you don't invest in the stock market with a short time horizon. If I know I need a new car in the next 6-24 months, that's a short time horizon. If I know I need a down payment for a house in the next 12 months, I shouldn't be investing in the stock market (with that money). Agreed?

I'm trying to get my head around this. My intention was always to sell down the bond portion and then replenish with new contributions (i.e., buying stocks in taxable and selling in tax-advantaged). Not, if my AA was 50/50, selling down equal parts bonds and stocks potentially in a bear market.

Can't quite crystallize whether one should a) temporarily take a riskier AA (which is all you're doing when you sell down and rebuild an EF if you consider the whole portfolio) which still allows for the full TLH benefits or b) immediately rebalance to your original AA, potentially net-selling equities in a down market.

Think I prefer option A but am not entirely convinced that's rational.

livesoft · Post by **livesoft** » Tue May 10, 2011 2:15 pm

Remember: This thread is about wealthy folks. With that given, here are comments in blue:

ShowMeThe... wrote:Sounds like there are multiple levels of "Emergency Fund"

1) Long-term EF: Like, what if we're unemployed for 1-2 years? How to pay expenses then <- No problem. Spend down wealth slowly.

2) Immediate emergency fund: Like, having liquid / immediately accessible funds around when your car's engine block decides to let loose on I-95 <- No problem. You're wealthy, so this is a small charge on the credit card. A quarter to a half of your next paycheck covers this and allows you to pay off the credit card in full when the bill comes.

3) Weird but possible emergency: My in-laws used to live in a coastal island hurricane-prone area. Just in case the island was cut off for awhile and the ATMs not working, they kept a small cache of cash in the house ("hurricane money"). <- No problem. You're on an island. You don't need cash to buy anything. Besides if you do all the stores got wiped out and are not open anyway. You probably left the island ahead of time. But if you didn't, that's poor planning. Since you are wealthy, you had boats and SUVs already filled up with gas ready to go a week before the weather forecaster knew where the hurricane was going to hit. You also cached food and water as well.

Maybe we need a repeat poll of real emergency fund uses?

Short term, I've heard of bailing kids out of jail or needing to fly home from overseas due to emergency health issues. In natural disasters, there is generally quite a lot of neighborly help. I know McDonalds gave out free food in our area if you told them your house was destroyed by a tornado.

Long term, you have quite a lot of options that do not require safety nor liquidity.

sscritic · Post by **sscritic** » Tue May 10, 2011 2:24 pm

You only need an emergency fund if you don't believe in rebalancing or if you think you can time the market.

The following four people all have $1 million. They all have an asset allocation of 10% cash, 40% bonds, and 50% stock. They all have an immediate need to spend $50,000, bringing their assets down to $950k.

A: uses cash and now has 50k cash, 400k bonds, and 500k stocks. She rebalances to 95k cash, 380k bonds, and 475k stocks by selling 20k of bonds and 25k of stock to bring her cash back to 10%.

B: uses bonds and now has 100k cash, 350k bonds, and 500k stocks. He rebalances to 95k cash, 380k bonds, and 475k stocks by selling 25k of stocks to buy bonds and buying another 5k of bonds with cash to bring his bonds back to 40%.

C: uses stocks and now has 100k cash, 400k bonds, and 450k stocks. She rebalances to 95k cash, 380k bonds, and 475k stocks by selling 20k of bonds to buy stocks and buying another 5k of stocks with cash to bring her stock back to 50%.

D: uses 5k of cash and sells 20k of bonds and 25k of stock to fund the needed 50k. He doesn't need to rebalance since he is still at 10%/40%/50% as desired.

Can you tell me the difference between the four? I see no difference if they all rebalance immediately without attempting to market time their sales and purchases. In the end, they all did what D did, use 5k of cash, 20k of bonds, and 25k of stocks. The only difference is that A, B, and C went through extra steps of selling and buying to get to the same place.

ruralavalon · Post by **ruralavalon** » Tue May 10, 2011 2:25 pm

lmpmd wrote:Emergency fund becomes less and less important as you become more wealthy. Once you have a million in investments, you don't need one if your invested conservatively.

True or false. What are your thoughts?

True, I am retired and we only keep a total of about 3 months of cash on hand in the checking account and in money market funds.

