Question for Bogleheads: Emergency Fund location ?

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Taylor Larimore
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Question for Bogleheads: Emergency Fund location ?

Post by Taylor Larimore » Fri Mar 26, 2010 10:13 am

Hi Bogleheads:

I would like to hear your opinion. It's about Emergency Fund location.

We'll define "Emergency Fund" as: "Money that's available for an unexpected emergency".

Which location do you recommend:

1) A separate taxable account.
2) A Roth IRA
3) Somewhere else.

Thank you in advance for your opinion.
"Simplicity is the master key to financial success." -- Jack Bogle

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Yuba
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Post by Yuba » Fri Mar 26, 2010 10:29 am

For my personal situation, I keep my emergency fund in the Vanguard Limited Term Tax Exempt fund. I do not think I will need to liquidate the entire fund, so I feel that I can withstand fluctuations to the NAV.

I also think once you have a "reasonable" amount, that using the bonds within a ROTH is a good idea if a true emergency required it, as contributions can be withdrawn.

While many posters hear will max out all their tax-advantaged space, I think most people will have room year over year. Therefore, "losing" the withdrawn money is not as bad on their personal situation.

In terms of actual funding, I would stop funding my Roth when I have to withdraw money from the emergency fund, then restart the Roth funding when the emergency fund is replenished.

Rick dba Yuba

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Post by stevewolfe » Fri Mar 26, 2010 10:30 am

We use a combination of three locations for a our tiered emergency funds:
  • 1) High Yield Savings account linked to checking
    2) Lower fixed coupon Inflation indexed savings bonds
    3) CD's

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Post by dandetour » Fri Mar 26, 2010 10:32 am

The bank within walking distance of the house is paying
1.2 - 1.5% on a plain old savings account. Capital One.
That is where our emergency cash is now. It used to be
in Prime MM.

For folks under 59.5 year of age the Roth IRA option may
not be attractive.

Dan

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emergency

Post by pkcrafter » Fri Mar 26, 2010 10:39 am

I don't think there is a clear answer to the question. A separate taxable account isn't really necessary if a person can keep a mental accounting of assets in a single taxable account. But emergency funds should remain separate from long term equity holdings. Sometimes a Roth is the best choice if the portfolio is short on taxable. Retirees don't really need an emergency fund since all assets are subject to emergency use. There are usually no portfolio contributions and no need to cover income loss.


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Post by integrity » Fri Mar 26, 2010 10:44 am

Separate taxable account.

Online savings account with Ally where I can easily electronic transfer into a checking account when need be. Currently earning 1.29%.

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Post by GammaPoint » Fri Mar 26, 2010 10:47 am

I hold our emergency account in taxable, either in CDs or in a short-term bond fund.

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Post by sscritic » Fri Mar 26, 2010 10:48 am

If I needed $500,000 for a life saving emergency operation, I would use my checking account, my money market account, my taxable account, and my tax-sheltered accounts. I would sell stocks, bonds, munis, ETFs, and pay early withdrawal penalties on CDs and the taxes on all my withdrawals from tax-deferred accounts.

I guess I don't understand the question. Would people rather die than take money out of their retirement accounts?

All of my money is available for when I need it. Isn't that what we have savings for?

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Emergency

Post by squawk » Fri Mar 26, 2010 10:51 am

Roth IRA Money Market (2.50%)

and

US I-Bonds

I have not had emergency yet, but I would cash in I-Bonds before taking money out of the Roth.

Problem is having the 1 year lockup with the I-Bonds. Nevertheless, you can't beat the inflation protection, tax deferral and principal protection.

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Post by wannabe_CPA » Fri Mar 26, 2010 12:30 pm

I bonds for most of it. I think eventually I'll do half in I bonds and half in some high yield savings or checking account more for convenience sake than anything.

I carry high deductibles on my insurance policies. The thing is when you're a person with a high deductible plan like that, you're usually a person who has good reason to believe you'll never actually use that insurance. Since the time frame on this is indefinite, I'm considering putting these monies in something that has more risk since I plan to have general cash readily available anyway. In other words, this would be "funny money".

