Should I invest my emergency fund?

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RevYoung
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Should I invest my emergency fund?

Post by RevYoung » Sat Mar 21, 2015 9:39 pm

I read this post by Dan Egan on the Betterment blog, and it really made a lot of sense to me:

Safety Net Funds: Why Traditional Advice Is Wrong

Their key takeaways:
  • Don’t keep your safety net fund in cash savings accounts. Odds are you’ll lose money due to inflation, and lose out on potential growth of your savings.
  • A smarter way is to invest 130 percent of your safety net in a moderate-risk portfolio. This ensures you keep your safety net fund available -- and growing.
That "130%" is critical since the investment may lose value. Over the longterm, though, presuming I don't need my emergency fund, it will continue to grow. This seems like betting on the market rather than betting that something catastrophic will happen.

I decided to do this with 50% of my emergency fund since that would buy me some time to figure out what to do with the invested half of it if I ever needed to begin tapping into the emergency fund.

Just for the sake of round numbers, let's say I have a $20,000 emergency fund. I am now earning 1% interest on $10,000 of it, but I added another $3,000 to the other half of it to make 130% and am investing $13,000 in 40% stocks and 60% bonds.

What do you think of this? Good use of money or risky business? Improvements on this plan are welcomed.

Thanks!
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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climber2020
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Re: Should I invest my emergency fund?

Post by climber2020 » Sat Mar 21, 2015 9:52 pm

I keep my emergency fund in a savings account that pays close to 0%. It won't grow, and I don't care. All I want is for the cash to be there if and when I lose my job so I don't have to sell my stock funds to pay rent. Each year that passes, my overall portfolio grows larger and the percentage of assets that makes up the emergency fund shrinks to a more insignificant level. If I need more growth/risk, I'll leave my emergency fund alone and simply increase my stock allocation.

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Re: Should I invest my emergency fund?

Post by RandomPointer » Sat Mar 21, 2015 9:55 pm

I put mine in I bonds.

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Re: Should I invest my emergency fund?

Post by RevYoung » Sat Mar 21, 2015 9:59 pm

All I want is for the cash to be there if and when I lose my job
But what if you don't lose your job? I think that is an important scenario to consider and one that folks with emergency funds don't think about often enough. In my case, I think the odds are better that I will keep my job. So I am behaving in a way that presumes that outcome to be more likely.

Money in an emergency fund earning 0% is actually losing value due to inflation. It's a huge opportunity cost depending on the size of your emergency fund, no?

Perhaps the answer to the question I'm asking in this thread depends on how stable one's job situation is…?
I put mine in I bonds.
A solid idea. I am considering 100% bonds as well.
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Mikle
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Re: Should I invest my emergency fund?

Post by Mikle » Sat Mar 21, 2015 10:00 pm

I have been questioning the wisdom of keeping of keeping the emergency funds invested in a low risk/less than zero return instruments ( Ladder CDs in my case) for as long as I have been investing.
I wonder if it would be better to double the amount of the emergency fund and then invest it in something slightly more risky that has a chance of returning your spending power? Something like the Vanguard LifeStrategy Income Fund .
I haven't done this because, overall the advice I get here on Bogelheads has served me so well that I am willing to accept a negative return on a small portion of my portfolio because the total return has been rewarding. So far.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Sat Mar 21, 2015 10:04 pm

…the advice I get here on Bogelheads has served me so well that I am willing to accept a negative return on a small portion of my portfolio because the total return has been rewarding. So far.
That makes a lot of sense. Maybe I am being too greedy. In fact, based on your mention of the LifeStrategy Income Fund, perhaps I am being a downright greedy fool. I'm using LifeStrategy Conservative Growth at the moment. :greedy
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Re: Should I invest my emergency fund?

Post by oldzey » Sat Mar 21, 2015 10:08 pm

Always nice to have a little dry powder on hand for life's vicissitudes. :moneybag
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Re: Should I invest my emergency fund?

Post by randomguy » Sat Mar 21, 2015 10:21 pm

Emergency funds are for people without taxable investment accounts.:) I have like 3 year of expenses in bonds in taxable (+ a lot more in stocks). Having 3-9 months in cash isn't going to make me sleep any better at night. Keep enough money in the checking account to pay the bills and invest the rest. Betterments rule of thumb of having an extra 30% seems about right. You could bump it to 50% if your feeling conservative. But unless the EF is a huge chunk of your savings, this isn't likely to be a big issue.

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Re: Should I invest my emergency fund?

