Goodbye Emergency Fund (sorta)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 12:12 pm

I've decided that I don't need an emergency fund but rather an emergency plan, here's the background of my situation:

Debt: No Debt
Tax Filing Status: Single
State of Residence: WI
Age: 27

Roth IRA: Maxed Out Yearly
9% Vanguard Target Retirement 2055 Fund (VFFVX) (Expense Ratio: .16)

401k: Maxed Out Yearly
30% Vanguard Target Retirement 2055 Fund (VFFVX) (Standard Traditional 401k)
Company match: 6%

Brokerage Account
7% Vanguard Large Cap ETF (VV) (Expense Ratio: .06%)
7% Vanguard Total Stock Market (VTI) (Expense Ratio: .04)

Remaining
47% Expenses (Living / Hobbies)

My emergency plan:

I plan to keep $7,000 in my checking account (this is outside my regular expenses) for big ticket items that I'd like in the upcoming year (I.E. Hobbies). I regularly contribute to this account and when the amount increases to $8,000 or more, I will invest the difference into the brokerage account.

If an emergency does occur and the cost is reasonable that I can pay it with my credit card and I would pay with it and pay it off with my upcoming paycheck.

If I were to lose my job/market crashes and was unable to make ends meet, I would withdraw from the Brokerage account until I am able to 'get back on my feet'. Of course, if this were to ever occur, I also plan to live on a 'college budget' cutting back as much as I could and living off with what I have.

I think, based on my situation, this has a healthy balance of living today and planning for tomorrow.

Thoughts? Criticism?

**EDIT w/ updated %s**
Last edited by BeautifulDisaster on Fri Mar 02, 2018 1:59 pm, edited 1 time in total.

MotoTrojan
Posts: 1615
Joined: Wed Feb 01, 2017 8:39 pm

Re: Goodbye Emergency Fund (sorta)

Post by MotoTrojan » Fri Mar 02, 2018 12:20 pm

How much do you have in your brokerage as a 3rd tier for emergencies? Have you considered a credit card with a long (21+ month) 0% APR as a safety-net as well?

What are you expenses each month? $7K is about what I have in cash on average (depending on what bills have been paid vs. my paychecks coming) between checking and my small emergency fund. As my taxable assets have grown, I have reduced the emergency fund.

Plan seems fine to me, but it is hard to say much as I don't know if you spend $700 or $3500 per month, or if you have $1000 or $100,000 in your brokerage.

Lastly, why are you splitting Total US and Large-cap? I would be going 100% VTI, and then use VV as my tax-loss harvest partner, if it were me. The returns are essentially the same over most time periods, with VTI being more diverse, and having a small increase in expected return due to risk of small-caps.

And I think your percentages are off, since taxable alone is 100%.

miamivice
Posts: 961
Joined: Tue Jun 11, 2013 11:46 am

Re: Goodbye Emergency Fund (sorta)

Post by miamivice » Fri Mar 02, 2018 12:31 pm

That's generally what we do.

I don't have an emergency fund per se, but try to keep a couple months expenses as float. We draw this down for vacations, hobbies, big ticket items, etc. If for some reason we have a true emergency (which is usually job loss) we have plenty of brokerage funds that can be liquated if need be.

And yes, credit cards, borrowing from parents, home equity line of credit, and potential 401k loan also are part of the access to emergency funds that I can tap from if need be.

I certainly don't keep 6-12 months living expenses in a cash account.

sport
Posts: 6849
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Goodbye Emergency Fund (sorta)

Post by sport » Fri Mar 02, 2018 12:39 pm

The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.

User avatar
BolderBoy
Posts: 3907
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Goodbye Emergency Fund (sorta)

Post by BolderBoy » Fri Mar 02, 2018 12:42 pm

BeautifulDisaster wrote:
Fri Mar 02, 2018 12:12 pm
I regularly contribute to this account and when the amount increases to $8,000 or more, I will invest the difference into the brokerage account.
What exactly do you mean by "the brokerage account"? Will this money be invested in stocks or bonds? Or sit in some sort of money market account? Or...

