Why have Emergency Funds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
jbschwartz55
Posts: 2
Joined: Tue Dec 26, 2017 4:18 pm

Why have Emergency Funds?

Post by jbschwartz55 » Tue Feb 27, 2018 10:21 pm

I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Tue Feb 27, 2018 10:39 pm

People that put all their savings into tax advantaged accounts?

mega317
Posts: 3067
Joined: Tue Apr 19, 2016 10:55 am

Re: Why have Emergency Funds?

Post by mega317 » Tue Feb 27, 2018 10:45 pm

You don't need an emergency fund. Many people are not in your financial position.

JustinR
Posts: 1148
Joined: Tue Apr 27, 2010 11:43 pm

Re: Why have Emergency Funds?

Post by JustinR » Tue Feb 27, 2018 10:47 pm

jbschwartz55 wrote:
Tue Feb 27, 2018 10:21 pm
I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?
Are you really interested in selling during a down market?

User avatar
whodidntante
Posts: 7130
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Why have Emergency Funds?

Post by whodidntante » Tue Feb 27, 2018 10:51 pm

Emergency funds are not for you. They are not for me, either.

Topic Author
jbschwartz55
Posts: 2
Joined: Tue Dec 26, 2017 4:18 pm

Re: Why have Emergency Funds?

Post by jbschwartz55 » Tue Feb 27, 2018 11:09 pm

OK. Thanks for the validation. You’ve confirmed my thinking. Of course, no one wants to sell in a down market, but taking that risk seems like a better alternative than putting a large chunk cash on the sidelines for 10-20 years.

Here in California, though, we DO believe in keeping an emergency stack of twenty’s under the mattress in case the Big One hits.

Thanks!

runner3081
Posts: 2696
Joined: Mon Aug 22, 2016 3:22 pm

Re: Why have Emergency Funds?

Post by runner3081 » Tue Feb 27, 2018 11:10 pm

JustinR wrote:
Tue Feb 27, 2018 10:47 pm
jbschwartz55 wrote:
Tue Feb 27, 2018 10:21 pm
I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?
Are you really interested in selling during a down market?
This statement doesn't look at the whole picture. If you had been investing the entire time, it is likely you would already be "up". When you sell in a "down" market, the loss may not match how bad the market is at the time. In other words, you may still be even or possibly ahead, compared to a savings account.

ThrustVectoring
Posts: 771
Joined: Wed Jul 12, 2017 2:51 pm

Re: Why have Emergency Funds?

Post by ThrustVectoring » Tue Feb 27, 2018 11:24 pm

You don't necessarily need an emergency fund. You do need an emergency plan. Whether it's selling stocks or bonds, taking out a margin loan, putting a major emergency purchase on a credit card, or simply withdrawing from your savings account - you will likely regret not being able to come up with money in the case of unexpected expenses.

A cash emergency fund is simply the cheapest way to get an emergency plan starting from a net worth of zero. If your taxable account has $200k in it, and you're comfortable taking on a margin loan for 10% of that, you're pretty much fine.
Current portfolio: 60% VTI / 40% VXUS

AlohaJoe
Posts: 5080
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why have Emergency Funds?

Post by AlohaJoe » Tue Feb 27, 2018 11:46 pm

runner3081 wrote:
Tue Feb 27, 2018 11:10 pm
JustinR wrote:
Tue Feb 27, 2018 10:47 pm
jbschwartz55 wrote:
Tue Feb 27, 2018 10:21 pm
I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?
Are you really interested in selling during a down market?
This statement doesn't look at the whole picture. If you had been investing the entire time, it is likely you would already be "up". When you sell in a "down" market, the loss may not match how bad the market is at the time. In other words, you may still be even or possibly ahead, compared to a savings account.
I agree that most people make statements like this without considering the whole picture. So of course it makes their position appear stronger than it actually is. As an example...

if you didn't set up an emergency fund and instead invested it in a 60/40 portfolio at the beginning of 2017, then even if the market drops 20% and you need to make a withdrawal at the absolute bottom for an emergency, you come out ahead. The further back we go, the more the market needs to drop before you actually end up under water.

Someone who skipped setting up an emergency fund in 2016 and instead put it in a 60/40 portfolio would still be ahead even if the market dropped 30% and they needed to make an emergency withdrawal.

Someone who did it in 2014 would be ahead even if the market dropped 40%.

Someone who did it in 2013 would be ahead even if the market dropped 60%.

Someone who did it in 2012 would be ahead even if the market dropped 70%.

Someone who did it in 2010 would be ahead even if the market dropped 85%.

Basically, unless you actually you use your emergency fund in the first ~10 years or so of your investing life, you always come out ahead by not having an emergency fund. That said, there are plenty of non-spreadsheet reasons people have emergency funds and that's perfectly fine.