Post by dsmil » Sat Mar 21, 2015 10:29 pm

I read that Betterment post a couple of weeks ago and love what it had to say, because I always feel bad about my emergency money just sitting there. Rather than having 6 months of expenses at on online savings account, my new plan is to have 4 months at an online savings account and 4 months in equities. This way, I'll still have 6 months of expenses in case of a 50% drop in equities.

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Re: Should I invest my emergency fund?

Post by Mrxyz » Sat Mar 21, 2015 10:36 pm

RandomPointer wrote:I put mine in I bonds.
.

So, do I!
And the I bonds (in parent's name) can also be used for their kids educational purposes and so they have a dual role.
I think livesoft has a better post/explanation about Efunds investing. You may be able to find it by searching the forum.

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Re: Should I invest my emergency fund?

Post by climber2020 » Sat Mar 21, 2015 11:53 pm

RevYoung wrote:
All I want is for the cash to be there if and when I lose my job
But what if you don't lose your job? I think that is an important scenario to consider and one that folks with emergency funds don't think about often enough. In my case, I think the odds are better that I will keep my job. So I am behaving in a way that presumes that outcome to be more likely.

Money in an emergency fund earning 0% is actually losing value due to inflation. It's a huge opportunity cost depending on the size of your emergency fund, no?

Perhaps the answer to the question I'm asking in this thread depends on how stable one's job situation is…?
Same could be said for disability insurance. I'm pretty sure I'll never need it, but I still have it, and it helps me sleep at night.

I'm in a career with very low unemployment, so my job is pretty secure. But I still like the peace of mind of having a year's worth of expenses in cash.

In any case, my emergency fund is such a small percentage of my overall portfolio that losing a little bit from inflation will have no significant impact on when I retire.

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Re: Should I invest my emergency fund?

Post by mikep » Sat Mar 21, 2015 11:55 pm

It is written like this since Betterment wants you to invest it to increase their AUM. If you look there are plenty of cash rates higher than 1% available with some minimal hoop jumping required. Find a rewards account for it -- mine used to be in I bonds but is now earning 5+%. Consumer CU, Mango, union plus, etc are 5-6% and NCUA/FDIC insured.

They also left out the opportunity cost of padding your emergency fund 30% higher to begin with - what goal did you take it from and what could it have done there invested to your full AA?

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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 1:21 am

It is written like this since Betterment wants you to invest it to increase their AUM.
I should have mentioned that in my initial post. You definitely have to take into account who wrote the post and what their motivation might be. There is something in it for them if you believe what is in the post. It should put one on guard.

Even with that in mind, though. I believe the reasoning is solid.
They also left out the opportunity cost of padding your emergency fund 30% higher to begin with - what goal did you take it from and what could it have done there invested to your full AA?
I took it out of a savings account earning next to nothing. So there's that. :wink:
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Re: Should I invest my emergency fund?

Post by red5 » Sun Mar 22, 2015 4:53 am

I have about 9-months invested 40/60 in a taxable account. I have done this for about the last 4 or 5 years. I have done this despite the vast majority (in here and elsewhere) saying emergency money should be kept safe and in a plain vanilla savings account. I have done this being aware that I could lose 20-30-40% of its value. Hopefully in the long run and with the benefit of hindsight it will be clear that it was a good decision.

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Re: Should I invest my emergency fund?

Post by chessmannextmove » Sun Mar 22, 2015 5:25 am

I love the idea of more return on an ef.
Ef
25% savings (1%) 6mo
50% 12 one year cds one for each month (varies but latest 1.05%) 1yr
25% muni fund 6mo

Since all the rest of my investments are in stocks and stock funds (exept pension and ss), i figured my ef was enough.

But hmmm... Making the ef bigger and including stock funds.... ???? Sounds appealing but I'll pass.

I already have funds for various exclusive purposes such as gifts and vacations.

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Re: Should I invest my emergency fund?

Post by columbia » Sun Mar 22, 2015 7:23 am

The companion question is: do people slot their emergency fund in with fixed income or is the fund considered to be completely outside of their investment allocations?
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Should I invest my emergency fund?

Post by FRANK2009 » Sun Mar 22, 2015 7:24 am

After reading that article, oh maybe a year ago, I put my emergency fund into Vanguard Retirement Income fund. (VTINX). 30% equity/70% bond split. I'm sure it's fine as long as you understand that your emergency fund can lose money.

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Re: Should I invest my emergency fund?

