Are you too wealthy for a LIQUID emergency fund?

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Hulk
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Are you too wealthy for a LIQUID emergency fund?

Post by Hulk » Sun Oct 28, 2018 3:24 pm

Hello wise bogle heads,

I have kept 6-9 months of expenses liquid for the past 10 years. I am going to drop it to 3 months of living expenses and maybe less. I feel like at at a certain level of wealth, it is not necessary for a liquid emergency fund.

Financial emergencies (large ones) boil down to 1) job loss 2) health care expense. (I mean unexpected expenses >10k or so. <10k could be absorbed, albeit with difficultly, via cash flow). I have a healthy HSA that, should disaster strike my family's health, we have enough to cover 3 years of max out of pocket expenses. So really, we are just left with job loss.

We max out all available retirement space every year and in addition add to our Taxable account. Our taxable account has grown considerably and dwarfs our emergency fund. If we choose to invest our emergency fund and the market goes down AND I have a job loss at the time, it will be less than ideal, but not the end of the world. Selling low to pay for emergency expenses isn't great, but how likely is that? How often will that happen. Once, twice, never? I feel very stable in my job and could get a replacement job fairly easily. Why keep 10s of thousands liquid?

Does anyone else do this/feel the same way?

cncm
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by cncm » Sun Oct 28, 2018 3:35 pm

My work pays a pretty generous severance (~10months salary given my seniority/tenure) so I don’t keep a huge emergency fund (about 2 months living expenses). I figure if I get laid off, I’m set for one year without even touching my investments/savings.

MnD
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by MnD » Sun Oct 28, 2018 3:51 pm

We went 30 years with an all-stock emergency fund of 70K (built in our 20's, pre-kids, double income).
Never added a dime to it and have spent a few 100-thousand from it over the decades.
After all the spending it's still about 1.5X larger after inflation than it was when we set it up.

Curiously the last two years we have put aside a cash fund, mainly for some big purchases coming up.
Probably because for the first time in our married lives our expenses were dropping (end of college bills, kids moved out, house paid off etc.)

zrail
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by zrail » Sun Oct 28, 2018 3:54 pm

This is one of those perennial personal finance topics that everyone loves to discuss but at the end of the day there cannot be a general resolution. Everyone’s liquidity needs are different.

At the beginning of the journey people have an “emergency fund”. As they proceed they decide two things: first, that fund isn’t actually for emergencies because they have other liquidity sources (primarily cash flow), and second that that fund just isn’t that big of a portion of their assets as it once was.

I don’t really think in terms of emergency fund anymore. We can cash flow basically anything other than job loss between our credit cards and my salary. We keep some liquidity in FDIC accounts and money market funds. If we must count in months it’s about four months of expenses. Our second line of liquidity is a HELOC and margin on our taxable investments. Our third line is the taxable investments themselves as well as our Roth accounts.

KlangFool
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by KlangFool » Sun Oct 28, 2018 3:59 pm

Hulk wrote:
Sun Oct 28, 2018 3:24 pm

If we choose to invest our emergency fund and the market goes down AND I have a job loss at the time, it will be less than ideal, but not the end of the world. Selling low to pay for emergency expenses isn't great, but how likely is that? How often will that happen. Once, twice, never?
Hulk,

1) It happened regularly to many folks during a recession. And, a recession occurred regularly in this country.

2) If you are wealthy enough, a big emergency fund is one of luxury that you can afford. Why bother investing your emergency fund? It won't matter a bit.

A) My portfolio is 20 times my annual expense.

B) My taxable account is about 500K.

C) I keep 1 year of the emergency fund. It is not counted as part of my portfolio.

3) My emergency fund is 5% of my portfolio. It won't matter a bit whether I invest that money.

KlangFool

KlangFool
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by KlangFool » Sun Oct 28, 2018 4:07 pm

OP,

Have you ever lost your job in a recession? I had been there many times.

A) It is stressful enough trying to find a job. The last thing that you need is having to decide how much stock to sell every month in order to feed your family. You do not want that additional pain.

B) It makes a hell of the difference whether you have to settle for a lower pay job. Or, wait a few more months for a better job offer and lose a few more thousands in stock. Historically, if a person settles for a lower pay job, it takes a lot longer for that person to recover to the previous pay level. It may take a few more years.

