why emergency savings?

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rbaldini
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why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 11:00 am

Folks,

I follow the common advice to keep a sum of cash in a savings account, for emergencies. I personally keep something like 6 months cash in Ally online savings. Let's just say this amounts to about $20k. But I wonder whether this is really necessary. Specifically, I'm wondering if I should just put that amount in taxable stock/bond funds.

The usual requirements for emergency savings, I believe, are
(1) speed of access: you should be able to get and spend the money quickly
(2) safe: it needs to be there when you need it. If your emergency amount is $20k, you need to be able to pull out $20k at any time.
A savings or checking account satisfies these requirements, of course.

So why abandon this? Here's why: I have many times the emergency amount invested in stock and bond funds in a Vanguard taxable account. I can sell these shares and have them cash out to my checking account just as fast as I can transfer money from savings to checking - so speed of access is satisfied. Furthermore, the amount invested is so much larger than my emergency amount that the chance I won't be able to access $20k when I need it is miniscule. If one has, say, $500k in bonds and stocks, then such funds would need to lose 96% of their value before you no longer have access to your emergency amount. I don't believe history has ever seen anything close to that.

So suppose I pull $20k out of savings and put it into stocks and bonds. Maybe to slightly increase my sense of security I increase my bond allocation by 1-2%. Now I have more money invested, and I can still virtually guarantee that I'll be able to sell up to $20k when I need to. What do you think?
Last edited by rbaldini on Mon Jan 15, 2018 11:26 am, edited 1 time in total.

livesoft
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Re: why emergency savings?

Post by livesoft » Mon Jan 15, 2018 11:01 am

You are very late to the party.

See: https://www.bogleheads.org/wiki/Placing ... ed_account
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Jags4186
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Re: why emergency savings?

Post by Jags4186 » Mon Jan 15, 2018 11:04 am

I think either $20k is a lot of money to you and if it represents 6 months of spending you definitely should be kept in cash or $20k isn't a lot of money to you and therefore you're way overthinking the problem of having $20k in cash.

Regardless, for only $20k there are plenty of ways to generate a high return for guarrantee of principal. Say you get four $200 savings account bonuses over the course of a year. You will have earned a 4% return. You could consider this $20k part of your bond allocation.
Last edited by Jags4186 on Mon Jan 15, 2018 11:08 am, edited 1 time in total.

delamer
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Re: why emergency savings?

Post by delamer » Mon Jan 15, 2018 11:05 am

If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?

thangngo
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Re: why emergency savings?

Post by thangngo » Mon Jan 15, 2018 11:08 am

In my opinion, advice on emergency funds is mostly for young people who start out saving and investing. They don't have a stable positive net cash flow (due to debt, car loan, mortgage, etc.) In the events that they lose their jobs or in an economic downturn, they would need to take out their retirement savings (i.e. 401k, Roth IRA) at great expense.

If you already have 500k in taxable account, it seems to me that 20k you have in online saving is for irregular expenses (property taxes, car/house repair, etc.). If you can plan those irregular expenses with your normal cash in-flows, you don't need to have 20k in online savings. Even if you're out of the job market for a year or so, your taxable account should be able to cover your expenses. In your situation, emergency funds is a moot point. Think about it like managing your cash flows with minimal impact.

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Re: why emergency savings?

Post by cfs » Mon Jan 15, 2018 11:09 am

Let me say this one more time, The Lowest Rated Fund (my portfolio) is my emergency fund, that's all I need. Your money, your portfolio, your decision. Good luck, and thanks for reading ~cfs~
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rbaldini
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Re: why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 11:10 am

livesoft wrote:
Mon Jan 15, 2018 11:01 am
You are very late to the party.

See: https://www.bogleheads.org/wiki/Placing ... ed_account
No, I'm suggesting something different.

The page you linked is still suggesting that you keep some money in a safe, separate investment - in the example, a money market fund. That becomes "the emergency fund."