Post by jeremyl » Sun Mar 22, 2015 8:46 am

FRANK2009 wrote:After reading that article, oh maybe a year ago, I put my emergency fund into Vanguard Retirement Income fund. (VTINX). 30% equity/70% bond split. I'm sure it's fine as long as you understand that your emergency fund can lose money.
How did you go about setting that up for yourself? I am interested in moving say 3 months of EF into something like that (and still contribute to until it's at a year's worth of expenses) and keeping 3 months in an online savings account. Does this impact amounts that can be invested in a tax deferred (403b) and/or Roth IRA?

I'm green to investing but have thought about trying to get more out of the emergency fund at a slightly higher risk compared to "losing" buying power by keeping the money in a low earning online savings account.

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Re: Should I invest my emergency fund?

Post by packet » Sun Mar 22, 2015 10:09 am

randomguy wrote:Emergency funds are for people without taxable investment accounts.:)
+1

And that was me until fairly recently.
I grew the EF in cash until i had enough to start investing in taxable with comfort. The EF goal was for 6 months expenses, once it reached 9 months expenses I invested almost all of it. Also, by this time, Roth accounts had enough contributions to count as EF too, so that added to my comfort level in investing the cash. I reduced my cash all the way down to a small ($5k) "contingency" fund and put the rest to work in a taxable (all equity) account.

The checking account is there to handle budgeted expenses, the contingency is there to cover un-budgeted expenses. I actually use the CF account as a place holder for the taxable investments, all cash left over after bills are paid goes into this account. Every time it reaches $6k, I move $1k to the taxable account. The taxable account counts as part of my over-all asset allocation, but the checking/CF do not (they just aren't big enough).

I've pretty much begun to view all of our assets as 1 big bucket... it ALL counts as emergency funds if need be.

After a few brews, I sleep well enough at night... :)

:beerCheers,
Packet
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Re: Should I invest my emergency fund?

Post by sambb » Sun Mar 22, 2015 10:16 am

Some of the worst financial advice i have received here is to NOT invest my emergency fund. I have changed that once i did the analysis. I see little downside over the long term with a 60/40 allocation mix. But i have a taxable account with significant holdings that i could sell if something happened.

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Re: Should I invest my emergency fund?

Post by digit8 » Sun Mar 22, 2015 10:38 am

I treat the EF as a monthly bill to myself, so money is always going into it. When I have more then 6 months in an MMSA, I move the extra to I Bonds and a taxable investment fund, but a cash stash is something I'll never give up. It is deeply satisfying to solve a major problem by simply writing a check- no tax consequences, no shuffling accounts, nothing. Done.
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Re: Should I invest my emergency fund?

Post by Pizzasteve510 » Sun Mar 22, 2015 10:51 am

I think it varies based on where you are in your plan, whether you have kids, risk tolerance, etc. The principles behind the standard advice are good, but then once you understand the reasoning behind the advice you can then make your own call - based on where you are in your life plan.

At some point the 'emergency' is a weekend trip to Paris for your beloved and yourself.

For us, we have a larger than needed reserve, but not for emergency fund security, but for spending or investment convenience. At financial independence having an extra 50k or so in cash is no big deal vs the overall portfolio allocation decisions.

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Re: Should I invest my emergency fund?

Post by IPer » Sun Mar 22, 2015 10:56 am

RevYoung wrote:I read this post by Dan Egan on the Betterment blog, and it really made a lot of sense to me:

Safety Net Funds: Why Traditional Advice Is Wrong

Their key takeaways:
  • Don’t keep your safety net fund in cash savings accounts. Odds are you’ll lose money due to inflation, and lose out on potential growth of your savings.
  • A smarter way is to invest 130 percent of your safety net in a moderate-risk portfolio. This ensures you keep your safety net fund available -- and growing.
That "130%" is critical since the investment may lose value. Over the longterm, though, presuming I don't need my emergency fund, it will continue to grow. This seems like betting on the market rather than betting that something catastrophic will happen.

I decided to do this with 50% of my emergency fund since that would buy me some time to figure out what to do with the invested half of it if I ever needed to begin tapping into the emergency fund.

Just for the sake of round numbers, let's say I have a $20,000 emergency fund. I am now earning 1% interest on $10,000 of it, but I added another $3,000 to the other half of it to make 130% and am investing $13,000 in 40% stocks and 60% bonds.

What do you think of this? Good use of money or risky business? Improvements on this plan are welcomed.