By the way, everyone says to keep an emergency fund so that you won't have to sell investments in a down market, but why just assume that the market will be down (not up) when the emergency happens? For the last 10 years prior to retirement we had a fairly large account of taxable investments (primarily TSM) which we could rapidly access without penalty in case of an emergency, and so had no dedicated "emergency fund".

empb · Post by **empb** » Tue May 10, 2011 2:36 pm

sscritic wrote: Can you tell me the difference between the four? I see no difference if they all rebalance immediately without attempting to market time their sales and purchases. In the end, they all did what D did, use 5k of cash, 20k of bonds, and 25k of stocks. The only difference is that A, B, and C went through extra steps of selling and buying to get to the same place.

Well, obviously there's no difference (expect you've forced everyone to view the portfolio as a whole) but the bolded is where I (and others?) am going to get hung up. It's not that I don't believe in rebalancing, it's that a bear market seems a particularly painful time to do it if it means selling equities.

Unless you're retired and it makes no difference, wouldn't you rather just sell the cash/bonds and buy them back with new contributions, essentially leaving the risk assets untouched?

It feels like I'm doing some mental accounting gymnastics but can't quite articulate how. Waiting for someone to untangle my thinking.

letsgobobby · Post by **letsgobobby** » Tue May 10, 2011 2:40 pm

empb wrote:
sscritic wrote: Can you tell me the difference between the four? I see no difference if they all rebalance immediately without attempting to market time their sales and purchases. In the end, they all did what D did, use 5k of cash, 20k of bonds, and 25k of stocks. The only difference is that A, B, and C went through extra steps of selling and buying to get to the same place.
Well, obviously there's no difference (expect you've forced everyone to view the portfolio as a whole) but the bolded is where I (and others?) am going to get hung up. It's not that I don't believe in rebalancing, it's that a bear market seems a particularly painful time to do it if it means selling equities.

Unless you're retired and it makes no difference, wouldn't you rather just sell the cash/bonds and buy them back with new contributions, essentially leaving the risk assets untouched?

It feels like I'm doing some mental accounting gymnastics but can't quite articulate how. Waiting for someone to untangle my thinking.

the difference is that I wouldn't do any of those 4 things (A-D) - I would live with the smaller EF until it was replenished over several pay periods, so I wouldn't have to sell stocks at all. If a second emergency occurred, then I would sell the necessary investments. That's why I'm having a hard time with the strategy, despite the costs.

empb · Post by **empb** » Tue May 10, 2011 2:55 pm

Right, so the difference is simply when to rebalance. SS is saying you should view the portfolio as a whole and rebalance immediately. You're saying (and I'd do the same) that you'll forego rebalancing, take a riskier AA temporarily and rebuy the safe asset with new contributions.

It does feel like mental accounting though...

Scott S · Post by **Scott S** » Tue May 10, 2011 3:02 pm

empb wrote:I'm trying to get my head around this. My intention was always to sell down the bond portion and then replenish with new contributions (i.e., buying stocks in taxable and selling in tax-advantaged). Not, if my AA was 50/50, selling down equal parts bonds and stocks potentially in a bear market.

Can't quite crystallize whether one should a) temporarily take a riskier AA (which is all you're doing when you sell down and rebuild an EF if you consider the whole portfolio) which still allows for the full TLH benefits or b) immediately rebalance to your original AA, potentially net-selling equities in a down market.

Think I prefer option A but am not entirely convinced that's rational.

It's kind of like the "buckets of money" approach, isn't it? Burn through your safest assets first (which you're less likely to sell at a loss), then touch the riskier ones only if you absolutely have to.

- Scott

ResNullius · Post by **ResNullius** » Tue May 10, 2011 3:58 pm

It's hard to make money by losing money, but I guess the new math might produce a different result.

Easy Rhino · Post by **Easy Rhino** » Tue May 10, 2011 4:04 pm

ShowMeThe... wrote:1) Long-term EF: Like, what if we're unemployed for 1-2 years? How to pay expenses then

2) Immediate emergency fund: Like, having liquid / immediately accessible funds around when your car's engine block decides to let loose on I-95

My benchmark for liquity is similar: "how quickly can I raise money to bail someone out of jail?"

natureexplorer · Post by **natureexplorer** » Tue May 10, 2011 4:33 pm

Presumably, once you are financially independent, at least you shouldn't really need an emergency fund for a job loss anymore.

If the goal of an emergency fund is not having to sell at a loss, then for how many years should such a fund be?

sport · Post by **sport** » Tue May 10, 2011 4:35 pm

Many people just like to consider their emergency fund as something separate and outside of their retirement asset allocation. Then, if an emergency occurs, they can spend part or all of their emergency fund without affecting their asset allocation. Once the emergency has passed, they plan to rebuild their emergency fund using income to provide the money.