I don't have a brokerage account so am unsure what you mean, exactly.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

miamivice
Posts: 961
Joined: Tue Jun 11, 2013 11:46 am

Re: Goodbye Emergency Fund (sorta)

Post by miamivice » Fri Mar 02, 2018 12:57 pm

sport wrote:
Fri Mar 02, 2018 12:39 pm
The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.
Like all investing, you have to weigh the risks you take and the reward.

How to balance risk and reward is different for every person.

Nate79
Posts: 2566
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Goodbye Emergency Fund (sorta)

Post by Nate79 » Fri Mar 02, 2018 12:57 pm

It isn't clear how much you are discounting stocks in the brokerage account as part of the emergency fund. I discount 85% because the worst case scenario is not a loss of 50%, it can be much worse.. There are tons of threads on how big of an emergency fund to have but for me it is to cover any of the things like 2 years worth of max out of pocket health insurance cost, cost of a roof, 6 months expenses for job loss.

User avatar
djpeteski
Posts: 544
Joined: Fri Mar 31, 2017 9:07 am

Re: Goodbye Emergency Fund (sorta)

Post by djpeteski » Fri Mar 02, 2018 1:03 pm

Some good and some bad.

Say it is 2008 all over again, and your brokerage account is worth half of what it is, seemingly overnight. Then you are laid off your job. In effect, you will be withdrawing double of what you actually withdraw as you are locking in your losses.

The ability to live off a "college" budget, and the ability to earn some amount of money in any economy is a good back up plan. In that case, you may never need to tap an EFund. Reducing debt helps with this greatly (you don't have any), but presumably you will still have rent to pay.

What can throw a money wrench in all of this is if you enter a long term relationship and possibly start a family. The chances are large that you will be attracted to someone who is now where near as frugal as you are. So beware of that.

Good work to being in such good shape so young, but I think an small efund is worth it. Throw 10K in an online savings.

BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Re: Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 1:09 pm

MotoTrojan wrote:
Fri Mar 02, 2018 12:20 pm
How much do you have in your brokerage as a 3rd tier for emergencies? Have you considered a credit card with a long (21+ month) 0% APR as a safety-net as well?
~10k: I should note that I've had ~14k just sitting around in a checking/savings account for the last 3 years.
What are you expenses each month? $7K is about what I have in cash on average (depending on what bills have been paid vs. my paychecks coming) between checking and my small emergency fund. As my taxable assets have grown, I have reduced the emergency fund.
I like to think I live a minimalist lifestyle spending ~2k a month, only spending money on things that make me happy (traveling, hiking, climbing mountains, friends)

Plan seems fine to me, but it is hard to say much as I don't know if you spend $700 or $3500 per month, or if you have $1000 or $100,000 in your brokerage.
Lastly, why are you splitting Total US and Large-cap? I would be going 100% VTI, and then use VV as my tax-loss harvest partner, if it were me. The returns are essentially the same over most time periods, with VTI being more diverse, and having a small increase in expected return due to risk of small-caps.
Ahhh...I wasn't aware of this. I planned on using VOO for Tax-Loss Harvest. Thanks for the insight.
And I think your percentages are off, since taxable alone is 100%.
You're right, I wasn't seeing my portfolio as 'one'.

BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Re: Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 1:20 pm

BolderBoy wrote:
Fri Mar 02, 2018 12:42 pm
BeautifulDisaster wrote:
Fri Mar 02, 2018 12:12 pm
I regularly contribute to this account and when the amount increases to $8,000 or more, I will invest the difference into the brokerage account.
What exactly do you mean by "the brokerage account"? Will this money be invested in stocks or bonds? Or sit in some sort of money market account? Or...

I don't have a brokerage account so am unsure what you mean, exactly.
Funds will be invested in Vanguard Large Cap ETF (VV) and Vanguard Total Stock Market (VTI).

User avatar
bligh
Posts: 769
Joined: Wed Jul 27, 2016 9:13 pm

Re: Goodbye Emergency Fund (sorta)

Post by bligh » Fri Mar 02, 2018 1:31 pm

Each person's risk profile is likely to be unique. The stability of your job, your expenses, your financial responsibilities, the size of your portoflio (taxable or not), your risk tolerance and so on. There is no doubt that you are way better off than most 27 year olds just by being debt free, maxing out your retirement accounts, having a brokerage account and considering an emergency plan.

