"Emergency Fund" Strategy

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RetireSomeday5
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"Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 12:12 pm

I've been thinking/rethinking my EF strategy a lot lately and wanted to see what people thought. I've looked through the wiki and some of the other threads but didn't really see what I'm looking for.

I'm leaning toward the tiered approach opinion, I was thinking 3 tiers but as I was typing this I think I may have convinced myself of 4.

For simplicity assume the following:

1) Own two rentals properties and I rent where I live (long story!) Both rentals are rented single family in good areas. The monthly outlay are 2K each so 6K total per month.

2) I have 85K in my Brokerage (tax advantaged already maxed out)

3) Stable job industry

4) Required to hold 9K in escrow for my two rentals.


Strategy:

How much? 34K = about 3.5Months @6K + 9K Escrow

Tier1- Brick and Mortar Checking 10K covers monthly expenses
Tier2- 5K High Yield Online Savings, a small amount of quickly accessible FDIC insured funds
Tier3- 10K Stable Value in tax advantaged account Currently about 1.8%; .3% higher than Money Markets
Tier4- 9K Intermediate duration bonds in tax advantaged

Thoughts??? And thanks in advance.

livesoft
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Re: "Emergency Fund" Strategy

Post by livesoft » Wed Jan 10, 2018 12:24 pm

Anything you do will be fine. But I didn't get your math two rental, $2K, then $6K? My brain is thinking "$4K."

If you want to use bond funds for an emergency, sometimes I advise that you have a larger amount. For instance, if you want 10 months of expenses in an emergency fund of bonds, but bonds might drop no more than 10% in a recession, then you might want to have 11 months of expenses instead because your emergency fund could drop by about 10% and you will still have 10 months of expenses in it.
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RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 12:32 pm

livesoft wrote:
Wed Jan 10, 2018 12:24 pm
Anything you do will be fine. But I didn't get your math two rental, $2K, then $6K? My brain is thinking "$4K."

If you want to use bond funds for an emergency, sometimes I advise that you have a larger amount. For instance, if you want 10 months of expenses in an emergency fund of bonds, but bonds might drop no more than 10% in a recession, then you might want to have 11 months of expenses instead because your emergency fund could drop by about 10% and you will still have 10 months of expenses in it.
Thanks livesoft, as always!

Two rentals at 2K =4K + the place I rent to live in also at 2K= 6K.

Clarifying with regard to the bonds; if my AA is 90/10 but then I want say 10 Months of emergency in bonds are you are suggesting 90/10+11 Months bonds? Obviously my situation is closer to 2 months bonds so 2.2 months worth rather than the 11 months, but same philosophy or am I missing something?

mega317
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Re: "Emergency Fund" Strategy

Post by mega317 » Wed Jan 10, 2018 12:41 pm

Well ok, first of all, an emergency fund that only accounts for 3.5 months of rental expenses, your own rent, and escrow is probably not enough.

Your plan is too complicated for my taste. If you want to use the stable value as part of your "emergency fund/cash needs" which I think is reasonable, then I'd forget the high-yield savings. And how would the 9k intermediate bonds in tax-advantaged differ from the rest of your bond allocation?

With 10k in checking and 5k in savings, what was your plan for the other 70k in taxable? You might have a large enough taxable account to forget the whole idea of an emergency fund.

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saltycaper
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Re: "Emergency Fund" Strategy

Post by saltycaper » Wed Jan 10, 2018 12:48 pm

I've rejected the idea of a AA plus an emergency fund and have instead incorporated the EF into the AA. If you are starting out or require a large emergency fund, this may mean shifting the AA significantly. If you've amassed a large portfolio, then it means the EF is insignificant in the context of the AA. Then it's just a question of what accounts/investments will be used in the case of an emergency--how you will logistically handle the transactions. I think this offers a better picture of the amount of risk I am taking.
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randomizer
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Re: "Emergency Fund" Strategy

Post by randomizer » Wed Jan 10, 2018 12:50 pm

I try not to sweat it too much with my emergency fund and keep it simple because it is a relatively small portion of my liquid net worth (about 10%, but it fluctuates). I expect the % to drop within a year or two anyway, probably down to about 5% (moving to a lower cost of living area, so need less EF), in which case I may as well stuff it under the mattress because it's not going to substantially change my retirement prospects or quality of life whether I get 0% or 1% or 2% return on that EF money.
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RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 12:54 pm

mega317 wrote:
Wed Jan 10, 2018 12:41 pm
Well ok, first of all, an emergency fund that only accounts for 3.5 months of rental expenses, your own rent, and escrow is probably not enough.

Your plan is too complicated for my taste. If you want to use the stable value as part of your "emergency fund/cash needs" which I think is reasonable, then I'd forget the high-yield savings. And how would the 9k intermediate bonds in tax-advantaged differ from the rest of your bond allocation?

With 10k in checking and 5k in savings, what was your plan for the other 70k in taxable? You might have a large enough taxable account to forget the whole idea of an emergency fund.
For it to be just 3.5 Months it would have to be one heck of a black swan, possible, but unlikely that I can rent neither of my two properties to someone else and yet still have to pay rent where I'm renting at the same time I lost my job. At which point, as I think you suggested, I then could dip in to the taxable. I know the usual rule is to look at EF by months, but does looking at it as 34K on a few 2-3K possibilites make more sense?


Are you suggesting eliminating the 5K high yield savings for simplicity or for another reason? I just liked the idea of having a few quickly transferable dollars in an account that is FDIC and is also not Vanguard.

What's in my taxable is nothing but Vanguard Total Stock (VTSAX), I do hold my stable value, some additional bonds, and effectively what is a mix of Vanguard total stock and vanguard total international in my tax advantaged.

I think that what I'm trying to do is forget the idea of a "Emergency Fund" but I still wanted to tilt a little to a few safer investements by the amount that I would have established the fund if I did hold it.

Does this make sense or am I off base?


Thanks again, :sharebeer

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DaftInvestor
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Re: "Emergency Fund" Strategy

Post by DaftInvestor » Wed Jan 10, 2018 1:05 pm

I don't understand what you mean by "Tax Advantaged" accounts for tiers 3 and 4. Most tax advantaged accounts are non-accessible for emergencies.
You aren't making very much for the extra effort of tiers 3 and 4. I'm also not sure why you need to hold 10K in checking - you can shift some of this to High-Yield Savings. I would just put the whole $34K in High-Yield savings.