User avatar
PhysicianOnFIRE
Posts: 458
Joined: Fri Jan 08, 2016 3:46 pm
Location: Up North

Re: Why have Emergency Funds?

Post by PhysicianOnFIRE » Wed Feb 28, 2018 12:07 am

I keep one to two months of ready cash, basically enough to pay the credit card balance and have something left over.

Cash emergencies can be covered with credit card float, HELOC, cashflow from paychecks, selling from taxable, etc...

An emergency is a great first step to getting your finances in shape, but once you're good and fit, the 6-month EF is probably overkill.

If you're looking for validation, here's a couple others that agree with you on No Emergency Fund.

Early Retirement Now

Passive Income MD

:beer
-PoF

JBTX
Posts: 5768
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why have Emergency Funds?

Post by JBTX » Wed Feb 28, 2018 3:39 am

It’s really as asset allocation question. You could include your cash fund as part of your non stock allocation. Instead of being 60/40 maybe you are 60/35/5. The difference in returns for cash and bonds is not nearly as dramatic as stocks and cash, and part of your cash fund could include accumulated ibonds.

The other answer to this is it isn’t primarily about returns, it is also risk. You keep bonds in a portfolio to reduce risk, not increase returns. If you are going to argue an emergency fund reduces returns, you can also argue a 100% stock portfolio will likely increase returns, so why not get rid of bonds too? In a scenario like 2008 one could very easily lose their job while their portfolio is tanking. Having a cash reserve can provide a buffer and reduce the downside impact of that.

xxd091
Posts: 107
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Why have Emergency Funds?

Post by xxd091 » Wed Feb 28, 2018 4:56 am

Hi JBTX
Search for the poster “Sheepdog “in this forum-read his posts.That will tell you why you need an emergency fund!
One of the most valued of the Boglehead posts!
Sorry I cannot give you a link but maybe someone else can
xxd09

User avatar
Tamarind
Posts: 1869
Joined: Mon Nov 02, 2015 2:38 pm

Re: Why have Emergency Funds?

Post by Tamarind » Wed Feb 28, 2018 6:09 am

ImUrHuckleberry wrote:
Tue Feb 27, 2018 10:39 pm
People that put all their savings into tax advantaged accounts?
This. At present, my emergency fund and savings for future big-ticket items are my only taxable holdings.

Which means OP may not need one if they have access to adequate relatively liquid funds to cover a string of catastrophes.

User avatar
Toons
Posts: 13427
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Why have Emergency Funds?

Post by Toons » Wed Feb 28, 2018 6:11 am

For many it is just a "psycological cushion".
They have attained their financial goals and do not need or want to invest any more.
Needed or Not.

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Bendee
Posts: 66
Joined: Wed Aug 17, 2016 8:41 am

Re: Why have Emergency Funds?

Post by Bendee » Wed Feb 28, 2018 6:30 am

xxd091 wrote:
Wed Feb 28, 2018 4:56 am
Hi JBTX
Search for the poster “Sheepdog “in this forum-read his posts.That will tell you why you need an emergency fund!
One of the most valued of the Boglehead posts!
Sorry I cannot give you a link but maybe someone else can
xxd09
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?

AlohaJoe
Posts: 5080
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why have Emergency Funds?

Post by AlohaJoe » Wed Feb 28, 2018 6:53 am

ImUrHuckleberry wrote:
Tue Feb 27, 2018 10:39 pm
People that put all their savings into tax advantaged accounts?
If you have an emergency fund in taxable then clearly not all of your money is in tax advantaged accounts.

There's absolutely nothing preventing you from taking the thousands of dollars you call and emergency fund and buying the S&P 500 with it instead and then adjusting the asset allocation in your tax advantaged accounts.

Now you have no emergency fund and you are able to get access to liquid funds whenever you need them.

edan
Posts: 18
Joined: Sun Aug 28, 2016 9:09 am

Re: Why have Emergency Funds?

Post by edan » Wed Feb 28, 2018 6:55 am

Bendee wrote:
Wed Feb 28, 2018 6:30 am
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?
/forum/viewtopic.php?t=25126

AlohaJoe
Posts: 5080
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why have Emergency Funds?

Post by AlohaJoe » Wed Feb 28, 2018 7:09 am

Bendee wrote:
Wed Feb 28, 2018 6:30 am
xxd091 wrote:
Wed Feb 28, 2018 4:56 am
Hi JBTX
Search for the poster “Sheepdog “in this forum-read his posts.That will tell you why you need an emergency fund!
One of the most valued of the Boglehead posts!
Sorry I cannot give you a link but maybe someone else can
xxd09
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?
I'm confused about what that thread has to do with emergency funds? Can you elaborate?

Sheepdog had been retired 10 years at that point and didn't experience any emergencies. He sold 20% of his portfolio to have 3 years of cash to fund his normal expenses. The entire thread appears to have nothing to do with emergency funds that I can tell but is about a retiree suggesting people keep a large cash bucket to fund retirement expenses in the event of a large bear market.