Thanks!
I have a significant amount in Betterment and a "Safety Net" is part of it, however, I argued with Dan Egan when he put out that post. I don't think people should
confuse what he is talking about with an Emergency Fund, though I do have my Emergency fund in 35% CDs, 25% cash in 2 bank accounts and the rest in bonds, mostly
muni/tax free. My Emergency fund is more than most, I have 18 months in projected living expenses, many say cut it off at 9 months or 6 or 12, I just like that number better. I don't look at any of my investments at Betterment in any allocation as my EF, one of my goals at Betterment is 50/50. The bottom line here is read a bunch
then decide what makes sense for you!
Last edited by IPer on Sun Mar 22, 2015 11:05 am, edited 1 time in total.
Read the Wiki Wiki !

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Re: Should I invest my emergency fund?

Post by IPer » Sun Mar 22, 2015 11:03 am

jeremyl wrote: How did you go about setting that up for yourself? I am interested in moving say 3 months of EF into something like that (and still contribute to until it's at a year's worth of expenses) and keeping 3 months in an online savings account. Does this impact amounts that can be invested in a tax deferred (403b) and/or Roth IRA?
Open an account at Vanguard, with minimum $1000.00, purchase VTINX with a minimum of $1000.00, add more whenever you want. This can be done online. http://www.vanguard.com
Read the Wiki Wiki !

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Re: Should I invest my emergency fund?

Post by terran » Sun Mar 22, 2015 12:41 pm

Here's a way of thinking about it: I ran $30000 yearly expenses with a $45000 investment in a 50/50 portfolio and 1 year of "retirement" (same start/end year) through cfireism and got 100% success with a low balance of $6500. That would seem to imply that for all 144 historic cycles a 1 year emergency fund equal to 150% of annual expenses would successfully cover expenses would it not? Or am I missing something?

I guess one issue is that this probably doesn't take sequence of withdrawals into account. How big a concern should that be over such a short time frame? If you make monthly withdrawals would it have similar effects if the market is down at the beginning as it does when planning retirement?

It looks like cfireism must be doing something other than withdrawing spending at the beginning of the year because 0 expenses and a $15000 portfolio results in a $10,500 low, so it's not just taking out 30k at the beginning and investing what's left for the rest of the year. Does anyone know how cfireism takes withdrawals?

Is there any reason to think that a 6 month time horizon would be significantly different from a 1 year time horizon?

I guess at the end of the day it comes down to what the shortest time horizon is that you ever expect to need your emergency funds, and what the single biggest drop has ever been over that time horizon. Does anyone know how to find that information?

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Re: Should I invest my emergency fund?

Post by island » Sun Mar 22, 2015 1:29 pm

Mrxyz wrote:
RandomPointer wrote:I put mine in I bonds.
.

So, do I!
And the I bonds (in parent's name) can also be used for their kids educational purposes and so they have a dual role.
I think livesoft has a better post/explanation about Efunds investing. You may be able to find it by searching the forum.
Been searching for livesoft's post since I read this, but haven't found it yet. If you happen to come across it, can you please post the link? Thanks.

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Re: Should I invest my emergency fund?

Post by Mrxyz » Sun Mar 22, 2015 1:37 pm

island wrote:
Mrxyz wrote:
RandomPointer wrote:I put mine in I bonds.
.

So, do I!
And the I bonds (in parent's name) can also be used for their kids educational purposes and so they have a dual role.
I think livesoft has a better post/explanation about Efunds investing. You may be able to find it by searching the forum.
Been searching for livesoft's post since I read this, but haven't found it yet. If you happen to come across it, can you please post the link? Thanks.
If you put livesoft emergency fund in the site search box at the top right corner, you will get more information that you need! There are so many interesting/readable threads on E funds...........

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Re: Should I invest my emergency fund?

Post by island » Sun Mar 22, 2015 3:04 pm

Mrxyz wrote:
island wrote:
Mrxyz wrote:
RandomPointer wrote:I put mine in I bonds.
.

So, do I!
And the I bonds (in parent's name) can also be used for their kids educational purposes and so they have a dual role.
I think livesoft has a better post/explanation about Efunds investing. You may be able to find it by searching the forum.
Been searching for livesoft's post since I read this, but haven't found it yet. If you happen to come across it, can you please post the link? Thanks.
If you put livesoft emergency fund in the site search box at the top right corner, you will get more information that you need! There are so many interesting/readable threads on E funds...........
Yes I know that, I thought you were talking about one specific discussion or unique approach.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 4:00 pm

columbia wrote:The companion question is: do people slot their emergency fund in with fixed income or is the fund considered to be completely outside of their investment allocations?
I have been counting mine separately. That may change in the future as I amass a larger pot of money. :)

----
Packet wrote:I've pretty much begun to view all of our assets as 1 big bucket... it ALL counts as emergency funds if need be.