But a more responsible part of me says that's stupid and to put that money in my retirement if I feel like I don't need it as cash in hand at all times.

My dad had something of a novel system. He'd think of a possible emergency, go buy a US savings bond with the present value of what he thought he needed to address said emergency, and stick the bond away in the family safe until that catastrophe came if ever. That way we were covered, it was getting at least some kind of return, and he wasn't tempted to spend it.

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Post by wannabe_CPA » Fri Mar 26, 2010 12:37 pm

sscritic wrote:I guess I don't understand the question. Would people rather die than take money out of their retirement accounts?

All of my money is available for when I need it. Isn't that what we have savings for?
It's a hedge against having to pay those sorts of fees, sort of. The idea is that if some life altering thing happens, namely losing your job, you can "coast" for some amount of time, say 3 months or a year, while you figure out what to do.

You're going to have to involuntarily switch jobs every 3 or 4 years typically or I do anyway, and wind up moving to some other city usually, so you've got to have some kind of cushion for these transitions. Some people don't have that problem so maybe it's not an issue for them as much.

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Re: Question for Bogleheads: Emergency Fund location ?

Post by YDNAL » Fri Mar 26, 2010 12:49 pm

Taylor Larimore wrote:We'll define "Emergency Fund" as: "Money that's available for an unexpected emergency".

Which location do you recommend:

1) A separate taxable account.
2) A Roth IRA
3) Somewhere else.
Hi, Taylor

I'm pretty sure this is for someone else or some type of research. :wink:

The only significant (to me) emergency (non life/death) is job-loss.
  • If one has 12, 18 months of expenses in the EF, plus a Taxable accounts with Stocks, use a Short Term Bond in tax-advantaged - not necessarily Roth IRA.
  • If there's no Taxable account, consider ST Tax-Exempt Bonds if it makes tax-sense; otherwise, ST Bond.
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Post by LynnC » Fri Mar 26, 2010 12:57 pm

Hi Taylor,

Our emergency money (Plan A) is in two different, insured, taxable, credit union accounts. The cash is sitting in money market funds and CD's. If I need it in a hurry, I can access it quickly by online transfer, visiting the credit union or writing a check.

Then I have "Plan B" for extra emergency money and then a "Plan C" for when and if I need more. When all else is exhausted, I will off some taxable stuff and go from there. I hope I have no major emergencies that require this type of action.

LynnC

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Re: Question for Bogleheads: Emergency Fund location ?

Post by DartThrower » Fri Mar 26, 2010 12:57 pm

Taylor Larimore wrote:Hi Bogleheads:

I would like to hear your opinion. It's about Emergency Fund location.

We'll define "Emergency Fund" as: "Money that's available for an unexpected emergency".

Which location do you recommend:

1) A separate taxable account.
2) A Roth IRA
3) Somewhere else.

Thank you in advance for your opinion.
Funny you should ask. My car mechanic just told me I needed a new transmission. Cost: $2,500... out of the blue and totally unexpected. I keep a modest amount in Prime MM for such things and will replenish the fund out of increased savings over the next several months.

For a layoff or disability lasting less than a year I can handle it out of short term taxable funds. Beyond that I would have to start digging into longer term strategic investments.

I come here looking for ways to do things better. So I admit that my strategy might not be optimal.
A Boglehead can stay the course longer than the market can stay irrational.

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Post by Bruce » Fri Mar 26, 2010 1:14 pm

I keep my emergency fund in the Vanguard Tax Exempt Money Market fund, (for an emergency where there is time to cash a check or transfer funds)

plus a few thousand in paper I bonds (as good as travelers checks if needed)

plus a few hundred in cash and rolls of dollar coins (for the "after the earthquake" scenario until networks are restored and the banks reopen)
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Re: Question for Bogleheads: Emergency Fund location ?

Post by Doc » Fri Mar 26, 2010 2:17 pm

Taylor Larimore wrote:
We'll define "Emergency Fund" as: "Money that's available for an unexpected emergency".
I define emergency as something that may never occur and contingency as something that will occur you just don't what it is or when it will occur.