There will be a recession in the future. Are you prepared?

KlangFool

depressed
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by depressed » Sun Oct 28, 2018 4:13 pm

My spouse had high job security and worked in an in-demand area, so we have never had an emergency fund apart from a HELOC (home equity line of credit). We've used it once in more than 40 years (to help out a friend).

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dccboone
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by dccboone » Sun Oct 28, 2018 4:30 pm

Are you too wealthy for a LIQUID emergency fund? No, we are not. We keep an Emergency Fund equal to 6-months of expenses. Three months is kept in a savings account and three months is kept in LifeStrategy Income Fund and can be accessed within 3 days. And, we only spend it on an emergency - an unexpected monthly expense that's not budgeted and must be purchased immediately. It must also be a "need", not a "want." Finally, we repay our Emergency Fund with the next month's budget in almost every situation.

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Watty
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Watty » Sun Oct 28, 2018 4:31 pm

Hulk wrote:
Sun Oct 28, 2018 3:24 pm
If we choose to invest our emergency fund and the market goes down AND I have a job loss at the time, it will be less than ideal, but not the end of the world. Selling low to pay for emergency expenses isn't great, but how likely is that?
Very unlikely because;

1) You can just set the dividends to not be automatically reinvested and that will give you something like 2% of the balance each year for a long term emergency.

2) If the stock market is down and you have something like a 60/40 stock and bond asset allocation then the bonds would be overweighted so you would be selling bonds to free up the money. The bonds might actually be in a retirement account for tax efficiency but when you rebalanced after the withdrawal then overall the bonds would be what was reduced.

3) Both stocks and bonds could be down at the same time but as long as your taxable accounts are several times the amount of the emergency fund there is little risk that the money would not be there when you need it even if you have to sell your investments when they are low.

I was able to buy some of the old iBonds that paid 3% above inflation so I always considered those to be my second tier emergency fund and part of my bond asset allocation so I never really had a large emergency fund. They don't pay a lot now but you might consider getting some ibonds for your second tier emergency fund and you could also include them as part of your bond asset allocation.

One other thing to consider your emergency funds is the mechanics how they can be accessed if you are in a hospital and unable to sell the investments if you needed to access that money.

sport
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by sport » Sun Oct 28, 2018 5:01 pm

In retirement, my allocation is 35/65, so I have most of my investments in "fixed income". If I have a sizable chunk of cash, it makes little difference because the money market funds and CDs yield as much as bonds, perhaps more. I consider it to be diversification of the fixed income portion of the portfolio.

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bligh
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by bligh » Sun Oct 28, 2018 5:29 pm

I have a large enough taxable account that I dont really need a separate liquid cash account to deal with a true emergency. However I do keep some funds in a savings account. I think of it as "Cash reserves" instead of as an emergency fund. My cash reserves aren't really just for emergencies, they are to smooth out and absorb large expenses that I cannot just cash flow.

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whodidntante
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by whodidntante » Sun Oct 28, 2018 5:51 pm

I think you might be referring to a cash allocation, not liquidity. An equity index ETF like VTI is highly liquid.

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rob
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by rob » Sun Oct 28, 2018 5:51 pm

I just have a slush fund in cash that would cover... 3-6months (depending how seriously we cut costs).... but we use it to pay cash for cars and other large but predictable expenses, so can sometimes be far lower. Have a large percentage in taxable stock, so I would agree that could be used in a real emergency.
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aspirit
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by aspirit » Sun Oct 28, 2018 5:59 pm

I have no EF. Theres bonds, cash, and instant liquidity w/a CC for the unexpected.
No, i'm not to wealthy for a EF, I just see no need for it. :happy
Last edited by aspirit on Tue Oct 30, 2018 7:13 am, edited 1 time in total.
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goblue100
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by goblue100 » Sun Oct 28, 2018 8:14 pm

This topic get covered every few months. Some people want a huge emergency fund, some want 0. My advice is to do what you want.

viewtopic.php?t=221399
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White Coat Investor
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by White Coat Investor » Sun Oct 28, 2018 8:59 pm

Hulk wrote:
Sun Oct 28, 2018 3:24 pm
Hello wise bogle heads,

I have kept 6-9 months of expenses liquid for the past 10 years. I am going to drop it to 3 months of living expenses and maybe less. I feel like at at a certain level of wealth, it is not necessary for a liquid emergency fund.