NextMil
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Re: "Emergency Fund" Strategy

Post by NextMil » Wed Jan 10, 2018 1:06 pm

I agree. Much too complicated. You are probably overthinking it, which all of us tend to do.

I would figure out what you are on the hook for monthly (that is bare bones, no frills - eliminate anything you can live without in terms of costs) and multiply by 6 - that should be your emergency fund number.

I do the following
1 months worth in checking as a buffer.
2 months worth in high interest saving - takes 24 hours to pull if needed.
3 months in taxable brokerage in S&P Index - admittedly, I now have more than 3 months in that account, but I throw in some every month.

If I were you, I might sit on more cash until you get up to six months. The peace you have when you have a solid emergency fund is worth way more than losing out on a few bucks in interest every month.

Everyone has a different approach/risk tolerance, but whatever you decide, I wouldn't overcomplicate it too much, just build yourself some safety even if its slow going.

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saltycaper
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Re: "Emergency Fund" Strategy

Post by saltycaper » Wed Jan 10, 2018 1:13 pm

DaftInvestor wrote:
Wed Jan 10, 2018 1:05 pm
I don't understand what you mean by "Tax Advantaged" accounts for tiers 3 and 4. Most tax advantaged accounts are non-accessible for emergencies.
Those holdings could be sold and used to purchase stocks while stocks are simultaneously sold in taxable. Then they would effectively function as emergency funds, as long as the tax considerations with regard to selling stocks in taxable are palatable.
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RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 1:24 pm

saltycaper wrote:
Wed Jan 10, 2018 1:13 pm
DaftInvestor wrote:
Wed Jan 10, 2018 1:05 pm
I don't understand what you mean by "Tax Advantaged" accounts for tiers 3 and 4. Most tax advantaged accounts are non-accessible for emergencies.
Those holdings could be sold and used to purchase stocks while stocks are simultaneously sold in taxable. Then they would effectively function as emergency funds, as long as the tax considerations with regard to selling stocks in taxable are palatable.
This is exactly what I was referring to.

You can see the wiki: https://www.bogleheads.org/wiki/Placing ... ed_account

mortfree
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Re: "Emergency Fund" Strategy

Post by mortfree » Wed Jan 10, 2018 1:30 pm

RetireSomeday5 wrote:
Wed Jan 10, 2018 12:12 pm


Strategy:

How much? 34K = about 3.5Months @6K + 9K Escrow

Tier1- Brick and Mortar Checking 10K covers monthly expenses
Tier2- 5K High Yield Online Savings, a small amount of quickly accessible FDIC insured funds
Tier3- 10K Stable Value in tax advantaged account Currently about 1.8%; .3% higher than Money Markets
Tier4- 9K Intermediate duration bonds in tax advantaged

Thoughts??? And thanks in advance.
Tier 1 - Brick 10k
Tier 2 - credit card (to be paid off with Tier 3, or 4)
Tier 3 - Online Savings Account 24k

Invest the rest.

Tier 4 - brokerage account

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DaftInvestor
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Re: "Emergency Fund" Strategy

Post by DaftInvestor » Wed Jan 10, 2018 1:33 pm

RetireSomeday5 wrote:
Wed Jan 10, 2018 1:24 pm
saltycaper wrote:
Wed Jan 10, 2018 1:13 pm
DaftInvestor wrote:
Wed Jan 10, 2018 1:05 pm
I don't understand what you mean by "Tax Advantaged" accounts for tiers 3 and 4. Most tax advantaged accounts are non-accessible for emergencies.
Those holdings could be sold and used to purchase stocks while stocks are simultaneously sold in taxable. Then they would effectively function as emergency funds, as long as the tax considerations with regard to selling stocks in taxable are palatable.
This is exactly what I was referring to.

You can see the wiki: https://www.bogleheads.org/wiki/Placing ... ed_account
Thanks for explaining - I remember reading about that strategy now - too complicated with too small of a benefit in my personal opinion.
So now you are selling stocks - waiting for those to clear - then waiting for the ACH transfer from the brokerage to access your emergency funds (okay - understand this is 3rd tier so perhaps you already believe a week delay is okay).
The ACH transfer from my High-Yield savings takes 1-day - last time I pulled from a brokerage it was 3 days. My high-yield savings pays 1.4% and comes with FDIC insurance. With your tiers 3 and 4 you make maybe another 0.4% on your 19K (without FDIC protection) - is $76 per year really worth it to you??? Personally I'd skinny down the checking account instead.
(I consider my iBonds my second tier - I have at least 6 months living in High-Yield but know I can fall back on iBonds if I am out of work for a longer period of time or have multiple disasters that deplete my 6 months of expenses).

mega317
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Re: "Emergency Fund" Strategy

Post by mega317 » Wed Jan 10, 2018 2:49 pm

RetireSomeday5 wrote:
Wed Jan 10, 2018 12:54 pm
Are you suggesting eliminating the 5K high yield savings for simplicity or for another reason? I just liked the idea of having a few quickly transferable dollars in an account that is FDIC and is also not Vanguard.
Your checking account is quickly transferable, FDIC insured, and not Vanguard. In what scenario do you envision needing another 5k faster than you can get by selling assets in a brokerage? That can't be covered by a credit card for 2 days.
I think that what I'm trying to do is forget the idea of a "Emergency Fund" but I still wanted to tilt a little to a few safer investements by the amount that I would have established the fund if I did hold it.

Does this make sense or am I off base?
I understand what you're saying, I just don't think the mental gymnastics are worth it. Either you want some safe money that you consider separately as an emergency fund or you don't.

By comparison: I have enough in a checking account to cover my anticipated expenses before my next paycheck (mortgage, daycare, credit cards, car payment, and that's about it). Every other dollar to my name is in stock index funds (75%) or bond index funds/I bonds (25%). If another expense comes up I put it on my credit card and either sell something in taxable because the next credit card bill will be larger, or more likely just invest less next month. If I lose my job or something else really big happens, I will need to do more of that.
Last edited by mega317 on Wed Jan 10, 2018 5:18 pm, edited 1 time in total.

RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 3:24 pm

mega317 wrote:
Wed Jan 10, 2018 2:49 pm
RetireSomeday5 wrote:
Wed Jan 10, 2018 12:54 pm
Are you suggesting eliminating the 5K high yield savings for simplicity or for another reason? I just liked the idea of having a few quickly transferable dollars in an account that is FDIC and is also not Vanguard.
Your checking account is quickly transferable, FDIC insured, and not Vanguard. In what scenario do you envision needing another 5k faster than you can get by selling assets in a brokerage? That can't be covered by a credit card for 2 days.
I think that what I'm trying to do is forget the idea of a "Emergency Fund" but I still wanted to tilt a little to a few safer investements by the amount that I would have established the fund if I did hold it.

Does this make sense or am I off base?
I understand what you're saying, I just don't think the mental gymnastics are worth it. Either you want some safe money that you consider separately as an emergency fund or you don't.

By comparison: I have enough in a checking account to cover my anticipated expenses before my next paycheck (mortgage, daycare, credit cards, car payment, and that's about it). Every other dollar to my name is in stock index funds (75%) or bond index funds/I bonds (25%). If another expense comes up I put it on my credit card and either sell something in taxable because the next credit card bill will be larger, or more likely just invest less next month. If I lose my job or something else really big happens, I will need to do more of that.

No events would really be thought of outside of crazy black swans.

Thanks for the thoughts all, I sincerely appreciate it!

aristotelian
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Re: "Emergency Fund" Strategy

Post by aristotelian » Wed Jan 10, 2018 3:37 pm

Tier 1-Checking $10k
Tier 2-Vanguard Prime Money Market Fund $15k
Tier 3-I Bonds $15k
Tier 4-Vanguard Muni fund $50k
Tier 5-Brokerage account

Tal-
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Re: "Emergency Fund" Strategy

Post by Tal- » Wed Jan 10, 2018 4:52 pm

I'll have a dissenting/minority opinion on this one.

Having real estate means that you really need to have a strong emergency fund. I'd recommend something like '20K for real estate emergency fund' + 'standard 3-6 months for personal emergency fund'. Big numbers...

Because the emergency fund needs to be so large, I often like complexity in an emergency fund in the right circumstances. Without getting lost in the weeds, our emergency fund is more of a set of emergency plans, and includes checking, savings, bonds, and even a HELOC (though the HELOC does not count towards our number).

With that said, you shouldn't use advantaged accounts/retirement accounts as part of your emergency funds (there are a few exceptions to this). So, the T3 and T4 money that you have set aside probably shouldn't be included in your calculations. I'm also not sure how accessible that $9K in escrow is for emergencies; if that's an escrow account done through your mortgage, it's for a defined purpose (taxes and insurance) and also shouldn't be counted as part of your emergency fund.

Insofar that this is accurate, I would recommend your emergency fund stay in cash (checking and savings accounts), and that it grows significantly before you think about adding any more complexity.

Just my two cents.
Debt is to personal finance as a knife is to cooking.

RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Wed Jan 10, 2018 5:00 pm

Tal- wrote:
Wed Jan 10, 2018 4:52 pm
I'll have a dissenting/minority opinion on this one.

Having real estate means that you really need to have a strong emergency fund. I'd recommend something like '20K for real estate emergency fund' + 'standard 3-6 months for personal emergency fund'. Big numbers...

Because the emergency fund needs to be so large, I often like complexity in an emergency fund in the right circumstances. Without getting lost in the weeds, our emergency fund is more of a set of emergency plans, and includes checking, savings, bonds, and even a HELOC (though the HELOC does not count towards our number).

With that said, you shouldn't use advantaged accounts/retirement accounts as part of your emergency funds (there are a few exceptions to this). So, the T3 and T4 money that you have set aside probably shouldn't be included in your calculations. I'm also not sure how accessible that $9K in escrow is for emergencies; if that's an escrow account done through your mortgage, it's for a defined purpose (taxes and insurance) and also shouldn't be counted as part of your emergency fund.

Insofar that this is accurate, I would recommend your emergency fund stay in cash (checking and savings accounts), and that it grows significantly before you think about adding any more complexity.

Just my two cents.
A few clarifications and questions.

1) The escrow of 9K is an amount that I hold in my bank accounts that must be refunded to my tenants (security deposits/last months rents) when they leave. Due to this my "EF" must be 9K higher than otherwise. This is NOT the amount the banks hold for my taxes/insurance.
2) Why does owning real estate change the amount I need in "cash"? Should I need a new roof I can pay be credit card and take from my brokerage I do like your wording though and would rather say real estate means you need a strong emergency PLAN.... but not fund (though after re-reading perhaps were at similar places, you noted 20K+personal 3-6 months, Mine is closer to 6 months personal + 50% of (3 months for 2 rental property)
3) You say "you shouldn't use advantaged funds as part of the emergency fund"- why not? Understanding that this is really just an accounting play, money will never actually be withdrawn from my IRA/401k for this purpose. It follows from the example in the wiki: https://www.bogleheads.org/wiki/Placing ... ed_account

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Sandtrap
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Re: "Emergency Fund" Strategy

Post by Sandtrap » Wed Jan 10, 2018 5:48 pm

EF
Tier 1 Brick n Mortar or equiv. Incl. Operating expenses to cover a potential rent loss.
Tier 2 High Yield accounts (bankrate.com)
Tier 3 CD Ladder

Generally the purpose of EF is protection of principal and readily available.

j :D

Tal-
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Re: "Emergency Fund" Strategy

Post by Tal- » Wed Jan 10, 2018 6:25 pm

RetireSomeday5 wrote:
Wed Jan 10, 2018 5:00 pm
Tal- wrote:
Wed Jan 10, 2018 4:52 pm
I'll have a dissenting/minority opinion on this one.

Having real estate means that you really need to have a strong emergency fund. I'd recommend something like '20K for real estate emergency fund' + 'standard 3-6 months for personal emergency fund'. Big numbers...

Because the emergency fund needs to be so large, I often like complexity in an emergency fund in the right circumstances. Without getting lost in the weeds, our emergency fund is more of a set of emergency plans, and includes checking, savings, bonds, and even a HELOC (though the HELOC does not count towards our number).