So an emergency fund may never be spent but a contingency fund will be spent.

A job loss for a school teacher might be an emergency but for a construction worker who often gets laid off it is a contingency.

Assuming your "unexpected" emergency is the same as my emergency any short term bond fund will suffice. It doesn't even need to be in taxable as long as you have some taxable assets you can sell easily and replace with the emergency funds in tax deferred.

If you really mean my "contingency" a MM fund or savings account is more appropriate.
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Post by Tyrobi » Fri Mar 26, 2010 2:56 pm

I keep my 6-month emergency fund in a 4.00% APY high-yield checking account at a local credit union. The whole purpose of this account is for emergency fund and nothing else.

I have a separate account elsewhere as my main checking account.
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Post by LarryG » Fri Mar 26, 2010 3:04 pm

We have almost all of our funds in an IRA. I consider this to be the source for a "true" emergency fund.

Regards

LarryG

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Post by Tortoise » Fri Mar 26, 2010 3:16 pm

6 month's of expenses in high-yield savings account
additional 6 month's of expenses in 12-mo CD ladder
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Post by Chris001122 » Fri Mar 26, 2010 3:20 pm

Hi Taylor

Separate Taxable Account.

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Post by mickeyd » Fri Mar 26, 2010 3:21 pm

Used to use the PMMF for my reserves (do not call it EF any more), but since that is not a good choice today, I use a bank savings account for 1/2 and the VG STB fund for the other part. Will go back to PMMF in the future when the fed starts to crank up the ST rates.
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Post by Ted Valentine » Fri Mar 26, 2010 3:41 pm

Separate taxable account and Ibonds.
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Post by Rager1 » Fri Mar 26, 2010 3:49 pm

Hi Taylor,

I Bonds that are past 12 months old.

Ed

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Post by sperry8 » Fri Mar 26, 2010 3:54 pm

I keep my emergency fund in an online bank money market (currently earning 1.75%). I have enough to last 4 years w/o needing to liquidate any stocks or bonds.
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Post by FarmGirl » Fri Mar 26, 2010 3:58 pm

First layer, which is about 2 weeks of expenses sits in cash in the safe. We occasionally tap this to get really great deals on used stuff we need or want off of Craigslist as well. Amazing how cash in hand smoothes a deal.

Second layer is two months of expenses in a checking account.

Third layer will eventually be all I-bonds, but it is slow go getting it all converted, so for now the excess is in CD's.

I do consider the ROTH-ira's to be a backup to our emergency funds, but it would have to be some serious emergency before I would be willing to tap them.

I am also a fan of keeping a well stocked pantry, dry firewood and a full diesel tank (runs the generator, tractor and truck) just in case.

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Post by daddydub » Fri Mar 26, 2010 4:04 pm

Separate taxable account

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Post by HomerJ » Fri Mar 26, 2010 4:16 pm

I'm a bad Boglehead...

My wife and I have 6 months of living expenses in our checking accounts at the bank paying basically nothing. (<--- to be clear, this is why I'm a bad Boglehead... It's a decent chunk of money earning nothing. I should be smarter than that)

We also have plenty in a taxable account at Vanguard, but that's in the Total Stock Market Index Fund so it could certainly drop at the same time we have an emergency...

But I feel pretty good about our situation... Both of us work, making about the same amount of money. If either of us lost our jobs, we could survive (with some serious cost-cutting) on one salary.

She also has a 6-month severance written into her employee contract... I don't have guarenteed severance, but I can also find a job a lot quicker than her (I'm an IT grunt, she's a VP of HR)

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Post by livesoft » Fri Mar 26, 2010 4:54 pm

I would sell equities in a taxable account to raise cash. At around the same time, I would exchange fixed income to equities in my 401(k). That's like a cross between your (1) and (3) choices.