Financial emergencies (large ones) boil down to 1) job loss 2) health care expense. (I mean unexpected expenses >10k or so. <10k could be absorbed, albeit with difficultly, via cash flow). I have a healthy HSA that, should disaster strike my family's health, we have enough to cover 3 years of max out of pocket expenses. So really, we are just left with job loss.

We max out all available retirement space every year and in addition add to our Taxable account. Our taxable account has grown considerably and dwarfs our emergency fund. If we choose to invest our emergency fund and the market goes down AND I have a job loss at the time, it will be less than ideal, but not the end of the world. Selling low to pay for emergency expenses isn't great, but how likely is that? How often will that happen. Once, twice, never? I feel very stable in my job and could get a replacement job fairly easily. Why keep 10s of thousands liquid?

Does anyone else do this/feel the same way?
Frankly, my stock index funds are plenty LIQUID for the vast majority of emergency fund needs. The problem is emergency money needs to be both liquid and relatively safe from short term loss.

But to answer your question, you're right that financially independent people don't need an emergency fund. That's what the portfolio is.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Dottie57
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Dottie57 » Sun Oct 28, 2018 9:22 pm

goblue100 wrote:
Sun Oct 28, 2018 8:14 pm
This topic get covered every few months. Some people want a huge emergency fund, some want 0. My advice is to do what you want.

viewtopic.php?t=221399
+1

Nissanzx1
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Nissanzx1 » Sun Oct 28, 2018 10:31 pm

No sorry, a healthy emergency fund is the ultimate luxury...

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willthrill81
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by willthrill81 » Sun Oct 28, 2018 10:39 pm

We have a 3 month EF and aren't likely to go beyond that. Our mortgage should be paid off in about 18 months, and our essential spending will obviously drop as well. I work under multi-year contracts, so a sudden layoff is not a concern. We are well insured on all fronts. And while we have no plans to ever borrow another dime, once our mortgage is paid off, we'll take out a HELOC as a last ditch measure to get quick cash without raiding retirement accounts.
“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

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willthrill81
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by willthrill81 » Sun Oct 28, 2018 10:41 pm

White Coat Investor wrote:
Sun Oct 28, 2018 8:59 pm
Frankly, my stock index funds are plenty LIQUID for the vast majority of emergency fund needs. The problem is emergency money needs to be both liquid and relatively safe from short term loss.
Depending on how they are defined, some characterize stock funds as being marketable but not liquid.
“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

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White Coat Investor
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by White Coat Investor » Sun Oct 28, 2018 11:12 pm

willthrill81 wrote:
Sun Oct 28, 2018 10:41 pm
White Coat Investor wrote:
Sun Oct 28, 2018 8:59 pm
Frankly, my stock index funds are plenty LIQUID for the vast majority of emergency fund needs. The problem is emergency money needs to be both liquid and relatively safe from short term loss.
Depending on how they are defined, some characterize stock funds as being marketable but not liquid.
I think my definition of liquid was just narrowed.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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mhc
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by mhc » Mon Oct 29, 2018 8:24 am

OP,

you are correct that as your portfolio grows the need for a liquid EF (cash, cash equivalents) drops. I just keep enough in my checking and savings accounts to manage cash flow. I also have enough room on my credit cards to act as a buffer until I can get money from my taxable investment account.

Broken Man 1999
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Broken Man 1999 » Mon Oct 29, 2018 9:25 am

mhc wrote:
Mon Oct 29, 2018 8:24 am
OP,

you are correct that as your portfolio grows the need for a liquid EF (cash, cash equivalents) drops. I just keep enough in my checking and savings accounts to manage cash flow. I also have enough room on my credit cards to act as a buffer until I can get money from my taxable investment account.
This post reflects pretty much what I do, as well.

We have multiple ways to come up with a large sum of money quickly. Truth is, we have never had to come up with a large sum of money in haste. That is not to say we haven't faced large, unexpected expenses, but they were not expenses where payment was demanded quickly.