With that said, you shouldn't use advantaged accounts/retirement accounts as part of your emergency funds (there are a few exceptions to this). So, the T3 and T4 money that you have set aside probably shouldn't be included in your calculations. I'm also not sure how accessible that $9K in escrow is for emergencies; if that's an escrow account done through your mortgage, it's for a defined purpose (taxes and insurance) and also shouldn't be counted as part of your emergency fund.

Insofar that this is accurate, I would recommend your emergency fund stay in cash (checking and savings accounts), and that it grows significantly before you think about adding any more complexity.

Just my two cents.
A few clarifications and questions.

1) The escrow of 9K is an amount that I hold in my bank accounts that must be refunded to my tenants (security deposits/last months rents) when they leave. Due to this my "EF" must be 9K higher than otherwise. This is NOT the amount the banks hold for my taxes/insurance.
2) Why does owning real estate change the amount I need in "cash"? Should I need a new roof I can pay be credit card and take from my brokerage I do like your wording though and would rather say real estate means you need a strong emergency PLAN.... but not fund (though after re-reading perhaps were at similar places, you noted 20K+personal 3-6 months, Mine is closer to 6 months personal + 50% of (3 months for 2 rental property)
3) You say "you shouldn't use advantaged funds as part of the emergency fund"- why not? Understanding that this is really just an accounting play, money will never actually be withdrawn from my IRA/401k for this purpose. It follows from the example in the wiki: https://www.bogleheads.org/wiki/Placing ... ed_account
Gotcha!
1: Regarding the escrow: That makes sense, and props to you for keeping it separate! I still wouldn't count it towards your emergency fund as all of that money is spoken for, and most isn't even really your money :)

2: Regarding Real Estate & EF. First, I think we'd agree on this, but if you're paying for a $15K roof with a credit card and then immediately paying the credit card off from your brokerage account, your brokerage account is your true emergency fund. I have no issues with using credit in this way.

However, without the true emergency fund behind the credit, I'm hesitating relying on credit as part of my emergency fund for a few reasons. A big one is that credit has a bad habit of vanishing, and vanishing in a way that correlates with your risk. Consider needing a new roof in a recession. For me, if the economy tanks, my HELOC may be reconsidered and vanish - right about the time that my income is taking a hit (also from the poor economy) - so if I need to spend 15k on a new roof, $15K in assets is more helpful than $15K in available credit. There are also larger fees using debt (especially credit cards). As a general statement, if you're carrying a balance on your credit cards to keep a rental afloat, something is probably wrong.

Still, under normal circumstances, I see your point. And I think we'd agree: If tomorrow I need to put a $15K roof on rental, I would probably pull that from the HELOC rather than sell some bonds. But, that's me using credit as a luxury rather than a necessity.

3: Regarding using retirement accounts as part of an EF: The link that you provided didn't work for me, and I couldn't find the Wiki that you were referencing. I'm interested in this one as we seem to be looking at the role of retirement accounts as part of an emergency fund very differently.
Debt is to personal finance as a knife is to cooking.


Jeep512
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Re: "Emergency Fund" Strategy

Post by Jeep512 » Thu Jan 11, 2018 6:47 am

mortfree wrote:
Wed Jan 10, 2018 1:30 pm

Tier 1 - Brick 10k
Tier 2 - credit card (to be paid off with Tier 3, or 4)
Tier 3 - Online Savings Account 24k

Invest the rest.

Tier 4 - brokerage account
You perfectly described my approach. I like to keep it simple. :sharebeer

RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Thu Jan 11, 2018 1:11 pm

Tal- wrote:
Wed Jan 10, 2018 6:25 pm
RetireSomeday5 wrote:
Wed Jan 10, 2018 5:00 pm
Tal- wrote:
Wed Jan 10, 2018 4:52 pm
I'll have a dissenting/minority opinion on this one.

Having real estate means that you really need to have a strong emergency fund. I'd recommend something like '20K for real estate emergency fund' + 'standard 3-6 months for personal emergency fund'. Big numbers...

Because the emergency fund needs to be so large, I often like complexity in an emergency fund in the right circumstances. Without getting lost in the weeds, our emergency fund is more of a set of emergency plans, and includes checking, savings, bonds, and even a HELOC (though the HELOC does not count towards our number).

With that said, you shouldn't use advantaged accounts/retirement accounts as part of your emergency funds (there are a few exceptions to this). So, the T3 and T4 money that you have set aside probably shouldn't be included in your calculations. I'm also not sure how accessible that $9K in escrow is for emergencies; if that's an escrow account done through your mortgage, it's for a defined purpose (taxes and insurance) and also shouldn't be counted as part of your emergency fund.

Insofar that this is accurate, I would recommend your emergency fund stay in cash (checking and savings accounts), and that it grows significantly before you think about adding any more complexity.

Just my two cents.
A few clarifications and questions.

1) The escrow of 9K is an amount that I hold in my bank accounts that must be refunded to my tenants (security deposits/last months rents) when they leave. Due to this my "EF" must be 9K higher than otherwise. This is NOT the amount the banks hold for my taxes/insurance.
2) Why does owning real estate change the amount I need in "cash"? Should I need a new roof I can pay be credit card and take from my brokerage I do like your wording though and would rather say real estate means you need a strong emergency PLAN.... but not fund (though after re-reading perhaps were at similar places, you noted 20K+personal 3-6 months, Mine is closer to 6 months personal + 50% of (3 months for 2 rental property)
3) You say "you shouldn't use advantaged funds as part of the emergency fund"- why not? Understanding that this is really just an accounting play, money will never actually be withdrawn from my IRA/401k for this purpose. It follows from the example in the wiki: https://www.bogleheads.org/wiki/Placing ... ed_account
Gotcha!
1: Regarding the escrow: That makes sense, and props to you for keeping it separate! I still wouldn't count it towards your emergency fund as all of that money is spoken for, and most isn't even really your money :)

2: Regarding Real Estate & EF. First, I think we'd agree on this, but if you're paying for a $15K roof with a credit card and then immediately paying the credit card off from your brokerage account, your brokerage account is your true emergency fund. I have no issues with using credit in this way.