Also, the thread has 250 posts, so trying to learn a lesson from it is...time consuming.

User avatar
bottlecap
Posts: 6252
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Why have Emergency Funds?

Post by bottlecap » Wed Feb 28, 2018 7:20 am

Say you buy your stocks at $40,000. They drop to $20,000 in a market downturn. You lose your job and need the $20,000 to pay bills. You cash out.

How much have you lost?

If you had $20,000 in cash and $20,000 in the market, you still have $10,000 in the market in this scenario. Moreover, the $10,000 will likely return to $20,000 when the market recovers.

You stand to lose twice as much without an emergency fund.

Any questions?

JT

User avatar
bottlecap
Posts: 6252
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Why have Emergency Funds?

Post by bottlecap » Wed Feb 28, 2018 7:23 am

runner3081 wrote:
Tue Feb 27, 2018 11:10 pm
JustinR wrote:
Tue Feb 27, 2018 10:47 pm
jbschwartz55 wrote:
Tue Feb 27, 2018 10:21 pm
I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?
Are you really interested in selling during a down market?
This statement doesn't look at the whole picture. If you had been investing the entire time, it is likely you would already be "up". When you sell in a "down" market, the loss may not match how bad the market is at the time. In other words, you may still be even or possibly ahead, compared to a savings account.
The market can drop a whole lot faster and harder than it will go up.

JT

rkhusky
Posts: 7891
Joined: Thu Aug 18, 2011 8:09 pm

Re: Why have Emergency Funds?

Post by rkhusky » Wed Feb 28, 2018 7:34 am

I haven't had a home owners claim in the past 25 years, so I would have been ahead not buying insurance. Same for my auto insurance - I've only replaced a couple of windshields.

If you have that much money, you probably don't even need bonds. 100% stocks has the highest expected return. Bonds are a drag on your portfolio. On the other hand, if you have that much money, then the performance drag of $20K in cash or in short term bonds wouldn't be noticed. And the same is likely true for having 20% of your portfolio in bonds.

mega317
Posts: 3067
Joined: Tue Apr 19, 2016 10:55 am

Re: Why have Emergency Funds?

Post by mega317 » Wed Feb 28, 2018 8:03 am

bottlecap wrote:
Wed Feb 28, 2018 7:20 am
Say you buy your stocks at $40,000. They drop to $20,000 in a market downturn. You lose your job and need the $20,000 to pay bills. You cash out.

How much have you lost?

If you had $20,000 in cash and $20,000 in the market, you still have $10,000 in the market in this scenario. Moreover, the $10,000 will likely return to $20,000 when the market recovers.

You stand to lose twice as much without an emergency fund.

Any questions?

JT
But you also have X in fixed income in your 401k. Stocks drop by half, you sell 20k to pay the bills and exchange 20k FI for stocks in 401k. When the market recovers you have 40k in stocks from that exchange and x-20k in FI, or exactly what you would have had selling 20k of FI in the first place. (And you're banked 20k of losses.)

You can take as much risk as you like with the fixed income--a money market in the 401k would be fine.

The only question is will your taxable portfolio be large enough to cover what you need after a crash. This is why the wiki recommends not doing this until your taxable account is double your cash needs.

IlliniDave
Posts: 2321
Joined: Fri May 17, 2013 7:09 am

Re: Why have Emergency Funds?

Post by IlliniDave » Wed Feb 28, 2018 8:11 am

When push comes to shove, all financial assets are emergency funds. What a person does with them is a function of their overall financial situation and personal temperament.

Most people don't have large non-retirement investment accounts.

Most people don't have large retirement investment accounts.

Most people (or close to it) have no appreciable savings at all.

A logical first step is to keep some money in a savings account to weather the many financial vagaries life can deal a person. Most people worried about keeping a vehicle running or putting food on the table during an income interruption or an unexpected medical bill won't like the volatility inherent to investment markets. Some people, once they do that and move beyond to longer-term savings, find they like having the available cash even when they don't absolutely need it. No real harm in that. Others, as their wealth grows, decide they no longer need the cash cushion. In my own case I've skinnied down my "official" emergency fund to ~2-3 month's expenses, enough that 99.9% of the checks I might write without pre-planning wouldn't bounce if cashed immediately, knowing that I've got a few years expenses parked at VG.
Don't do something. Just stand there!

bling
Posts: 372
Joined: Sat Jan 21, 2012 12:49 pm

Re: Why have Emergency Funds?