Being single, if you feel your job is stable, and reasonably sized portfolio an emergency plan that doesn't consist of large cash reserves is likely a reasonable approach. It seems like you have no responsibilities but yourself, and that is a great position to be in, in terms of risk tolerance.

My situation is very different from yours and not only do I maintain a couple of months of cash reserves in my checking account, but I also have multiple tiers consisting of Savings Accounts, I-Bonds and Municipal bond funds that I can pull upon before I ever have to sell a single share of a stock fund. I have financial responsibilities and I dont ever want to be caught with my pants down. Make sure that as you progress in life, and your financial responsibilities evolve, you review and update your emergency plan, and it may involve maintaining larger cash reserves.

You obviously have a good head on your shoulders and I have no doubt you'll be fine. Keep up the excellent work. Your future self is going to thank you.

BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Re: Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 1:43 pm

djpeteski wrote:
Fri Mar 02, 2018 1:03 pm
Say it is 2008 all over again, and your brokerage account is worth half of what it is, seemingly overnight. Then you are laid off your job. In effect, you will be withdrawing double of what you actually withdraw as you are locking in your losses.

The ability to live off a "college" budget, and the ability to earn some amount of money in any economy is a good back up plan. In that case, you may never need to tap an EFund. Reducing debt helps with this greatly (you don't have any), but presumably you will still have rent to pay.
When I first maxed out my 401k to 18k (at the time) a year, I realized that I wasn't having much money to spend on things I want. Retirement is very important to me so at that point I decided I have two options:
  • 1) Re-adjust my 401k contributions so I could live life today

    or

    2) Make more money
Long story short, I found a way to make more money by taking a part time job that I loved until I was promoted at work.

The point of this is, I hope this type of thinking will carry over during desperate times (such as a market crash). Of course, not having experienced something like 2008 - this is just an self-awareness assumption.
What can throw a money wrench in all of this is if you enter a long term relationship and possibly start a family. The chances are large that you will be attracted to someone who is now where near as frugal as you are. So beware of that.
Very true - I hope to make it a point to understand and talk about finances when relationships take a serious route. It will not be an end all if they are un-frugal if we both can compromise on where we'd like to be in, with regards to finances, in 5, 10, 15, 20, etc years.

User avatar
KSOC
Posts: 277
Joined: Sat Oct 29, 2016 3:53 pm
Location: Central Florida

Re: Goodbye Emergency Fund (sorta)

Post by KSOC » Fri Mar 02, 2018 1:46 pm

"Only when the tide goes out do you discover who's been swimming naked."

Warren Buffett

At my age I'm making sure I got my trunks on. At your age I can see your point.
Only folks dependent on me back then were bartenders.
Looks like you're pointed in the right direction.
Too soon old, too late smart.

runner3081
Posts: 1328
Joined: Mon Aug 22, 2016 3:22 pm

Re: Goodbye Emergency Fund (sorta)

Post by runner3081 » Fri Mar 02, 2018 1:58 pm

sport wrote:
Fri Mar 02, 2018 12:39 pm
The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.
But that same money could be up 50% from when it was put in. They would only be down 50% if you put them in and they never gained in value.

User avatar
Flobes
Posts: 959
Joined: Tue Feb 16, 2010 12:40 am

Re: Goodbye Emergency Fund (sorta)

Post by Flobes » Fri Mar 02, 2018 2:07 pm

Your plan might work. Your "hobbies" fund can cover the unexpected.

That is until you have a personal emergency during a broad cycle of emergencies. And when that happens, you seem smart and resilient, and so you'll invent Plan C; it might not be at all pleasant or resemble what you anticipated.

Suggestion: Consider buying IBonds. They become your "emergency fund." Call them part of your Fixed Income (Bonds) allocation. IBonds are inflation protected, they never lose principal, and IBond interest is tax-deferred for up to 30 years as well as exempt from state income taxes. It's a comfy cushion so you are not forced to deplete your taxable equity investments right when they (and you) are crashing.