However, without the true emergency fund behind the credit, I'm hesitating relying on credit as part of my emergency fund for a few reasons. A big one is that credit has a bad habit of vanishing, and vanishing in a way that correlates with your risk. Consider needing a new roof in a recession. For me, if the economy tanks, my HELOC may be reconsidered and vanish - right about the time that my income is taking a hit (also from the poor economy) - so if I need to spend 15k on a new roof, $15K in assets is more helpful than $15K in available credit. There are also larger fees using debt (especially credit cards). As a general statement, if you're carrying a balance on your credit cards to keep a rental afloat, something is probably wrong.

Still, under normal circumstances, I see your point. And I think we'd agree: If tomorrow I need to put a $15K roof on rental, I would probably pull that from the HELOC rather than sell some bonds. But, that's me using credit as a luxury rather than a necessity.

3: Regarding using retirement accounts as part of an EF: The link that you provided didn't work for me, and I couldn't find the Wiki that you were referencing. I'm interested in this one as we seem to be looking at the role of retirement accounts as part of an emergency fund very differently.

I think we agree on 1 and 2... I agree the escrow should not be part of the emergency fund, it's really a separate line item, in my case 9K. My EF is really 25K and the escrow is 9K --- I just bucketed together and called it 34.

As for Item 3, hopefully you saw Megas follw up post, I must have miscopied the link.

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dwickenh
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Re: "Emergency Fund" Strategy

Post by dwickenh » Thu Jan 11, 2018 1:17 pm

Sandtrap wrote:
Wed Jan 10, 2018 5:48 pm
EF
Tier 1 Brick n Mortar or equiv. Incl. Operating expenses to cover a potential rent loss.
Tier 2 High Yield accounts (bankrate.com)
Tier 3 CD Ladder

Generally the purpose of EF is protection of principal and readily available.

j :D
I agree with Sandtrap, especially the part about readily available. Not sure why someone would hold their Emergency Fund in a tax advantaged account unless we are talking Roth account? Not a big believer in using the Roth for emergencies unless that is the only way you can establish an emergency fund.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

Maita
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Re: "Emergency Fund" Strategy

Post by Maita » Thu Jan 11, 2018 1:21 pm

I try to keep my EF simple and worry free.

1st Tier: Local Credit Union (65k)
2nd Tier: CD (30k)
3rd Tier: I Bonds (20k) - will be funded by 1st tier and purchase I Bonds this year

For the rest, I Invest
Last edited by Maita on Thu Jan 11, 2018 1:25 pm, edited 1 time in total.
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RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Thu Jan 11, 2018 1:22 pm

dwickenh wrote:
Thu Jan 11, 2018 1:17 pm
Sandtrap wrote:
Wed Jan 10, 2018 5:48 pm
EF
Tier 1 Brick n Mortar or equiv. Incl. Operating expenses to cover a potential rent loss.
Tier 2 High Yield accounts (bankrate.com)
Tier 3 CD Ladder

Generally the purpose of EF is protection of principal and readily available.

j :D
I agree with Sandtrap, especially the part about readily available. Not sure why someone would hold their Emergency Fund in a tax advantaged account unless we are talking Roth account? Not a big believer in using the Roth for emergencies unless that is the only way you can establish an emergency fund.
See the wiki; you only use the tax advantaged to hold the "cash" if you ever need that money you withdraw from your taxable and convert the cash that was held in the tax advantaged to equities. This way you don't get the 1099-INT/DIV every year.

Agggm
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Re: "Emergency Fund" Strategy

Post by Agggm » Thu Jan 11, 2018 1:24 pm

RetireSomeday5 wrote:
Wed Jan 10, 2018 12:12 pm
I've been thinking/rethinking my EF strategy a lot lately and wanted to see what people thought. I've looked through the wiki and some of the other threads but didn't really see what I'm looking for.

I'm leaning toward the tiered approach opinion, I was thinking 3 tiers but as I was typing this I think I may have convinced myself of 4.

For simplicity assume the following:

1) Own two rentals properties and I rent where I live (long story!) Both rentals are rented single family in good areas. The monthly outlay are 2K each so 6K total per month.

2) I have 85K in my Brokerage (tax advantaged already maxed out)

3) Stable job industry

4) Required to hold 9K in escrow for my two rentals.


Strategy:

How much? 34K = about 3.5Months @6K + 9K Escrow

Tier1- Brick and Mortar Checking 10K covers monthly expenses
Tier2- 5K High Yield Online Savings, a small amount of quickly accessible FDIC insured funds
Tier3- 10K Stable Value in tax advantaged account Currently about 1.8%; .3% higher than Money Markets
Tier4- 9K Intermediate duration bonds in tax advantaged

Thoughts??? And thanks in advance.
Find a high yielding bank account. I have a local checking account yielding 2.53%.

JBTX
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Re: "Emergency Fund" Strategy

Post by JBTX » Thu Jan 11, 2018 1:26 pm

Ibonds may also be an option.

In our case we probably have about 1 year expenses in liquid cash or cash equivalents. Roughly half in ibonds, and the other half divided between online savings account and checking accounts.

I would consider in our case the ibonds are more part of the bond portion of investment portfolio asset allocation vs the EF, but it does serve as additional stable liquidity if needed

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willthrill81
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Re: "Emergency Fund" Strategy

Post by willthrill81 » Thu Jan 11, 2018 1:36 pm

livesoft wrote:
Wed Jan 10, 2018 12:24 pm
If you want to use bond funds for an emergency, sometimes I advise that you have a larger amount. For instance, if you want 10 months of expenses in an emergency fund of bonds, but bonds might drop no more than 10% in a recession, then you might want to have 11 months of expenses instead because your emergency fund could drop by about 10% and you will still have 10 months of expenses in it.
This is the strategy I use. About two-thirds of my EF is invested in Wellesley Income. The worst drawdown in its nearly 50 year history was roughly 19% from peak to trough. The future could always be different, but I just decided to overfund that portion of my EF by about 25% to account for this. So far, I'm very pleased with it (up 10% in 2017). :)
“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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Re: "Emergency Fund" Strategy

Post by remomnyc » Thu Jan 11, 2018 1:51 pm

Jeep512 wrote:
Thu Jan 11, 2018 6:47 am
mortfree wrote:
Wed Jan 10, 2018 1:30 pm

Tier 1 - Brick 10k
Tier 2 - credit card (to be paid off with Tier 3, or 4)
Tier 3 - Online Savings Account 24k

Invest the rest.