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Post by snyder66 » Fri Mar 26, 2010 5:19 pm

For all of you who hold your emergency funds in bonds, Is this more of a taxable event, selling the bonds, instead of selling a money market or online savings account? I'm assuming you don't touch this account too much...But, What about frequent sellers?

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Post by livesoft » Fri Mar 26, 2010 5:30 pm

Frequent sellers? I would question my definition of an emergency.

The beauty of using stocks (and not bonds) is that the taxes are minimized:
(a) If you sell at a loss, you get a tax deduction.
(b) If you sell at a gain, you just use your carryover losses to net out no gain and no taxes.
(c) If you sell at neither a gain nor a loss, no taxes.

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Post by Peter Foley » Fri Mar 26, 2010 5:37 pm

Part of our emergency fund is mental accounting. We have a savings account paying about 1% where we purposefully hold a few months salary. After that I would turn to a couple old EE bonds that I inherited, then to some lower yielding I-Bonds.

The weak point in this plan is that I'm not sure my wife would know how to execute it past the savings account if something happened to me. For example, she might sell the oldest I-Bonds which are the highest yielding.

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Post by snyder66 » Fri Mar 26, 2010 6:10 pm

I guess what I meant was frequent withdraws from the account, livesoft. In other words, If your emergency fund is in the short term bond, what would be my tax implication for withdrawing money? I do like the idea.

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Post by livesoft » Fri Mar 26, 2010 6:11 pm

Tax implication is a line on Schedule D of Form 1040.

Why would you have frequent withdrawals from your emergency fund?

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Post by snyder66 » Fri Mar 26, 2010 6:20 pm

OK, Maybe not frequent. I guess I could always keep some of my emergency money in an online savings and keep the rest in my Vanguard short term. But, There are times when I do need to dip into this account.

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Post by grabiner » Fri Mar 26, 2010 7:00 pm

I don't have a separate emergency fund, because I have enough low-risk bonds in my retirement plan to create a virtual fund, and much more stock in my taxable account than I would need in an emergency. Thus, if I need cash, I would sell taxable stock, and move an equal amount from bonds to stock in my retirement accounts, keeping the correct stock allocation.
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Post by Luka5P » Sat Mar 27, 2010 12:34 am

Currently, the money is with an online bank in a high yield savings account. I will probably move it to the Vanguard Prime Money Market in the future, depending on the interest rates.

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Post by Hat » Sat Mar 27, 2010 12:49 am

Vanguard Limited-Term Tax-Exempt Fund (VMLTX)

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Post by pteam » Sat Mar 27, 2010 2:54 am

rrosenkoetter wrote:I'm a bad Boglehead...

My wife and I have 6 months of living expenses in our checking accounts at the bank paying basically nothing. (<--- to be clear, this is why I'm a bad Boglehead... It's a decent chunk of money earning nothing. I should be smarter than that)

We also have plenty in a taxable account at Vanguard, but that's in the Total Stock Market Index Fund so it could certainly drop at the same time we have an emergency...

But I feel pretty good about our situation... Both of us work, making about the same amount of money. If either of us lost our jobs, we could survive (with some serious cost-cutting) on one salary.

She also has a 6-month severance written into her employee contract... I don't have guarenteed severance, but I can also find a job a lot quicker than her (I'm an IT grunt, she's a VP of HR)
rrosenkoetter,

You could take 80% of that money out of checking account and put in an online money market paying close to 2%. When you need money you'd still have the other 20% already in your checking account (or open a savings at the same bank and have them linked so you can transfer immediately) the other 80% at the online bank money market you can have transfered to your checking account in like 2 days.

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Post by billb » Sat Mar 27, 2010 3:05 am

Who is paying close to 2% right now? I find most are paying close to 1%.

Thanks.

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Post by carolc » Sat Mar 27, 2010 4:46 am

Mine is in CDs at my local credit union (taxable).

carolc

Snowjob
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Post by Snowjob » Sat Mar 27, 2010 9:55 am

Taxable account at InteractiveBrokers.

I have never owned a savings account in my life.

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Post by BW1985 » Sat Mar 27, 2010 10:03 am

Snowjob wrote:Taxable account at InteractiveBrokers.