Post by bling » Wed Feb 28, 2018 8:33 am

mega317 wrote:
Wed Feb 28, 2018 8:03 am
The only question is will your taxable portfolio be large enough to cover what you need after a crash. This is why the wiki recommends not doing this until your taxable account is double your cash needs.
agreed. after a certain point, emergency funds are pointless. the 2x recommendation allows you to suffer a 50% drop in the market without being forced to withdraw (not sell) in your tax advantaged.

what i think it is more interesting, is when you're young and just starting out, whether it still makes sense to have an emergency fund or not. and even in that circumstance i'm failing to see good reasons.

if we start with a typical 6 month emergency fund, and someone is just starting out in their career and have $0 to their name. they would have to forgo 401k/IRA contributions for 5-10 years before they have enough in their emergency fund. can you imagine being entirely in cash for any 10 year period in the past 30 years!?

mbasherp
Posts: 286
Joined: Mon Jun 26, 2017 8:48 am

Re: Why have Emergency Funds?

Post by mbasherp » Wed Feb 28, 2018 8:47 am

Once one has significant taxable investment assets, this becomes a question of psychology rather than math. I'm right at the border where the wiki advice is starting to tug on me. My taxable investment account is roughly 2x my emergency fund at the moment. I've decided that I'm going to make the transition slowly rather than investing my EF all at once. I do this knowing that it would likely be better to lump sum it in right now. It's purely a behavioral change that I will need to adjust to. Eventually, I see holding 10k in a high yield savings as a large expense buffer (rather than EF) and a growing amount of ibonds.

bgf
Posts: 1177
Joined: Fri Nov 10, 2017 9:35 am

Re: Why have Emergency Funds?

Post by bgf » Wed Feb 28, 2018 9:03 am

jbschwartz55 wrote:
Tue Feb 27, 2018 10:21 pm
I’m having trouble understanding the common wisdom of having a bunch of cash for Emergencies. I have a majority of my retirement in taxable equities from an inheritance. Why park $20,000+ in a low yield MM account or similar versus leave it in the market? If needed, cash can be generated from a quick stock sale. Who needs a bunch of cash that quickly?
ive been struggling with this question recently... we have a little over $20k in capital one making like 1.5% i think it is now. it is our 'emergency fund,' and i do not include it in our asset allocation for investments because i dont look at it as an investment, more like insurance.

im wondering if it is worthwhile to look at it this way at this point... our net worth is 4-5x our gross annual income. and we have over $80k in a taxable brokerage account...

the thing is, it would pain me greatly to sell anything held in the brokerage account 1) because literally everything has a capital gain, and 2) i don't like to see my portfolio decrease...

i want to be prudent, but i also want there to be a purpose for my actions... im just not sure.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

User avatar
KlingKlang
Posts: 852
Joined: Wed Oct 16, 2013 3:26 pm

Re: Why have Emergency Funds?

Post by KlingKlang » Wed Feb 28, 2018 9:30 am

edan wrote:
Wed Feb 28, 2018 6:55 am
Bendee wrote:
Wed Feb 28, 2018 6:30 am
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?
/forum/viewtopic.php?t=25126
Thank you for the link.

For posters like AlohaJoe who start history at 2010 of course everyone would be better off investing 100% in equities. When you are in Sheepdog's situation of watching equities declining for over a year and accelerating, wondering if they will actually lose everything, having a large cash position to use to buy food and pay your electric bill is very comforting.

Minor rant: I wish that people would stop saying that "cash yields nothing". Current yields are comparable to that of the SP500 and rising rapidly.

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Wed Feb 28, 2018 9:58 am

AlohaJoe wrote:
Wed Feb 28, 2018 6:53 am
ImUrHuckleberry wrote:
Tue Feb 27, 2018 10:39 pm
People that put all their savings into tax advantaged accounts?
If you have an emergency fund in taxable then clearly not all of your money is in tax advantaged accounts.

There's absolutely nothing preventing you from taking the thousands of dollars you call and emergency fund and buying the S&P 500 with it instead and then adjusting the asset allocation in your tax advantaged accounts.

Now you have no emergency fund and you are able to get access to liquid funds whenever you need them.
Sure, you can do that. However, a lot of people can't even fully use all of their tax advantaged space every year. And the emergency fund outside of tax advantage space, if invested in equities, should be larger than if held in cash or fixed income. Maybe better to have a smaller taxable emergency fund in safer investments and max as much as possible in tax advantaged accounts?

Once someone can max tax advantaged space and start saving a lot in taxable as well, then sure.

User avatar
Sandtrap
Posts: 8693
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Why have Emergency Funds?

Post by Sandtrap » Wed Feb 28, 2018 10:28 am

An emergency fund acts as a "buffer" or "shock absorber" between money held for daily living expenses and money held for long term. By it's name, an "emergency" fund addresses financial and personal "black swans".

An emergency fund's requirements are unique to each person's life and financial situation and temperament.
1 Immediate accessibility.
2 Preservation of principal.
3 An amount large enough to accomplish it's goal but not so large as to be unnecessary.

Thus, some folks need no EF, some more, some a lot.
Like shoes, there is no "one size fits all".

mahalo,
j :D
Wiki Bogleheads Wiki: Everything You Need to Know

AlohaJoe
Posts: 5080
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why have Emergency Funds?