MotoTrojan
Posts: 1615
Joined: Wed Feb 01, 2017 8:39 pm

Re: Goodbye Emergency Fund (sorta)

Post by MotoTrojan » Fri Mar 02, 2018 2:15 pm

BeautifulDisaster wrote:
Fri Mar 02, 2018 1:20 pm

Funds will be invested in Vanguard Large Cap ETF (VV) and Vanguard Total Stock Market (VTI).
Follow-on to what I said before, for most purposes I consider VTI ~= VV = VOO. No real reason to separate them unless you are really into factor investing, and want to get S&P500 exposure with only Small-value (no Small-growth) or similar.

I hold VTI primarily and VV would be my first TLH partner, since it has 100% qualified dividends. VOO could then be used as a 3rd partner if the market drops a bunch more before 30 days has passed.

I'd simplify if I were you, but you aren't in a terrible place with VTI and VV; just no real advantage.

With $2K/month, holding $7K in checking plus a sizeable brokerage seems fine to me at your (my) age, especially if it enables you to max out your tax-advantaged space.

BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Re: Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 2:26 pm

Flobes wrote:
Fri Mar 02, 2018 2:07 pm
Your plan might work. Your "hobbies" fund can cover the unexpected.

That is until you have a personal emergency during a broad cycle of emergencies. And when that happens, you seem smart and resilient, and so you'll invent Plan C; it might not be at all pleasant or resemble what you anticipated.

Suggestion: Consider buying IBonds. They become your "emergency fund." Call them part of your Fixed Income (Bonds) allocation. IBonds are inflation protected, they never lose principal, and IBond interest is tax-deferred for up to 30 years as well as exempt from state income taxes. It's a comfy cushion so you are not forced to deplete your taxable equity investments right when they (and you) are crashing.
I have no familiarity with IBonds, any suggestions on where I can find out more information / to buy / etc.?

djheini
Posts: 44
Joined: Fri Jul 29, 2016 5:53 pm

Re: Goodbye Emergency Fund (sorta)

Post by djheini » Fri Mar 02, 2018 2:41 pm

BeautifulDisaster wrote:
Fri Mar 02, 2018 2:26 pm
Flobes wrote:
Fri Mar 02, 2018 2:07 pm
Your plan might work. Your "hobbies" fund can cover the unexpected.

That is until you have a personal emergency during a broad cycle of emergencies. And when that happens, you seem smart and resilient, and so you'll invent Plan C; it might not be at all pleasant or resemble what you anticipated.

Suggestion: Consider buying IBonds. They become your "emergency fund." Call them part of your Fixed Income (Bonds) allocation. IBonds are inflation protected, they never lose principal, and IBond interest is tax-deferred for up to 30 years as well as exempt from state income taxes. It's a comfy cushion so you are not forced to deplete your taxable equity investments right when they (and you) are crashing.
I have no familiarity with IBonds, any suggestions on where I can find out more information / to buy / etc.?
https://www.bogleheads.org/wiki/I_savings_bonds

User avatar
Flobes
Posts: 959
Joined: Tue Feb 16, 2010 12:40 am

Re: Goodbye Emergency Fund (sorta)

Post by Flobes » Fri Mar 02, 2018 2:42 pm

BeautifulDisaster wrote:
Fri Mar 02, 2018 2:26 pm
I have no familiarity with IBonds, any suggestions on where I can find out more information / to buy / etc.?
IBonds are a federal government instrument. Here's their info:
IBonds info at Treasury Direct

Read and understand how they work: fixed vs variable components, purchase limits, redemptions, taxation, etc. They are not quite like anything else.