Jeff

letsgobobby · Post by **letsgobobby** » Tue May 10, 2011 5:25 pm

anyway, there's nothing magical about $1 million in investments and I certainly wouldn't call it wealthy. Anyone desiring more than $30,000-$40,000 per year in income from their investments will need more.

If you need $50,000 per year from your investments and you have $10,000,000, then I'll agree with the OP's assertion. Maybe we should define the precise situation we're talking about.

avalpert · Post by **avalpert** » Tue May 10, 2011 5:37 pm

livesoft wrote:Remember: This thread is about wealthy folks. With that given, here are comments in blue:
ShowMeThe... wrote:Sounds like there are multiple levels of "Emergency Fund"

1) Long-term EF: Like, what if we're unemployed for 1-2 years? How to pay expenses then <- No problem. Spend down wealth slowly.

2) Immediate emergency fund: Like, having liquid / immediately accessible funds around when your car's engine block decides to let loose on I-95 <- No problem. You're wealthy, so this is a small charge on the credit card. A quarter to a half of your next paycheck covers this and allows you to pay off the credit card in full when the bill comes.

3) Weird but possible emergency: My in-laws used to live in a coastal island hurricane-prone area. Just in case the island was cut off for awhile and the ATMs not working, they kept a small cache of cash in the house ("hurricane money"). <- No problem. You're on an island. You don't need cash to buy anything. Besides if you do all the stores got wiped out and are not open anyway. You probably left the island ahead of time. But if you didn't, that's poor planning. Since you are wealthy, you had boats and SUVs already filled up with gas ready to go a week before the weather forecaster knew where the hurricane was going to hit. You also cached food and water as well.
Maybe we need a repeat poll of real emergency fund uses?

Short term, I've heard of bailing kids out of jail or needing to fly home from overseas due to emergency health issues. In natural disasters, there is generally quite a lot of neighborly help. I know McDonalds gave out free food in our area if you told them your house was destroyed by a tornado.

Long term, you have quite a lot of options that do not require safety nor liquidity.

I really don't understand your obsession with not having emergency cash on hand. It's impact on your portfolio is near zero and (even if you can't imagine a situation) if ever needed its benefit is can be infinite. This is one of those pound foolish risk management approaches that makes no sense at all especially in light of all the costly reminders recently of the understated likelihood of fat tail events - what is the harm?

avalpert · Post by **avalpert** » Tue May 10, 2011 5:38 pm

ResNullius wrote:It's hard to make money by losing money, but I guess the new math might produce a different result.

Better not invest in stock - they lose money all the time. Some forms of insurance are not bad ideas you know - even if the expected outcome is negative you sometimes have to protect against the unexpected outcome.

monkey_business · Post by **monkey_business** » Tue May 10, 2011 6:05 pm

avalpert wrote:
livesoft wrote:Remember: This thread is about wealthy folks. With that given, here are comments in blue:
ShowMeThe... wrote:Sounds like there are multiple levels of "Emergency Fund"

1) Long-term EF: Like, what if we're unemployed for 1-2 years? How to pay expenses then <- No problem. Spend down wealth slowly.

2) Immediate emergency fund: Like, having liquid / immediately accessible funds around when your car's engine block decides to let loose on I-95 <- No problem. You're wealthy, so this is a small charge on the credit card. A quarter to a half of your next paycheck covers this and allows you to pay off the credit card in full when the bill comes.

3) Weird but possible emergency: My in-laws used to live in a coastal island hurricane-prone area. Just in case the island was cut off for awhile and the ATMs not working, they kept a small cache of cash in the house ("hurricane money"). <- No problem. You're on an island. You don't need cash to buy anything. Besides if you do all the stores got wiped out and are not open anyway. You probably left the island ahead of time. But if you didn't, that's poor planning. Since you are wealthy, you had boats and SUVs already filled up with gas ready to go a week before the weather forecaster knew where the hurricane was going to hit. You also cached food and water as well.
Maybe we need a repeat poll of real emergency fund uses?

Short term, I've heard of bailing kids out of jail or needing to fly home from overseas due to emergency health issues. In natural disasters, there is generally quite a lot of neighborly help. I know McDonalds gave out free food in our area if you told them your house was destroyed by a tornado.

Long term, you have quite a lot of options that do not require safety nor liquidity.
I really don't understand your obsession with not having emergency cash on hand. It's impact on your portfolio is near zero and (even if you can't imagine a situation) if ever needed its benefit is can be infinite. This is one of those pound foolish risk management approaches that makes no sense at all especially in light of all the costly reminders recently of the understated likelihood of fat tail events - what is the harm?