Post by AlohaJoe » Wed Feb 28, 2018 10:44 am

ImUrHuckleberry wrote:
Wed Feb 28, 2018 9:58 am
AlohaJoe wrote:
Wed Feb 28, 2018 6:53 am
ImUrHuckleberry wrote:
Tue Feb 27, 2018 10:39 pm
People that put all their savings into tax advantaged accounts?
If you have an emergency fund in taxable then clearly not all of your money is in tax advantaged accounts.

There's absolutely nothing preventing you from taking the thousands of dollars you call and emergency fund and buying the S&P 500 with it instead and then adjusting the asset allocation in your tax advantaged accounts.

Now you have no emergency fund and you are able to get access to liquid funds whenever you need them.
Sure, you can do that. However, a lot of people can't even fully use all of their tax advantaged space every year. And the emergency fund outside of tax advantage space, if invested in equities, should be larger than if held in cash or fixed income.
No it doesn't.

The amount I hold in taxable is irrelevant.

- Sell $10,000 of stocks in taxable
- Sell $10,000 of bonds in tax-deferred
- Buy $10,000 of bonds in tax-deferred

I have sold $10,000 of bonds (which didn't drop 50%) and used it for my emergency expense, even though I happened to be holding equities in taxable.

DaftInvestor
Posts: 4842
Joined: Wed Feb 19, 2014 10:11 am

Re: Why have Emergency Funds?

Post by DaftInvestor » Wed Feb 28, 2018 10:48 am

I have an emergency fund so that I can feed my family for a period of time if I lose my job without having to sell stock at a large loss.
The most likely time I will lose my job coincides with a stock market crash.

The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Why have Emergency Funds?

Post by The Wizard » Wed Feb 28, 2018 10:53 am

KlingKlang wrote:
Wed Feb 28, 2018 9:30 am
Minor rant: I wish that people would stop saying that "cash yields nothing". Current yields are comparable to that of the SP500 and rising rapidly.
Cash in a savings or MM account has gone up by 16% over the past twelve months?
Are you sure about that?
Attempted new signature...

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Wed Feb 28, 2018 10:54 am

AlohaJoe wrote:
Wed Feb 28, 2018 10:44 am
ImUrHuckleberry wrote:
Wed Feb 28, 2018 9:58 am
AlohaJoe wrote:
Wed Feb 28, 2018 6:53 am
ImUrHuckleberry wrote:
Tue Feb 27, 2018 10:39 pm
People that put all their savings into tax advantaged accounts?
If you have an emergency fund in taxable then clearly not all of your money is in tax advantaged accounts.

There's absolutely nothing preventing you from taking the thousands of dollars you call and emergency fund and buying the S&P 500 with it instead and then adjusting the asset allocation in your tax advantaged accounts.

Now you have no emergency fund and you are able to get access to liquid funds whenever you need them.
Sure, you can do that. However, a lot of people can't even fully use all of their tax advantaged space every year. And the emergency fund outside of tax advantage space, if invested in equities, should be larger than if held in cash or fixed income.
No it doesn't.

The amount I hold in taxable is irrelevant.

- Sell $10,000 of stocks in taxable
- Sell $10,000 of bonds in tax-deferred
- Buy $10,000 of bonds in tax-deferred

I have sold $10,000 of bonds (which didn't drop 50%) and used it for my emergency expense, even though I happened to be holding equities in taxable.
I think you have a typo and one of the tax deferred transactions should have been "Buy $10,000 stocks in tax-deferred".

But anyway, yes the amount held in taxable does matter. Let's say you determine that you need $20,000 in taxable for your emergency fund. You can just keep $20,000 in safe investments, but you need more if you hold it in stocks. Otherwise, you can have a crash of 50% and be left with $10,000 when you need $20,000.

So sure you can keep $40,000 in stocks in taxable instead of $20,000 to account for a possible crash at an inopportune time. But if you're not maxing all tax advantaged space first that's probably a bad idea.

The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Why have Emergency Funds?

Post by The Wizard » Wed Feb 28, 2018 10:55 am

AlohaJoe wrote:
Wed Feb 28, 2018 10:44 am

- Sell $10,000 of stocks in taxable
- Sell $10,000 of bonds in tax-deferred
- Buy $10,000 of STOCKS in tax-deferred

I have sold $10,000 of bonds (which didn't drop 50%) and used it for my emergency expense, even though I happened to be holding equities in taxable.

(fixed that for AJ...)
Attempted new signature...

User avatar
willthrill81
Posts: 15190
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Why have Emergency Funds?

Post by willthrill81 » Wed Feb 28, 2018 11:07 am

PhysicianOnFIRE wrote:
Wed Feb 28, 2018 12:07 am
I keep one to two months of ready cash, basically enough to pay the credit card balance and have something left over.