There are a gazillion threads about IBonds on the Forum, if you use the search. Many Bogleheads use them as an emergency fund.

jnet2000
Posts: 281
Joined: Tue Mar 19, 2013 4:22 pm

Re: Goodbye Emergency Fund (sorta)

Post by jnet2000 » Fri Mar 02, 2018 2:56 pm

To each their own. But I would not. My wife and I are more conservative and we keep 2 years of expenses in a savings account. I had multiple emergencies in 2008 and I'm sure glad I had plenty of cash around. I had no need to sell my equities or play with debt.
"You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing" Warren Buffet

User avatar
mhc
Posts: 3669
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Goodbye Emergency Fund (sorta)

Post by mhc » Fri Mar 02, 2018 2:57 pm

OP, in the long run, you will probably come out ahead following your plan. Sounds like a good plan to me.

As some of pointed out, if things go really, really bad, you may be eating ramen for a while. So what. You are young and can deal with it.

User avatar
DaftInvestor
Posts: 3921
Joined: Wed Feb 19, 2014 10:11 am

Re: Goodbye Emergency Fund (sorta)

Post by DaftInvestor » Fri Mar 02, 2018 2:59 pm

I didn't have an emergency fund until after I started a family so I certainly see nothing wrong with your plan. When you are single it is easier to cut back to a "college budget" as you put it.

ThrustVectoring
Posts: 398
Joined: Wed Jul 12, 2017 2:51 pm

Re: Goodbye Emergency Fund (sorta)

Post by ThrustVectoring » Fri Mar 02, 2018 3:01 pm

You could have a similar amount of market exposure with a more stable cash availability if you replaced the target retirement funds in your tax-advantaged accounts with VTSAX/VTIAX.

Basically: find out how much stock market exposure you "should" have, replace the target-retirement funds with 100% equity funds, and use the freed up portfolio space in taxable accounts to hold fixed-income products of some sort.

PhilosophyAndrew
Posts: 305
Joined: Sat Aug 13, 2016 10:06 am

Re: Goodbye Emergency Fund (sorta)

Post by PhilosophyAndrew » Fri Mar 02, 2018 3:58 pm

runner3081 wrote:
Fri Mar 02, 2018 1:58 pm
sport wrote:
Fri Mar 02, 2018 12:39 pm
The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.
But that same money could be up 50% from when it was put in. They would only be down 50% if you put them in and they never gained in value.
This seems exactly right to me. Suppose you decided to decide to hold in a cash emergency fund money you would otherwise inves. Doesn’t this amount a form of pre-emptive selling where you (1) avoid the possibility of selling when the market is down by (2) foregoing for sure all future investment growth for the cash kept in your investment fund while also (3) subjecting that cash to inflation risk.


There are situations where it may make sense to do this, but I agree with the OP that, in many circumstances, a reasonable emergency plan doesn’t need to involve holding significant quantities of cash.

sport
Posts: 6849
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Goodbye Emergency Fund (sorta)

Post by sport » Fri Mar 02, 2018 5:01 pm

PhilosophyAndrew wrote:
Fri Mar 02, 2018 3:58 pm
runner3081 wrote:
Fri Mar 02, 2018 1:58 pm
sport wrote:
Fri Mar 02, 2018 12:39 pm
The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.
But that same money could be up 50% from when it was put in. They would only be down 50% if you put them in and they never gained in value.
This seems exactly right to me. Suppose you decided to decide to hold in a cash emergency fund money you would otherwise inves. Doesn’t this amount a form of pre-emptive selling where you (1) avoid the possibility of selling when the market is down by (2) foregoing for sure all future investment growth for the cash kept in your investment fund while also (3) subjecting that cash to inflation risk.


There are situations where it may make sense to do this, but I agree with the OP that, in many circumstances, a reasonable emergency plan doesn’t need to involve holding significant quantities of cash.
It just depends on how much risk you are willing to take. Having an EF is conservative, safe, and may limit your growth. Going without an EF may get you more growth, but you are taking more risk to achieve it.