I have tried to stay as fully invested as I could over the years, and so far it has been successful. A stable income, without periods of no/reduced income certainly helps tremendously.

Different circumstances might dictate different strategies. I don't believe there is any "standard" emergency plan/fund that fits all households.

Broken Man 1999
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GoldStar
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by GoldStar » Mon Oct 29, 2018 10:42 am

cncm wrote:
Sun Oct 28, 2018 3:35 pm
My work pays a pretty generous severance (~10months salary given my seniority/tenure) so I don’t keep a huge emergency fund (about 2 months living expenses). I figure if I get laid off, I’m set for one year without even touching my investments/savings.
Do you have this in a written contract? Have you had the contract reviewed by an attorney?

Just because they've paid generous severances in the past doesn't mean they will in the future. Even if the company wants to - they could merge/be-bought by someone else who suddenly lays off a large number of folks with little or no severance.
Also - you could land on the wrong side of an argument with the wrong person and be fired. Fired employees are not like laid off employees - no severance.

jnet2000
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by jnet2000 » Mon Oct 29, 2018 10:59 am

No. But my wife and I are very conservative and we are financially independent.

We have 80% of our portfolio in taxable accounts, 25x our annual expenses saved between taxable and retirement accounts, proceeds from a house sale in CDs, and 2 years of expenses in a boring old savings account.

We are small busines owners so we take the majority of our risk in our business. Finance is personal so this is what allows us to sleep well at night regardless of our busines
"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

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ruralavalon
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by ruralavalon » Mon Oct 29, 2018 11:48 am

Once we had a large taxable account, we no longer kept a cash or cash equivalent emergency fund.

We could handle most unplanned events with a couple months of expenses in our checking account, cash flow from income, and very high limit credit cards (normally paid off every month).

Our taxable account was and is entirely in stock index funds. They are liquid, and can be turned into cash in a couple of days in the event of some extreme emergency.
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michaeljc70
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by michaeljc70 » Mon Oct 29, 2018 2:28 pm

Yes, I feel that way. I don't even think you need to be that wealthy if you have a good job and spend much less than you make. There have been other threads on this. Some argue, and I would mostly agree, that if there were a couple/few times in your 40 year investing "life" you needed to sell investments when the market is bad, it is more than made up for by all the times you were fully invested and getting a return on the EF. As the OP implied, if you have a good job and savings, not many real emergencies should arise that you cannot handle with your cash flow or by temporarily stopping/lowering retirement contributions.

lostdog
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by lostdog » Mon Oct 29, 2018 2:32 pm

No emergency cash. About 100k in VT in taxable. Keep adding to it. It's very liquid.

Dandy
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Dandy » Tue Oct 30, 2018 7:04 am

Since you can't take it with you there comes a point where making sure you have enough assets to support your preferred life style until death becomes more important than growing your wealth. In retirement there is usually a fairly rapid loss of human capital coupled with a retirement of up to several decades often for a couple vs a single life.

How wealthy people handle these challenges differs. Some maintain a fairly aggressive investment approach and others choose to shift to a more asset preservation approach. Some want to maximize early retirement income to check off bucket list items like extensive travel. Others have less expensive plans and look toward a more stable withdrawal approach. One size doesn't fit all.

I see no problem for people at any stage of life having an allocation to cash or cash-like liquid assets. Any non equity allocation can reduce overall growth since equities usually outperform fixed assets by a large percentage over the long term. Cash/liquid assets is just another fixed income choice.

As far as emergency funds -- your whole portfolio comes into play depending on the emergency. It seems sensible to have safe liquid assets at some level to address that concern as opposed to affecting the rest of your portfolio for every unexpected expense "emergency". Having lost my job a couple of times having a decent amount of liquid cash assets was really appreciated. It gave time to get our financial house in order and focus on re employment rather than focusing on portfolio issues.

Captain kangaroo
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Re: Are you too wealthy for a LIQUID emergency fund?

Post by Captain kangaroo » Tue Oct 30, 2018 9:51 am

I have 20k in my emergency fund.

Wayyy more then 3 or 6 months expenses.

I love keeping a good portion of cash ready. You never know what might happen in life.

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