Cash emergencies can be covered with credit card float, HELOC, cashflow from paychecks, selling from taxable, etc...

An emergency is a great first step to getting your finances in shape, but once you're good and fit, the 6-month EF is probably overkill.

If you're looking for validation, here's a couple others that agree with you on No Emergency Fund.

Early Retirement Now

Passive Income MD

:beer
-PoF
I agree. Unless you're a retiree or a single income earner in a precarious career position, keeping 6 months to a year's spending in cash just doesn't make sense to me. We have one month's spending in physical cash and another couple of months' in Vanguard's Wellesley Income fund.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mega317
Posts: 3067
Joined: Tue Apr 19, 2016 10:55 am

Re: Why have Emergency Funds?

Post by mega317 » Wed Feb 28, 2018 11:13 am

ImUrHuckleberry wrote:
Wed Feb 28, 2018 10:54 am

So sure you can keep $40,000 in stocks in taxable instead of $20,000 to account for a possible crash at an inopportune time. But if you're not maxing all tax advantaged space first that's probably a bad idea.
You're thinking about it backwards. 100% stock in taxable with no emergency fund is not the goal in and of itself. It is an option, some of us think a good option, when the taxable account is already large enough from regular activities. I think most of us would agree that maxing retirement contributions comes first. For many people there is no taxable account, and retirement contributions are all they can manage. This strategy is not for them and we aren't advocating it.

AlohaJoe
Posts: 5080
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why have Emergency Funds?

Post by AlohaJoe » Wed Feb 28, 2018 11:19 am

KlingKlang wrote:
Wed Feb 28, 2018 9:30 am
edan wrote:
Wed Feb 28, 2018 6:55 am
Bendee wrote:
Wed Feb 28, 2018 6:30 am
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?
/forum/viewtopic.php?t=25126
Thank you for the link.

For posters like AlohaJoe who start history at 2010 of course everyone would be better off investing 100% in equities.
Who said anything about investing in 100% equities? The example I gave was for a 60/40 portfolio.

You can do the same analysis for any time period and it always comes back the same. Unless you use your emergency fund in the first 5 years or so of it being created you would don't lose money.

So that's event you are insuring against: an emergency that forces you to use the entire emergency fund while the market is down 40-50% in the first five years.

As others in this thread have pointed out, creating an emergency is not a cost-free choice. It means not contributing to one's retirement fund, possibly for years. A family that saves 15% of their income is saving around 2 months of expenses a year. Building a 3 month emergency fund means no retirement savings for 1 1/2 years. Building a 6 month emergency fund means no retirement savings for 3 years. And a 12 month emergency fund means no retirement savings for 6 years.

That's a big opportunity cost and I think that people should think seriously about whether they actually can afford to pay it.

User avatar
Taylor Larimore
Advisory Board
Posts: 28959
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Why have Emergency Funds?

Post by Taylor Larimore » Wed Feb 28, 2018 11:29 am

Bogleheads:

This is a post about "Emergency Funds" that I wrote long ago. I still feel the same.
Is a separate Emergency Fund necessary?
Post by Taylor Larimore » Tue Nov 10, 2009 1:00 pm

Emergency Fund definition: "Cash set aside in a dedicated interest account to cover unanticipated emergencies such as property repairs, medical expenses and car repairs."--Financial Glossary

Hi Red Tail:

Most investors do not need a separate "Emergency Fund" as described above. What we need is a "source" of ready cash--not necessarily another separate, low-yielding account (other than a checking account).

Pat and I have not had a separate "Emergency Fund" for many years. Like most Bogleheads, we know that if it becomes necessary, we can get money from our checking account, portfolio, credit card, bank, home equity loan, life insurance, family, etc.

For young working investors, a Roth IRA can be an excellent emergency fund. Of course, no one likes to take emergency funds from contributions in a retirement account, but if it is necessary (and may never be), its better than delaying the start of a tax-free Roth.

For older investors with sizeable retirement portfolios, emergency funds are normally no problem.

In my opinion, the idea that everyone must have a separate "emergency fund" is an investing myth.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
KlingKlang
Posts: 852
Joined: Wed Oct 16, 2013 3:26 pm

Re: Why have Emergency Funds?

Post by KlingKlang » Wed Feb 28, 2018 11:42 am

The Wizard wrote:
Wed Feb 28, 2018 10:53 am
KlingKlang wrote:
Wed Feb 28, 2018 9:30 am
Minor rant: I wish that people would stop saying that "cash yields nothing". Current yields are comparable to that of the SP500 and rising rapidly.
Cash in a savings or MM account has gone up by 16% over the past twelve months?
Are you sure about that?
Yield is not the same thing as total return.

User avatar
HomerJ
Posts: 13584
Joined: Fri Jun 06, 2008 12:50 pm

Re: Why have Emergency Funds?