BeautifulDisaster
Posts: 45
Joined: Thu Jan 11, 2018 12:56 pm

Re: Goodbye Emergency Fund (sorta)

Post by BeautifulDisaster » Fri Mar 02, 2018 5:20 pm

sport wrote:
Fri Mar 02, 2018 5:01 pm
PhilosophyAndrew wrote:
Fri Mar 02, 2018 3:58 pm
runner3081 wrote:
Fri Mar 02, 2018 1:58 pm
sport wrote:
Fri Mar 02, 2018 12:39 pm
The problem is if the economy gets bad, you can lose your job and the stock market goes down at the same time. If it is a bad market, your brokerage account (all stocks) could drop about 50%. You might then be forced to sell stocks when the prices are down. An emergency fund, or a bond fund would lessen the risk of this situation occurring.
But that same money could be up 50% from when it was put in. They would only be down 50% if you put them in and they never gained in value.
This seems exactly right to me. Suppose you decided to decide to hold in a cash emergency fund money you would otherwise inves. Doesn’t this amount a form of pre-emptive selling where you (1) avoid the possibility of selling when the market is down by (2) foregoing for sure all future investment growth for the cash kept in your investment fund while also (3) subjecting that cash to inflation risk.


There are situations where it may make sense to do this, but I agree with the OP that, in many circumstances, a reasonable emergency plan doesn’t need to involve holding significant quantities of cash.
It just depends on how much risk you are willing to take. Having an EF is conservative, safe, and may limit your growth. Going without an EF may get you more growth, but you are taking more risk to achieve it.
+1

The only one affected with a market drop in this scenario would be me. As I grow older and eventually have a wife and kid(s), I would not be willing to make this amount of risks because my responsibility would be to care for my family. But...well, if order to get a wife, I need a girlfriend and I don't have one of those either :?

PhilosophyAndrew
Posts: 305
Joined: Sat Aug 13, 2016 10:06 am

Re: Goodbye Emergency Fund (sorta)

Post by PhilosophyAndrew » Fri Mar 02, 2018 5:32 pm

Holding a cash EF has a nearly 100% chance of limiting future growth of the assets held as cash — and has a good chance of inflation eroding the value of those assets, necessitating the sale of investments (or additional diversion of assets away from investments) to mainta B the EF’s purchasing power.

Whether or not assets kept in the market but sold to meet an emergency grow before the sale is uncertain, but we have good reason to suspect that there will continue to be long-term growth. This suggests to me that the dogma of holding short-term needs in cash is correct as a strategy for mediating short-term market risk. But this argument becomes less compelling the longer the period that EF funds are not needed.

In the end, I suspect you are right: Spme folks will choose to forego all growth because they brings emotional comfort. Sometimes this will end up being the financially correct decision, but not always — and, hopefully, emergencies will happen infrequently enough in one’s life for this decision to be incorrect!

lostdog
Posts: 928
Joined: Thu Feb 04, 2016 2:15 pm

Re: Goodbye Emergency Fund (sorta)

Post by lostdog » Fri Mar 02, 2018 5:56 pm

We are doing the same. We'll have $5,000 in checking at all times. Anything above that goes to Vanguard. Opportunity cost.
100% Vanguard Total World Equity Index. Simplicity 100%.

bling
Posts: 249
Joined: Sat Jan 21, 2012 12:49 pm

Re: Goodbye Emergency Fund (sorta)

Post by bling » Fri Mar 02, 2018 7:41 pm

your plan is perfectly sensible. i personally average around $500 in my checkings and everything else is invested.

the only tweak i'd recommend taking a look at is splitting your tax advantaged space into separate bond vs stock components. by doing so, it opens options for stuff like https://www.bogleheads.org/wiki/Placing ... ed_account

User avatar
Clever_Username
Posts: 1040
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Goodbye Emergency Fund (sorta)

Post by Clever_Username » Fri Mar 02, 2018 9:46 pm

Flobes wrote:
Fri Mar 02, 2018 2:07 pm
Suggestion: Consider buying IBonds. They become your "emergency fund." Call them part of your Fixed Income (Bonds) allocation. IBonds are inflation protected, they never lose principal, and IBond interest is tax-deferred for up to 30 years as well as exempt from state income taxes. It's a comfy cushion so you are not forced to deplete your taxable equity investments right when they (and you) are crashing.
Seconded. I am slowly transitioning from emergency fund to emergency plan; as it stands, I am keeping about three months' expenses in cash, plus as summer approaches a little bit more (as my summer income doesn't quite meet my expenses; fortunately the rest of the year, especially Spring, exceeds it). I imagine in a year or two reducing to less than two months' expenses in cash, other than when summer is coming up.