After a few brews, I sleep well enough at night...
I like the cut of your jib, Packet. :sharebeer

----
Pizzasteve510 wrote:I think it varies based on where you are in your plan, whether you have kids, risk tolerance, etc. The principles behind the standard advice are good, but then once you understand the reasoning behind the advice you can then make your own call - based on where you are in your life plan.
A good reminder. No kids at the moment, high risk tolerance. Only in my 30s. I think I'm going to continue investing my emergency fund and have a beer with Packet. :mrgreen:

----
Mrxyz wrote:I think livesoft has a better post/explanation about Efunds investing. You may be able to find it by searching the forum.
I've actually read them all. Good stuff! I still had some questions, and was mostly interested in the specific recommendation from that blog post. But if anyone reading this hasn't yet read the other threads, now is your chance. :)

Posts from Boglehead livesoft about emergency funds
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Re: Should I invest my emergency fund?

Post by 555 » Sun Mar 22, 2015 4:06 pm

My emergency fund doesn't have an asset allocation because you can't divide by zero.

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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 4:12 pm

555 wrote:My emergency fund doesn't have an asset allocation because you can't divide by zero.
So…you don't have an emergency fund.

Which is another way of saying you have invested it.

Do I get a prize now? :)
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Re: Should I invest my emergency fund?

Post by 555 » Sun Mar 22, 2015 4:19 pm

RevYoung wrote:
555 wrote:My emergency fund doesn't have an asset allocation because you can't divide by zero.
So…you don't have an emergency fund.
Which is another way of saying you have invested it.
Do I get a prize now? :)
Right. It's all one big portfolio. An "emergency fund" is just mental accounting.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 4:32 pm

555 wrote:Right. It's all one big portfolio. An "emergency fund" is just mental accounting.
Which I find helpful at this stage. I'm still very new to investing. (Although, I'm sure that much is obvious from my posts.)

I'll get there eventually, I'm sure.
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Re: Should I invest my emergency fund?

Post by Dancer » Sun Mar 22, 2015 4:35 pm

Another thing to consider are different conservative allocations such as the Permanent Portfolio or Ray Dalio's All-Weather Portfolio. Low stock allocations ; lower max drawdowns.

With the Permanent Portfolio, it does a bond barbell (1/2 "Cash"; 1/2 long term treasuries), so money in the bank can be factored into the portfolio.

Adjust percentages if concerned about the avg duration -- 8.4 years if use VGs Long Term Treasury fund (VUSTX) vs 5.6 years for VGs Total Bond (the baseline bond allocation around these here parts.)

A recent discussion of the Ray Dalio portfolio on this site: viewtopic.php?f=1&t=151127

A PP/Dalio comparison (VERY high level, PP biased) is at http://www.crawlingroad.com/blog/2014/1 ... portfolio/ ; but does not some similarities in construction and differences from typical Stock/Bond only portfolios.

(BTW, no INTL stock in the vanilla PP, although some like to tinker.... :)

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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 4:41 pm

Dancer wrote:(BTW, no INTL stock in the vanilla PP, although some like to tinker.... :)
I love that you included that in there for me. ;)

I will take a look at your links. Thank you!
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Re: Should I invest my emergency fund?

Post by Artsdoctor » Sun Mar 22, 2015 4:46 pm

There comes a point when you just want liquidity. Things come up, and it doesn't have to be a loss of a job.

You're never going to find a consensus here because there's no right answer. In fact, I'd be weary of someone trying to tell you that their way is the best, or only, way.

You'd probably be best served by defining emergency. Is it a rare event, or is it something as mundance as a new roof, a delay in getting reimbursed for a cash outlay, an exorbitant car maintenance fee? You can rely on income from your investments, but if you need to get your hands on a big chunk of cash, are you going to have to sell your investment to do it? Would you have to sell at a loss? Do you want to sell at a gain and deal with the tax consequences?

Everyone has their own comfort level on what they need within a few days' notice. The things that matter most to me are liquidity and not having to worry about tax ramifications. So what if I'm not maximizing my return on my emergency cash? It's the cost of living that we all have to endure. It's very powerful to be able to make decisions without having to worry about where you're going to come up with the money.

If you decide that you really want liquidity and easy access, then you can figure out where to stash it. For example, it makes no sense to put it in a money market account making 0.01% when you can easily make 1% on an FDIC-insured savings account. Rates are ridiculously low but if you want $100,000 in cash, you'd probably rather make $1,000 for the year on it than $10, for example.