Tier 4 - brokerage account
You perfectly described my approach. I like to keep it simple. :sharebeer
+2. My only quibble is with the amount, which I think may be light. As others have pointed out, expenses could be big and chunky (new roof, boiler, storm/water damage, etc) with rental ownership.

Also, I would not count my EF in my asset allocation because it could really skew it when your assets are small. I only started counting it this year because I am retiring and all my assets are now essentially an EF.

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saltycaper
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Re: "Emergency Fund" Strategy

Post by saltycaper » Thu Jan 11, 2018 3:11 pm

remomnyc wrote:
Thu Jan 11, 2018 1:51 pm

Also, I would not count my EF in my asset allocation because it could really skew it when your assets are small. I only started counting it this year because I am retiring and all my assets are now essentially an EF.
It should be skewed if your assets are small, as you shouldn't be taking a lot of risk if you have no emergency fund. When you're just starting out, you should have a conservative allocation. Not counting the EF in the AA doesn't necessarily change what you actually hold, it just changes how you look at it by realizing your true risk profile. Doing it this way also forces the young investor to start questioning "rules of thumb" they may have heard, like "age in bonds" and other such shortcuts in thinking.
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dwickenh
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Re: "Emergency Fund" Strategy

Post by dwickenh » Thu Jan 11, 2018 3:44 pm

RetireSomeday5 wrote:
Thu Jan 11, 2018 1:22 pm
dwickenh wrote:
Thu Jan 11, 2018 1:17 pm
Sandtrap wrote:
Wed Jan 10, 2018 5:48 pm
EF
Tier 1 Brick n Mortar or equiv. Incl. Operating expenses to cover a potential rent loss.
Tier 2 High Yield accounts (bankrate.com)
Tier 3 CD Ladder

Generally the purpose of EF is protection of principal and readily available.

j :D
I agree with Sandtrap, especially the part about readily available. Not sure why someone would hold their Emergency Fund in a tax advantaged account unless we are talking Roth account? Not a big believer in using the Roth for emergencies unless that is the only way you can establish an emergency fund.
See the wiki; you only use the tax advantaged to hold the "cash" if you ever need that money you withdraw from your taxable and convert the cash that was held in the tax advantaged to equities. This way you don't get the 1099-INT/DIV every year.
Why wouldn't you just hold the cash in your taxable then unless you had a stable value fund that paid a good return in your tax deferred?
I am sure I am missing something..... The 1099-INT would likely be for less than 1000.00 in most cases.

From the Wiki:

"A Roth IRA is primarily intended for retirement, not to store emergency funds. One should consider the impact to portfolio allocations and potential custodial costs. There are behavioral considerations, as well. If a choice is to be made between funding a Roth IRA and an emergency fund, a Roth IRA can be used as an emergency fund in the appropriate situation."
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Thu Jan 11, 2018 4:39 pm

dwickenh wrote:
Thu Jan 11, 2018 3:44 pm
RetireSomeday5 wrote:
Thu Jan 11, 2018 1:22 pm
dwickenh wrote:
Thu Jan 11, 2018 1:17 pm
Sandtrap wrote:
Wed Jan 10, 2018 5:48 pm
EF
Tier 1 Brick n Mortar or equiv. Incl. Operating expenses to cover a potential rent loss.
Tier 2 High Yield accounts (bankrate.com)
Tier 3 CD Ladder

Generally the purpose of EF is protection of principal and readily available.

j :D
I agree with Sandtrap, especially the part about readily available. Not sure why someone would hold their Emergency Fund in a tax advantaged account unless we are talking Roth account? Not a big believer in using the Roth for emergencies unless that is the only way you can establish an emergency fund.
See the wiki; you only use the tax advantaged to hold the "cash" if you ever need that money you withdraw from your taxable and convert the cash that was held in the tax advantaged to equities. This way you don't get the 1099-INT/DIV every year.
Why wouldn't you just hold the cash in your taxable then unless you had a stable value fund that paid a good return in your tax deferred?
I am sure I am missing something..... The 1099-INT would likely be for less than 1000.00 in most cases.

From the Wiki:

"A Roth IRA is primarily intended for retirement, not to store emergency funds. One should consider the impact to portfolio allocations and potential custodial costs. There are behavioral considerations, as well. If a choice is to be made between funding a Roth IRA and an emergency fund, a Roth IRA can be used as an emergency fund in the appropriate situation."
Stable value fund, bonds, whatever, anything that pays a return.... Sure it may be less than 1K, but thats still 1K I'd rather not pay taxes on at the moment.

This was the wiki I was referencing https://www.bogleheads.org/wiki/Placing ... ed_account

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Re: "Emergency Fund" Strategy

Post by scrabbler1 » Thu Jan 11, 2018 9:05 pm

I have a layered, or tiered approach to the money in my portfolio. Call it an EF or not, I have had this tiered approach both before and after I retired 9 years ago.

The first tier is a small buffer, or cushion, I keep in my local bank's checking account, over the minimum balance requirement to avoid monthly fees. Thus buffer had been around $750 but over the years I have reduced it to $500. This money earns no interest, of course, but that's okay. I can tap into this money easily, via personal check, or cash from a local ATM. It's pretty common I have to tap into this to cover small, unforeseen expenses which arise during the month.

The next tier is a blob of $40k in an intermediate-term muni bond fund which has checkwriting privileges. It earns around 2-2.5% annual interest which is mostly tax-free. The principal can fluctuate, of course, but not a lot. I am willing to take that risk in return for the money earning a decent amount. Having checkwriting privileges makes the money more accessible than it would be if I had to do a transfer to my local bank's checking account. I rarely have to tap into this money, on average less than once a year, the last time many years ago. I don't like having large amounts of money earning zilch or nearly zilch.