Series I Bonds are amazing. They're my emergency plan as it stands -- over 7.5 months' expenses liquid at the moment.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

saver007
Posts: 96
Joined: Fri Nov 07, 2014 9:18 pm

Re: Goodbye Emergency Fund (sorta)

Post by saver007 » Sat Mar 03, 2018 12:08 am

Keep your taxable brokerage account with IB so you can borrow at fed funds rate + 150 basis point in case of emergencies.. fed funds + 100 basis point if you sign up via stockbrokers.com. I don't recommend using margin for investment but it is very reasonable as a emergency fund reserv.

bling
Posts: 249
Joined: Sat Jan 21, 2012 12:49 pm

Re: Goodbye Emergency Fund (sorta)

Post by bling » Sat Mar 03, 2018 8:39 am

saver007 wrote:
Sat Mar 03, 2018 12:08 am
Keep your taxable brokerage account with IB so you can borrow at fed funds rate + 150 basis point in case of emergencies.. fed funds + 100 basis point if you sign up via stockbrokers.com. I don't recommend using margin for investment but it is very reasonable as a emergency fund reserv.
this only makes sense after you have more than $100k in taxable since IB charges a monthly fee if you're under. and of course you likely want at least $150k in case of a market down turn.

IlliniDave
Posts: 2270
Joined: Fri May 17, 2013 7:09 am

Re: Goodbye Emergency Fund (sorta)

Post by IlliniDave » Sat Mar 03, 2018 8:45 am

I am also single and debt free, and coincidentally I also keep about $7K extra in my checking account. That happens to be about 2.5 months of regular expenses. But in my case I've got ~8 years living expenses in my taxable investment account.

The traditional rule-of-thumb regarding emergency funds is that single-income households should size theirs a little larger since a single job loss results in household income going all the way to zero. Per the conventional wisdom 6 mos expenses is often what's advised. It's fine if you want to count your brokerage account in that total, but it is typically considered prudent to only "count" half the total (in case the need for the funds coincides with a large swoon in the capital markets). Incurring debt while you are in tough financial straits (i.e., during a period of unemployment) can work, or it can compound the problems.

YMMV, but in your situation, if $7K + 0.5*Brokerage Acct balance is < 6 mos required living expenses I'd consider proactively adopting the college lifestyle for a time and increase brokerage account contributions. If it is above that, then no need to do anything. I'd also consider (wouldn't necessarily do it) holding some more stable assets (bonds or MM) in the brokerage acct until I met the condition (full disclosure, if it were me I'd be sizing for 12 mos expenses, but I'm a bit more conservative than most), at which point the money could be moved to more aggressive investments. Odds are that such an approach is unnecessarily conservative, and temporarily holding a little extra cash might rob your estate of a few $K when all is said and done, but emergency funds are there for the improbable/unpredictable.
Don't do something. Just stand there!

UpperNwGuy
Posts: 516
Joined: Sun Oct 08, 2017 7:16 pm
Location: Washington DC

Re: Goodbye Emergency Fund (sorta)

Post by UpperNwGuy » Sat Mar 03, 2018 8:58 am

I like the concept of "emergency plan." It works for me.

Theoretical
Posts: 1260
Joined: Tue Aug 19, 2014 10:09 pm

Re: Goodbye Emergency Fund (sorta)

Post by Theoretical » Sat Mar 03, 2018 1:13 pm

I think your overall strategy is fine but I think you should increase the hobby fund size by whatever amount would be the largest single or multipart hobby purchase you would do at one time - say for the quarter.

So if it's a potential for a $3,000 expense, then you should have $10-11,000 in your combined fund to account for an emergency happening right after the big hobby purchase.

Also, this money will do you some good in a high yield savings account rather than a straight checking account.

Also, if you have any trouble keeping the two mentally separate, I'd consider using separate accounts for hobbies and emergency, or putting the emergency into the brokerage in a money market fund.

Post Reply