I agree. I really don't see why someone would not want to hold a small highly liquid low-risk amount for emergencies. I would imagine for most people, the majority of their investments are in tax-advantaged accounts like IRAs. If they are not retired and are thus not drawing down on those accounts, and an emergency hits, it might be problematic withdrawing from them.

Even in the case of a Roth IRA, you would not be able to put that money back in after you withdraw it. If you have a lot in taxable, depending on your allocations, those particular investments might be down significantly, and you might not be able to buy elsewhere to offset the withdrawals.

Maybe if you're already retired and are already actively living off your savings it might make sense not to have a separate emergency fund. For others, it seems like an unnecessary (and potentially costly) complication just to earn a bit more interest on a small chunk of money.

jh · Post by jh » Tue May 10, 2011 6:17 pm

livesoft · Post by **livesoft** » Tue May 10, 2011 6:32 pm

avalpert wrote:I really don't understand your obsession with not having emergency cash on hand. It's impact on your portfolio is near zero and (even if you can't imagine a situation) if ever needed its benefit is can be infinite. This is one of those pound foolish risk management approaches that makes no sense at all especially in light of all the costly reminders recently of the understated likelihood of fat tail events - what is the harm?

The impact is more than the impact of going from TotalStockMarket Investor shares to TotalStockMarket Admiral shares, yet folks fall all over themselves trying to get low expense ratios around here. If one is going to extraordinary lengths to reduce expense ratios, then they should take some lesser measures to increase the return of their emergency fund.

For us, those lesser measures include a tiered emergency fund: Checking account, credit cards, short-term bonds, etc. I would not think of having more than a month's worth of expenses in cash paying less than 1%. This tiered approach covers all possible contingencies that I cannot even imagine ... all without having much cash on hand. If we held cash instead, that would cost us several thousand dollars a year in lost gains. That's enough to buy a used car every couple of years.

staythecourse · Post by **staythecourse** » Tue May 10, 2011 6:58 pm

I think EF and the amount needed is really something that is very individualized based on the person's situation in life, their job security, their health, the health of their dependents, the psychological comfort of having the liquidity, the overall portfolio size, the overall asset allocation, etc.

That is why you see so many different answers.

Good luck.

sscritic · Post by **sscritic** » Tue May 10, 2011 7:07 pm

monkey_business wrote: I agree. I really don't see why someone would not want to hold a small highly liquid low-risk amount for emergencies. I would imagine for most people, the majority of their investments are in tax-advantaged accounts like IRAs. If they are not retired and are thus not drawing down on those accounts, and an emergency hits, it might be problematic withdrawing from them.

Either you have money in a taxable account or not. If all your money is in a tax-advantaged account, then your emergency fund necessarily must be in your tax-advantaged account. If you have $1 million in tax-advantaged accounts and an additional $50k in a taxable account, then you have $50k in a taxable account. What you put in your taxable account vs your tax-advantaged account is a matter of asset allocation and placement. Whether you label all your taxable account as "emergency fund" or consider part of your taxable account as "house down payment" or consider part of your tax-deferred account as "emergency fund" is just labeling to my mind.

The person with $1 million in tax-advantaged accounts and $50k in taxable probably also has credit cards with a credit limit of $50k.

In a true emergency, I would not hesitate to take money out of my tax-advantaged accounts, but I would spend some time thinking about whether it was a true emergency that would require such a drastic step. I would draw on other resources first (the taxable account, the credit cards, possible family -- but I just hate asking family for money - you know how they can be).

letsgobobby · Post by **letsgobobby** » Tue May 10, 2011 7:27 pm

let's say there is an identified use for some money in a short time frame: less than 3 years. Is there agreement that that money should not be invested per one's AA? Let's use the example of $100,000 needed for a home down payment, against a $1,000,000 overall investment portfolio. Normal EF for this individual is, say, $50,000.

scrabbler1 · Post by **scrabbler1** » Tue May 10, 2011 8:42 pm

staythecourse wrote:I think EF and the amount needed is really something that is very individualized based on the person's situation in life, their job security, their health, the health of their dependents, the psychological comfort of having the liquidity, the overall portfolio size, the overall asset allocation, etc.

That is why you see so many different answers.

Good luck.

I agree with this. I would add to your good list the following two items: "Their risk tolerance of the principal in their most liquid account used to hold all or most of their EF, and their the rate of return s/he is willing to forgo for the sake of increased preservation of said EF's principal."

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Emergency fund and your wealth

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