I-bonds are great. The only problem is that you need time to get them going. You can't access them for a year, and you give up three months of interest if you cash them in within 5 years. If it's a matter of life and death, so what. But if it's just a matter of taking an unexpected trip to Rome because there's an opportunity that presents itself, I don't really want to pay fees to do that.

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Re: Should I invest my emergency fund?

Post by Seattlenative » Sun Mar 22, 2015 4:49 pm

RevYoung wrote:But what if you don't lose your job? I think that is an important scenario to consider and one that folks with emergency funds don't think about often enough. In my case, I think the odds are better that I will keep my job. So I am behaving in a way that presumes that outcome to be more likely.......Money in an emergency fund earning 0% is actually losing value due to inflation. It's a huge opportunity cost depending on the size of your emergency fund, no?......Perhaps the answer to the question I'm asking in this thread depends on how stable one's job situation is…? .......I am considering 100% bonds as well.
Unless you are appointed by POTUS to a Federal judgeship, there is literally no such thing as a "permanent" job in the U.S.A. Period. Anyone who thinks that they are completely immune from ever losing their job, or having their spouse lose a job, is kidding themselves. There is no absolutely surefire method of predicting future business conditions, or having a new supervisor/manager hired over you who does not appreciate your skills and abilities, or (if you are in public sector) governmental budget cuts where your job is among those being axed. When that happens, you can't predict whether you'll receive severance pay or the amount of severance, and you will in fact sleep better at night knowing that somehow the mortgage and utilities can be paid, COBRA health premiums paid, and so forth while you seek re-employment elsewhere.

More significantly, an emergency fund can cover unanticipated major outlays such as: loss of wages from extended hospitalization, unusually high medical bills for which some are not fully paid by your ERISA plan, a major vehicle breakdown (i.e. transmission replacement), an urgent need to replace the roof of your home, etc. If you are comfortable with fluctuations in principal value/pricing on bonds, that is a choice you are entitled to make, and you are right that even if you earn 1% in a high-yield savings account, you lose some purchasing power. My suggestion here would be put half of your emergency fund into a high-yield FDIC-insured savings account, half of your fund into United States Series I Savings Bonds (inflation protected). Keep in mind that I Bonds, as well as EE Bonds, must be held at least one year before early redemption is allowed.

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packet
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Re: Should I invest my emergency fund?

Post by packet » Sun Mar 22, 2015 5:00 pm

RevYoung wrote:... have a beer with Packet.
Cheers!
:sharebeer

Just happen to be having a Smuttynose, Finestkind IPA at the moment... :) ... https://smuttynose.com/beer/finestkind-ipa/

Sounds like you're on the right track... keep at it and keep it simple... viewtopic.php?f=10&t=161617&newpost=2428684

(again) :beerCheers,
Packet
First round’s on me.

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kellyfj
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Re: Should I invest my emergency fund?

Post by kellyfj » Sun Mar 22, 2015 5:01 pm

For my emergency fund I like cash and the knowledge that it's FDIC insured (especially as I watched our financial system nearly implode in 2007-2009 and wondered if I should be buying shotguns and water rather than investing in my 401k). It also plays a good counter balance to the rest of my portfolio which is quite aggressive for my age (43) - lots of small caps.

Someone said - and I liked it - that cash is insurance not an investment and that works for me. I just like the security of knowing I have 6 months of cash sitting idle - ready for anything. Considering that it's less than 5% of my net worth I don't see the point in investing it compared to the "I can sleep at night factor".

Just one thing to notice - these types of questions ONLY ever come up when the market is near a top - I doubt anyone was asking this in the 2007-2009 timeframe
after people lost 50% of their equity portfolio dollars (or 30% of their balanced fund), when HELOCs were closed and layoffs were occurring left, right and center
- when people needed the e-fund the most :-(

But YMMV,

Best Wishes,

Frank

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Re: Should I invest my emergency fund?