I have never owned a savings account in my life.
What are the investments in this account?

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Post by Snowjob » Sat Mar 27, 2010 10:15 am

BW1985 wrote:
Snowjob wrote:Taxable account at InteractiveBrokers.

I have never owned a savings account in my life.
What are the investments in this account?
At the moment no margin, just cash and equities. I sold a position in some mortgage reits this past week when as pricing had temporarily peaked pre dividend and I was now into mostly long term capital gains territory. Damn IB doesnt identify individual lot, which is why I miss my old etrade account. But sub 2% margin rates represented a MAJOR cost savings.

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Post by HomerJ » Sat Mar 27, 2010 11:18 am

pteam wrote: You could take 80% of that money out of checking account and put in an online money market paying close to 2%. When you need money you'd still have the other 20% already in your checking account (or open a savings at the same bank and have them linked so you can transfer immediately) the other 80% at the online bank money market you can have transfered to your checking account in like 2 days.
I know... I really should do that... :)

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Post by norm » Sat Mar 27, 2010 11:46 am

I just received some insurance pay offs. One which is equivalent to one year's income I am leaving with the insurance company which pays 3.25% interest. I have some money in the VG Prime Money Market Fund. The other insurance pay out which is currently in my savings account waiting for me to decide where to put it. More than likely that money will go into a short term bond fund waiting for CD & money market rates to rise and then I will switch money to those two vehicles.

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Post by Cernel » Sat Mar 27, 2010 11:57 am

My emergency funds equal 1 year of expenses and is located in a separate taxable account. I have 12 1-year CD's maturing on the 1st of each month.

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Post by mickeyd » Sat Mar 27, 2010 12:02 pm

I am leaving with the insurance company which pays 3.25% interest.
Good idea in order to capture that high rate. But, be prepared for salesmen from that insurance company to be contacting you in an effort to "assist" you with your investment/insurance/annuity program.

Be prepared to say~ " Hey there John. I do my own investing with Vanguard. Please take my name off of your marketing list. Have a good day, John."
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Post by akira » Sat Mar 27, 2010 12:48 pm

Currently, all of our emergency fund is held in our normal taxable Vanguard account. It is all invested in Vanguard's short term bond index fund (VBISX), as I want my money to at least beat taxes and inflation, with perhaps some additional growth (but safety is obviously paramount).

I had never thought of using a Roth IRA account to hold an emergency fund, since I was not aware that you could withdraw contributions tax free. Would someone please post a link that explains this more?

I do not understand why anyone needs a separate account for their emergency fund, unless you are worried about confusing it with the same investments that you would want to use for long term investments (which is no problem for me, as I am middle aged).

Many of you have mentioned US I-bonds, which I just checked out. Looks no good to me, since they limit you to a pathetic $5,000 max purchase each year!

Many of you have also mentioned high yield checking/savings/money market accounts, that are getting over 2% returns right now. For example, Tyrobi claimed 4% in a checking account--that is stunning! For all you guys who have found such impressive rates, please do the rest of us a favor and say the specific institution. My search at http://www.bankrate.com just now found utterly pathetic CD and savings/mm rates, and that was using their nationwide search.

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Post by wannabe_CPA » Mon Mar 29, 2010 9:26 am

akira wrote:Many of you have mentioned US I-bonds, which I just checked out. Looks no good to me, since they limit you to a pathetic $5,000 max purchase each year!
1. I have a hard time saving $5k on my $25k annual income anyway. That's probably about what I'll manage to save this year all total including everything so the $5k limit is of no consequence. I'm glad you think saving $5k is pathetic because for me it's quite an achievement.

2. It's actually $10k. $5k electronically via Treasury Direct and $5k in paper bonds from a bank. You can double that if you're married, triple it if you're married and have a child, etc.

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Post by Random Musings » Mon Mar 29, 2010 9:46 am

Emergency fund is in taxable account. It can be in a variety of investment vehicles (I'm at the point where separation is not much of an issue - although tax considerations must be considered).

RM

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