Post by HomerJ » Wed Feb 28, 2018 11:53 am

jbschwartz55 wrote:
Tue Feb 27, 2018 11:09 pm
Of course, no one wants to sell in a down market, but taking that risk seems like a better alternative than putting a large chunk cash on the sidelines for 10-20 years.
(1) The biggest reason for an emergency fund is to handle a job loss. Recessions, stock crashes and losing one's job can be related events. So the odds are higher that you will need the emergency fund when the market is down.

(2) After 5-10 years, it probably won't be a "large chunk" of cash any more, as your other investments grow.

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Wed Feb 28, 2018 12:10 pm

mega317 wrote:
Wed Feb 28, 2018 11:13 am
ImUrHuckleberry wrote:
Wed Feb 28, 2018 10:54 am

So sure you can keep $40,000 in stocks in taxable instead of $20,000 to account for a possible crash at an inopportune time. But if you're not maxing all tax advantaged space first that's probably a bad idea.
You're thinking about it backwards. 100% stock in taxable with no emergency fund is not the goal in and of itself. It is an option, some of us think a good option, when the taxable account is already large enough from regular activities. I think most of us would agree that maxing retirement contributions comes first. For many people there is no taxable account, and retirement contributions are all they can manage. This strategy is not for them and we aren't advocating it.
I agree with you 100%.

My first response to OP's subject line question was "people who put all their savings in tax sheltered investments". I should have made it more clear that I meant tax sheltered retirement savings although that seems a bit redundant. I was then challenged by AJ with a specific example of how emergency funds can be invested and included as part of the overall allocation. His example was also fine except imo not the best path for someone who can't currently max tax sheltered space.

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Wed Feb 28, 2018 12:18 pm

AlohaJoe wrote:
Wed Feb 28, 2018 11:19 am
KlingKlang wrote:
Wed Feb 28, 2018 9:30 am
edan wrote:
Wed Feb 28, 2018 6:55 am
Bendee wrote:
Wed Feb 28, 2018 6:30 am
Sheepdog has almost 5000 posts. Maybe at least a hint on what to search for?
/forum/viewtopic.php?t=25126
Thank you for the link.

For posters like AlohaJoe who start history at 2010 of course everyone would be better off investing 100% in equities.
Who said anything about investing in 100% equities? The example I gave was for a 60/40 portfolio.

You can do the same analysis for any time period and it always comes back the same. Unless you use your emergency fund in the first 5 years or so of it being created you would don't lose money.

So that's event you are insuring against: an emergency that forces you to use the entire emergency fund while the market is down 40-50% in the first five years.

As others in this thread have pointed out, creating an emergency is not a cost-free choice. It means not contributing to one's retirement fund, possibly for years. A family that saves 15% of their income is saving around 2 months of expenses a year. Building a 3 month emergency fund means no retirement savings for 1 1/2 years. Building a 6 month emergency fund means no retirement savings for 3 years. And a 12 month emergency fund means no retirement savings for 6 years.

That's a big opportunity cost and I think that people should think seriously about whether they actually can afford to pay it.
A compromise option that we used when we couldn't afford to max all tax sheltered space is to maintain a small taxable fund ($5000) and contribute the bulk of emergency funds to a Roth. Now that we can max tax sheltered (including the Roth) and still have excess savings we are starting to convert the Roth to more aggressive allocations.

ImUrHuckleberry
Posts: 229
Joined: Sat Apr 15, 2017 7:44 am

Re: Why have Emergency Funds?

Post by ImUrHuckleberry » Wed Feb 28, 2018 12:21 pm

willthrill81 wrote:
Wed Feb 28, 2018 11:07 am
PhysicianOnFIRE wrote:
Wed Feb 28, 2018 12:07 am
I keep one to two months of ready cash, basically enough to pay the credit card balance and have something left over.

Cash emergencies can be covered with credit card float, HELOC, cashflow from paychecks, selling from taxable, etc...

An emergency is a great first step to getting your finances in shape, but once you're good and fit, the 6-month EF is probably overkill.

If you're looking for validation, here's a couple others that agree with you on No Emergency Fund.

Early Retirement Now

Passive Income MD

:beer
-PoF
I agree. Unless you're a retiree or a single income earner in a precarious career position, keeping 6 months to a year's spending in cash just doesn't make sense to me. We have one month's spending in physical cash and another couple of months' in Vanguard's Wellesley Income fund.
It also likely depends on how likely one is to receive a generous package if laid off. Some companies/industries are very generous (pharma for one) while others send you packing with not much more than good luck wishes. This is also dependent in some cases on longevity in the company.

User avatar
badgerland
Posts: 10
Joined: Sun Feb 25, 2018 10:26 am

Re: Why have Emergency Funds?

Post by badgerland » Wed Feb 28, 2018 12:26 pm

$1k.

Everything else is invested in TSP, Roth, and MM for big purchases.

I've got a fairly secure government job, though.