Post by Artsdoctor » Sun Mar 22, 2015 5:06 pm

^ Agree with Seattle. In fact, I'd go one step further. You don't have to paint yourself into a corner of dire emergencies. Sometimes, opportunities just come up and you want to take advantage of them. Airfares to Asia are slashed 50% and the Four Seasons is running a once-in-a-lifetime special. Do you really want to sell shares in your intermediate bond fund for that? Take a loan from your stash and replenish it within the next 30 days when other money becomes available (the key is to replenish that stash). So what if you've lost a few bucks in investment income? Hopefully you'll have several layers of protection and liquidity.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 5:21 pm

Artsdoctor wrote:You'd probably be best served by defining emergency. … if it's just a matter of taking an unexpected trip to Rome because there's an opportunity that presents itself, I don't really want to pay fees to do that.
Good point. In my case, it is for real emergencies. I'd never dip into the emergency fund for non-emergencies. And unless a close relative suddenly moves to Rome and passes away, I can't imagine ever defining a trip there as an emergency. :)
Seattlenative wrote:Unless you are appointed by POTUS to a Federal judgeship, there is literally no such thing as a "permanent" job in the U.S.A. Period. Anyone who thinks that they are completely immune from ever losing their job, or having their spouse lose a job, is kidding themselves.
Apologies if what I wrote came across that way. That certainly wasn't my intention. I agree with you. Anything can happen—to you, me, or anyone. My point was simply that in any given year, I am either losing my job or not losing my job. Most years I am not losing my job. So shouldn't I adjust my behavior to match that reality? I've done so and am increasingly happy with my decision to invest half of my emergency fund in a 40/60 portfolio.

As an example, if my fund is 6 months of *necessary* spending — I would be going into emergency budget mode, so it doesn't need to be 6 months of my regular life-is-great budget — then that still gives me 3 whole months to figure out my next move before touching even a penny of the invested funds.
kellyfj wrote:…wondered if I should be buying shotguns and water rather than investing in my 401k
I guess I just refuse to live in that state of anxiety. If things are really so bad that I need to arm myself to survive, then it probably doesn't matter much what my money is doing. I'll sell low to buy a tank and not think twice about it.
kellyfj wrote:Just one thing to notice - these types of questions ONLY ever come up when the market is near a top - I doubt anyone was asking this in the 2007-2009 timeframe
I can't speak for anyone else thinking about this topic, but as I mentioned earlier, I am new to investing. That combined with the fact that I don't watch the markets since I am not trying to time them, means that I would have been asking this same question circa 2008.

I’m a firm believer that good investment advice should remain good investment advice regardless of what the market is doing.

Cheers (to all, including and especially Packet)! I may go to a local brewery here in LA later tonight thanks to this thread. That is an investment I will never regret. :beer
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

Seattlenative
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Re: Should I invest my emergency fund?

Post by Seattlenative » Sun Mar 22, 2015 5:23 pm

Artsdoctor wrote:^ Agree with Seattle. In fact, I'd go one step further. You don't have to paint yourself into a corner of dire emergencies. Sometimes, opportunities just come up and you want to take advantage of them. Airfares to Asia are slashed 50% and the Four Seasons is running a once-in-a-lifetime special. Do you really want to sell shares in your intermediate bond fund for that? Take a loan from your stash and replenish it within the next 30 days when other money becomes available (the key is to replenish that stash). So what if you've lost a few bucks in investment income? Hopefully you'll have several layers of protection and liquidity.
That reminds me that for many of us, we should set up a small separate fund to accumulate $$ for vacations, car replacement or other special events. It should be separate from our investments. For that account, which is not mission-critical but could help you to take advantage of an unusual bargain opportunity, it might be acceptable to use an aggregate-bond ETF like BND or SCHZ, but put those bonds (or FDIC-insured high-yield savings) into a segregated account earmarked for that specific purpose.

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Re: Should I invest my emergency fund?

Post by RandomPointer » Sun Mar 22, 2015 5:26 pm

columbia wrote:The companion question is: do people slot their emergency fund in with fixed income or is the fund considered to be completely outside of their investment allocations?
My goal is to have one year worth of emergency fund. That is a lot of money.

In the beginning, I tried to treat emergency fund separately from my total investment allocation, and that made me frustrated. I just started investing, and treating emergency funds separately makes my overall portfolio too conservative.

Finally I decided to treat my emergency funds as part of my bonds portfolio. The frustration has gone. I feel that my overall portfolio truly reflects my willingness to take risk. The emergency funds occupies the safest part of my bonds allocation.

Other consideration: when I retire, I do not need an emergency fund. I will have enough money to cover emergency. I cannot rationalize for myself why do I have to treat it separately today.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Sun Mar 22, 2015 5:29 pm

Seattlenative wrote:That reminds me that for many of us, we should set up a small separate fund to accumulate $$ for vacations, car replacement or other special events. It should be separate from our investments. For that account, which is not mission-critical but could help you to take advantage of an unusual bargain opportunity, it might be acceptable to use an aggregate-bond ETF like BND or SCHZ, but put those bonds (or FDIC-insured high-yield savings) into a segregated account earmarked for that specific purpose.
Indeed. Vacations and new cars are most decidedly NOT emergencies in my book. Perhaps that's where at least a bit of the disagreement came in.
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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Re: Should I invest my emergency fund?