After that it's the rest of my portfolio, and this happens very rarely.

remomnyc
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Re: "Emergency Fund" Strategy

Post by remomnyc » Thu Jan 11, 2018 10:10 pm

saltycaper wrote:
Thu Jan 11, 2018 3:11 pm
remomnyc wrote:
Thu Jan 11, 2018 1:51 pm

Also, I would not count my EF in my asset allocation because it could really skew it when your assets are small. I only started counting it this year because I am retiring and all my assets are now essentially an EF.
It should be skewed if your assets are small, as you shouldn't be taking a lot of risk if you have no emergency fund. When you're just starting out, you should have a conservative allocation. Not counting the EF in the AA doesn't necessarily change what you actually hold, it just changes how you look at it by realizing your true risk profile. Doing it this way also forces the young investor to start questioning "rules of thumb" they may have heard, like "age in bonds" and other such shortcuts in thinking.
You should not be investing if you don't have an adequate emergency fund. Fill up the emergency fund, then turn to investing at whatever allocation fits your ability, need, and willingness to take risk.

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saltycaper
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Re: "Emergency Fund" Strategy

Post by saltycaper » Thu Jan 11, 2018 11:15 pm

remomnyc wrote:
Thu Jan 11, 2018 10:10 pm

You should not be investing if you don't have an adequate emergency fund. Fill up the emergency fund, then turn to investing at whatever allocation fits your ability, need, and willingness to take risk.
Part of the problem with this approach is there is no definition of "adequate." Once you stop bucketing the EF, you can assess N/A/W comprehensively. The advantage is you are not fooling yourself about how much risk you are actually taking.

"Investing" is ambiguous too. You can hold what most people would call an investment (say, certain bond funds or stable value funds) in your bucketed EF, like some in this thread apparently do, and you can hold what some people would argue are not investments (say, CDs, although I think they are investments) in your non-EF AA.

But all of this is just mental accounting. You can certainly invest without an EF at all. Maybe someone has a $5 million portfolio and no EF. It's "invested" in whatever. Or maybe someone has a $10,000 portfolio, and it's all "invested" very conservatively, like CDs, money market funds, high yield savings, etc. It would be difficult to say on the surface that either one of these investors is wrong just because they don't have an EF bucket. Criticism is likely to be focused on semantics.
Quod vitae sectabor iter?

NextMil
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Re: "Emergency Fund" Strategy

Post by NextMil » Fri Jan 12, 2018 9:42 am

remomnyc wrote:
Thu Jan 11, 2018 1:51 pm

You should not be investing if you don't have an adequate emergency fund. Fill up the emergency fund, then turn to investing at whatever allocation fits your ability, need, and willingness to take risk.
+1

RetireSomeday5
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Re: "Emergency Fund" Strategy

Post by RetireSomeday5 » Fri Jan 12, 2018 9:56 am

NextMil wrote:
Fri Jan 12, 2018 9:42 am
remomnyc wrote:
Thu Jan 11, 2018 1:51 pm

You should not be investing if you don't have an adequate emergency fund. Fill up the emergency fund, then turn to investing at whatever allocation fits your ability, need, and willingness to take risk.
+1
I don't think anyone on here would disagree.

The term "emergency fund" is more aptly, in my opinion, a "plan to access funds in a financial emergency". I think what saltycaper and some others are getting at is that when total assets are sufficiently large, having a separate "fund" is no longer needed. When assets are small, then yes, having X dollars sitting in a bank account to cover 3-6 months expenses makes sense. But if you have multiple millions of invested assets (relatively liquid) do you really need to hold a separate account and say "this 30K of my multi-millions will be used in an emergency"?

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Re: "Emergency Fund" Strategy

Post by inbox788 » Fri Jan 12, 2018 6:52 pm

saltycaper wrote:
Wed Jan 10, 2018 12:48 pm
I've rejected the idea of a AA plus an emergency fund and have instead incorporated the EF into the AA. If you are starting out or require a large emergency fund, this may mean shifting the AA significantly. If you've amassed a large portfolio, then it means the EF is insignificant in the context of the AA. Then it's just a question of what accounts/investments will be used in the case of an emergency--how you will logistically handle the transactions. I think this offers a better picture of the amount of risk I am taking.
I hear what you're saying, but I like the absolute number of 3-6 months expenses, and that's my rule of thumb for the required emergency fund, which is not counted in my AA. You're right, it's skewed too high to the bonds side when starting out delaying investing in equities and insignificant when your retirement funds grow. I'm not a fan of lots of buckets, but in this case, these 2 buckets helps give me clarity about purpose.
livesoft wrote:
Wed Jan 10, 2018 12:24 pm
If you want to use bond funds for an emergency, sometimes I advise that you have a larger amount. For instance, if you want 10 months of expenses in an emergency fund of bonds, but bonds might drop no more than 10% in a recession, then you might want to have 11 months of expenses instead because your emergency fund could drop by about 10% and you will still have 10 months of expenses in it.
Yup, that's exactly what I've done, going with Intermediate Term Tax Exempt Bonds in taxable account and planning an extra 10-20% buffer for bad times. All my other bonds are in tax advantaged accounts that I don't want to touch. I've looked at the equivalency of shifting stuff around, but the added complexity wasn't worth the trouble for me and I've kept it as simple as possible. Plus I figure I'd never really tap into emergency fund anyways (cross fingers), not anymore anyways.
RetireSomeday5 wrote:
Wed Jan 10, 2018 12:12 pm
Tier1- Brick and Mortar Checking 10K covers monthly expenses
Tier2- 5K High Yield Online Savings, a small amount of quickly accessible FDIC insured funds
Tier3- 10K Stable Value in tax advantaged account Currently about 1.8%; .3% higher than Money Markets
Tier4- 9K Intermediate duration bonds in tax advantaged
Tier 1 - Checking - 1 to 3 months of expenses
Tier 2 - Intermediate Tax Exempt Bonds in Taxable

To me it's about liquidity, and as long as you foresee the needs a few days to weeks, there's time to deal with liquidating mutual funds and other shifts. Besides the 10-20% extra buffer in the bonds, I have always kept about 1 month in expenses in checking, but have been trying to increase that to 2-3 months. However, whenever there is extra cash there, we have a bad habit of spending it down, sometimes planned, other times unplanned. It's kind of like having cash in your pocket that you might overspend, and if it's not there, you just don't have it to spend.