User avatar
randomizer
Posts: 1547
Joined: Sun Jul 06, 2014 3:46 pm

Re: Why have Emergency Funds?

Post by randomizer » Wed Feb 28, 2018 1:11 pm

For me the "emergency fund" is less about actual emergencies (unexpected expenses) and more about making sure I have enough of a buffer to meet my high cash flow requirements in a HCOL area. I tend to have large expenses, and having a big buffer helps me to sleep well at night, and that in turn means I'm not thinking about my equity investments. I want the stuff I put in to the stock market to stay in the stock market, and not have to pull it out at a moment's notice — getting whatever the market says its worth at that arbitrary moment — to cover some expense.
87.5:12.5, EM tilt — HODL the course!

User avatar
welderwannabe
Posts: 1115
Joined: Fri Jun 16, 2017 8:32 am

Re: Why have Emergency Funds?

Post by welderwannabe » Wed Feb 28, 2018 2:30 pm

My emergency fund gives me a sense of comfort and peace. Even though I have about $250K in taxable investments (stocks and bonds) I still feel the need to have $50K of cash for my emergency fund. I started at $30K and I have been upping it slowly. Not yet at my $50K target.

Having this emergency fund makes me feel better about keeping my desired 80/20 allocation in taxable. If I didn't have it I would want to be more conservative.

Is it all smoke and mirrors? Yes, because if I include the efund in my AA, I would really be at 67/37. Whatever. A lot of it is behavior and emotions, and it is what it is.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

User avatar
Nate79
Posts: 5326
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Why have Emergency Funds?

Post by Nate79 » Wed Feb 28, 2018 6:48 pm

Any stocks in taxable account I devalue by 85% and count as a bucket for emergency funds. To me the claimed potential loss of 50% for stocks in a downturn is not nearly the worst case and the point of running a stress test for an emergency is to look at the potential worst case.

My target is 3 months of expenses in cash/checking/savings accounts, 3 months in short term bond funds in taxable and Roth accounts, and as many months as possible in stock index funds taxable and Roths above that.

I'm in accumulation phase so amount in 401k is irrelevant for emergency fund in all but the worst of the worst situations.

Emergency in my books is:
Great depression in stock market + economy severe downturn + layoff or physical emergency (medical/new roof/etc).

DrGoogle2017
Posts: 2528
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why have Emergency Funds?

Post by DrGoogle2017 » Wed Feb 28, 2018 6:59 pm

DaftInvestor wrote:
Wed Feb 28, 2018 10:48 am
I have an emergency fund so that I can feed my family for a period of time if I lose my job without having to sell stock at a large loss.
The most likely time I will lose my job coincides with a stock market crash.
This happened to my family twice. Lose job and stock market crash. But people here are exceptional people, nothing like this will happen to them ever. /sarcasm end
I have $20,000 in my checking account earning zero. At one time I had ten time the amount earning zero. Too lazy to open a saving account. I pay tax on whatever money I make, so I didn’t bother.
Last edited by DrGoogle2017 on Wed Feb 28, 2018 7:05 pm, edited 1 time in total.

User avatar
corn18
Posts: 1560
Joined: Fri May 22, 2015 6:24 am

Re: Why have Emergency Funds?

Post by corn18 » Wed Feb 28, 2018 7:05 pm

Death. The ultimate emergency. We simulated my death a few years ago and as soon as I told her our EF was at Chase for the higher interest rate and sign up bonus, she glazed over and said that was stupid. Now there is $50k sitting in our checking account all the time. If I die, I don't want my wife worrying about selling stocks to pay the bills and my funeral while waiting for the money to get into the checking account. She has 6 months of money to figure things out.
Don't do something, just stand there!

Grogs
Posts: 541
Joined: Tue Mar 24, 2015 4:55 pm

Re: Why have Emergency Funds?

Post by Grogs » Wed Feb 28, 2018 8:48 pm

JBTX wrote:
Wed Feb 28, 2018 3:39 am
It’s really as asset allocation question. You could include your cash fund as part of your non stock allocation. Instead of being 60/40 maybe you are 60/35/5. The difference in returns for cash and bonds is not nearly as dramatic as stocks and cash, and part of your cash fund could include accumulated ibonds.

The other answer to this is it isn’t primarily about returns, it is also risk. You keep bonds in a portfolio to reduce risk, not increase returns. If you are going to argue an emergency fund reduces returns, you can also argue a 100% stock portfolio will likely increase returns, so why not get rid of bonds too? In a scenario like 2008 one could very easily lose their job while their portfolio is tanking. Having a cash reserve can provide a buffer and reduce the downside impact of that.
This really captures my thoughts as well. Unless the OP is advocating a 100% equity (or similarly risky asset) allocation, it seems like a false dichotomy. There's not much difference between yields of savings accounts or CDs vs. bond funds, right now. So just consider the emergency fund in savings as part of the bond portion of the AA.

Post Reply