Post by 3504PIR » Sun Mar 22, 2015 5:31 pm

digit8 wrote:I treat the EF as a monthly bill to myself, so money is always going into it. When I have more then 6 months in an MMSA, I move the extra to I Bonds and a taxable investment fund, but a cash stash is something I'll never give up. It is deeply satisfying to solve a major problem by simply writing a check- no tax consequences, no shuffling accounts, nothing. Done.
I like this approach very much.

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Watty
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Re: Should I invest my emergency fund?

Post by Watty » Sun Mar 22, 2015 5:50 pm

How to invest the emergency fund is really just a detail, the important things are;

1) That you have an emergency fund.

2) That you distinguish between an emergency and an unpredictable expense. Something like an expensive car repair, doctor bill, or having a tree removed after a storm is not an emergency since you can pretty well predict that you will have things like that, just not when they will occur. You are either very unlucky or defining emergency wrong if you have more than a handful of real emergency expenses in your life.

3) The money is readily accessible. One of the problems with having the money in an investment account, especially if you are single, is that it might take several steps to get access to the money.


I have also heard of emergency money being used for "good" things so those are valid too. Things I have see happen are;

1) An elderly relative of a friend has finally agreed to give up driving. Could you buy their great car from them TODAY for a very low(but not criminal) price before they change their mind? (The persons kids who had been trying to get them to give up driving for a long time were in the loop so it was legitimate.)

2) Someone's traveling companion had to cancel a big nonrefundable trip at the last minute. The person that did not have to cancel did not want to go alone. Would you like to go to resort in Hawaii for just the cost of an airline ticket?

3) There is a great job opening across the country that you would be perfect for an it would really help your career. Unfortunately the company cannot pay relocation expenses. Would you be willing to pay your own relocation costs?

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Re: Should I invest my emergency fund?

Post by letsgobobby » Sun Mar 22, 2015 5:53 pm

RevYoung wrote:I read this post by Dan Egan on the Betterment blog, and it really made a lot of sense to me:

Safety Net Funds: Why Traditional Advice Is Wrong

Their key takeaways:
  • Don’t keep your safety net fund in cash savings accounts. Odds are you’ll lose money due to inflation, and lose out on potential growth of your savings.
  • A smarter way is to invest 130 percent of your safety net in a modeI decided to do this with 50% of my emergency fund since that would buy

    What do you think of this? Good use of money or risky business? Improvements on this plan are welcomed.

    Thanks!
I think it's a terrible idea.

am
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Re: Should I invest my emergency fund?

Post by am » Sun Mar 22, 2015 7:27 pm

I wonder whether we would have such a discussion if there was a bear market?

island
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Re: Should I invest my emergency fund?

Post by island » Mon Mar 23, 2015 1:23 am

3504PIR wrote:
digit8 wrote:I treat the EF as a monthly bill to myself, so money is always going into it. When I have more then 6 months in an MMSA, I move the extra to I Bonds and a taxable investment fund, but a cash stash is something I'll never give up. It is deeply satisfying to solve a major problem by simply writing a check- no tax consequences, no shuffling accounts, nothing. Done.
I like this approach very much.
Agree. I too like a stash of cash and the simplicity of writing a check. It helps me sleep well at night.

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RevYoung
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Re: Should I invest my emergency fund?

Post by RevYoung » Mon Mar 23, 2015 2:26 am

Watty wrote:You are either very unlucky or defining emergency wrong if you have more than a handful of real emergency expenses in your life.
Completely agreed. I'm leaning more and more towards the Placing cash needs in a tax-advantaged account approach and just eliminating my emergency fund altogether. Then I don't have to keep track of an additional asset allocation (or calculate it as part of my total asset allocation, depending on how you want to look at it).
am wrote:I wonder whether we would have such a discussion if there was a bear market?
As I mentioned earlier…

I can't speak for anyone else thinking about this topic, but I am new to investing. That combined with the fact that I don't watch the markets since I am not trying to time them, means that I would have been asking this same question circa 2008.

I’m a firm believer that good investment advice should remain good investment advice regardless of what the market is doing.
“For wisdom is a defence, and money is a defence: but the excellency of knowledge is, that wisdom giveth life to them that have it.”

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