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dratkinson
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Re: "Emergency Fund" Strategy

Post by dratkinson » Sat Jan 13, 2018 9:44 pm

BH Emergency Fund Strategy


My general thoughts on emergency funds.


Enough. After learning these things:
--Senior investors say, "...when we have enough (as defined by us), we don't need a dedicated EF as all of our investments become our EF".
--Forum’s preferred investing order: #1 get employer’s match---it’s free money, #2 fill your IRA---better selection, #3 fill employer’s retirement plan---maximize annual tax-advantages space, #4 begin taxable investing.
--Wiki’s topic on tax efficiency: https://www.bogleheads.org/wiki/Princip ... _placement
--Livesoft’s advice to tweak tax efficiency:
See: viewtopic.php?p=874973#p874973
See: viewtopic.php?p=2830434#p2830434
--Stocks can lose 50-90% during a crash, bonds can lose 5-15% during a crash.
--Forum's advice on time horizons and recommended vehicles to save for goals: <5 years, insured accounts; 5-10 years, safe bond fund; >10 years, safe equity fund.
--Wiki's Emergency Fund topic: https://www.bogleheads.org/wiki/Emergency_fund
--Wiki’s advice that "daily accrual" muni funds are exempt from the IRS 6-month holding period requirement to protect tax-exempt dividends. (Meaning they are as easy to sell as taxable bonds.) See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting
--Retired investors say, "...we keep 5-years in a stable value fund to avoid selling during a down market." (To avoid SoRR (sequence of return risk)---recent forum topic).
--Forum’s advice, "Invest your time actively (in your career and family) and your money passively."
--Forum’s advice, “Live below your means (LBYM) and target a significant portion of each pay raise to retirement investing.


My EF strategy. I was able to create my first EF strategy and tweak it as it grew.

My EF strategy as it looks today… a 3-fund portfolio, with some extra cash and bonds in tiers 1-2.
--1st-tier, 1 yr ST cash: CC, cash (ATM), checking (2 mos), savings (1 mo), mmkt (9 mos VMSXX+checks).
--2nd-tier, 3 yrs IT money: less-risky bond funds (current*: VWIUX). (Tried: CDs, savings bonds.)
--3rd-tier, growing LT money: taxable 3-fund portfolio + more-risky bond funds (current*: VWLUX, WTCOX).
--4th-tier, doomsday scenario: tax-advantaged retirement accounts.

* I followed the forum’s advice and began conservatively. I gradually changed as I learned more about investing and my ability to accept risk. I now prefer the immediate gratification of higher yields and fed+state tax benefits. (Don’t expect to live long enough to enjoy the low state-tax benefit from holding EE savings bonds to 20 years.)

Waterfall. I’ve learned that above structure works like a waterfall to create/(re)fill lower pools. How? Once you establish (reestablish) how much to keep in each pool, then new money (salary, redirected distributions, SS,…) flowing into the top pool overflows to create/(re)fill lower pools to their assigned (reassigned) level. (This assumes we live below our means.)


Simplicity. I believe the senior investors are correct when they advise keeping our financial life simple. But I still had the urge to chase bank teaser rates (even thought I know from experience that the rates will go away, and it's a pain to move/relink accounts afterwards). What to do?


Money is fungible.

I use ABP to replace rate-chasing 1st-tier cash. I set up ABP (automatic bill payment) plans with all of my trusted creditors and target payments to use a 2% cashback CC where I can, and ~0% checking where I must. The tax-free CC cashback makes me feel better about the imposed simplicity of NOT chasing taxable teaser rates.

I also believe I’m coming out ahead by doing this. Why? Because 2%/mo cashback tax-free is better than 2% APY taxable. And 2% APY does not exist without jumping through hoops. ABP is simpler.

This is also why my 1st-tier cash is set to be no larger than 12-months of living expenses, to ensure the math continues to work in my favor.


I use VWITX to replace rate-chasing CDs. I’m no longer interested in CDs because VWITX produces more after-tax income in the 22% fed tax bracket. VWITX is also simpler to live with: no early withdrawal penalty, no rate-chasing so no relinking accounts.
--5-year CD rates: http://www.google.com/search?q=CD+5+year+rate
--VWITX SEC yield: http://quotes.morningstar.com/chart/fun ... ture=en_US
--Current VWITX TEY (taxable-equivalent yield): 2.04% SEC yield / (1 - .22) = 2.62%

Bond funds are more risky than insured CDs---the money might not all be there when needed. What to do? Assume worst case 15% bond crash and future need for a fixed amount. I filled VWITX to 118% (= 1 / (1 - .15)) of anticipated need and stopped worrying.


New Investors. Just starting out, I believe new investors should:
--Always keep 2-mos of living expense in checking---first small EF so won’t run out of money during month.
--Then begin filling the other pools. Give emphasis (not priority) to tax-advantaged accounts (pool 4).
--While slowly working to build depth to pools 1-3 (add savings, mmkt, CDs,…).

This is where the waterfall technique comes in. Add savings to checking (always keep 2 mos of livings expenses in checking) and set pools 1 (cash: checking, savings, mmkt) and 2 (cash proxy: CDs, savings bonds, safe bond fund) to be 3-6-months of livings expenses each (your choice). Allow them to be filled from the overflow from checking (salary, redirected distributions, bonuses, tax refund,…) when you rebalance accounts after the first-of-the-month account statement reconciliations.

Sidebar: chasing teaser rates. It’s your choice whether you want to chase rates on checking/savings/CDs, but I don’t believe it’s worth the effort. Why?
--It’s a lot of work to get little money, so an inefficient use of your time.
--This money is tax inefficient, is reported on Sch B part I, and taxed at your highest marginal tax rate.
--I believe banking simplicity, convenience, and low cost are more important. You can spend your time more profitably by working to advance your career, and being with your family.

Once you are maximizing all annual tax-advantaged space, and satisfied with the size of your pools 1-2, then you can begin taxable investing for retirement (pool 3).

Progress will come slowly in the beginning. But things will speed up as your career advances and you target a significant portion of each pay raise to retirement investing. And as time passes and your investments grow, you’ll find yourself reassigning an increased size to pools 1-2. This is when you’ll know the waterfall process is working for you. And pool 3 can be allowed to grow without limit.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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