What I'm really suggesting is that you don't have anything called "the emergency fund" at all. You just own stocks and bonds, allocated appropriately. If you have enough money invested, the probability of not being able to sell enough of these to get your the emergency amount is miniscule.

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mhc
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Re: why emergency savings?

Post by mhc » Mon Jan 15, 2018 11:11 am

OP,

I think the light bulb did turn on for you. I see no problem if you want to reduce your cash holdings. Cash is a drag on returns.

I am in a similar situation as you, and I have $0 allocated as emergency fund.

livesoft
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Re: why emergency savings?

Post by livesoft » Mon Jan 15, 2018 11:12 am

I didn't read the link the same as you. It has:
Tax-advantaged account, such as 401(k)
$5,000 stock funds
$5,000 bond fund
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rbaldini
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Re: why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 11:14 am

livesoft wrote:
Mon Jan 15, 2018 11:12 am
I didn't read the link the same as you. It has:
Tax-advantaged account, such as 401(k)
$5,000 stock funds
$5,000 bond fund
You're reading after the emergency amount has been pulled out. Here's before
"
Tax-advantaged account, such as 401(k)
$5,000 money market fund <- emergency fund
$5,000 bond fund
"

livesoft
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Re: why emergency savings?

Post by livesoft » Mon Jan 15, 2018 11:16 am

Anyways, I haven't had an emergency fund nor any cash around for years and years.

And the settlement times for non-mutual funds have changed from T+3 to T+2, so one can get money a day earlier than in the past.
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willthrill81
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Re: why emergency savings?

Post by willthrill81 » Mon Jan 15, 2018 11:44 am

delamer wrote:
Mon Jan 15, 2018 11:05 am
If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?
Since we budget for irregular expenses and can easily cover insurance deductibles, including health care expenses, a job loss is about the only emergency left to be concerned about, and it's not something I'm concerned about right now since I'm working in a multi-year contract. Consequently, I have no problem whatsoever with putting my EF in Vanguard's Wellesley Income fund. In its nearly 50 year history, its worst drawdown was just -19%. I'm very comfortable with that level of volatility and the returns so far. Looking at the whole portfolio, however, it doesn't make a big difference in the end whether someone does this or just puts the money in a savings account. But I'm a bit of an optimizer.
“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: why emergency savings?

Post by BolderBoy » Mon Jan 15, 2018 11:46 am

rbaldini wrote:
Mon Jan 15, 2018 11:00 am
So suppose I pull $20k out of savings and put it into stocks and bonds. Maybe to slightly increase my sense of security I increase my bond allocation by 1-2%. Now I have more money invested, and I can still virtually guarantee that I'll be able to sell up to $20k when I need to. What do you think?
Before I retired, my emergency fund was in the VG Int-Term Tax-Exempt fund. Never regretted it.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

rbaldini
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Re: why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 11:50 am

delamer wrote:
Mon Jan 15, 2018 11:05 am
If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?
One less account to juggle.

Jags4186
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Re: why emergency savings?

Post by Jags4186 » Mon Jan 15, 2018 11:52 am

rbaldini wrote:
Mon Jan 15, 2018 11:50 am
delamer wrote:
Mon Jan 15, 2018 11:05 am
If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?
One less account to juggle.
Who says you need a separate account? You could use a rewards checking account, like I have at Consumers Credit Union. They pay me 4.59% APY interest on $20k

TheHouse7
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Re: why emergency savings?

Post by TheHouse7 » Mon Jan 15, 2018 11:56 am

delamer wrote:
Mon Jan 15, 2018 11:05 am
If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?
This. You either shouldn't be risking your unemployment fund or it doesn't matter so why not have it?

Did anyone get rich from having a EM fund? No

Did anyone get unnecessary debt/ have to sell at an inopportune time? Yes
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

rbaldini
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Re: why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 12:02 pm

So is the best argument for keeping the emergency fund "it doesn't matter anyway"? That doesn't strike me as particularly strong.

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Re: why emergency savings?

Post by SQRT » Mon Jan 15, 2018 12:02 pm

thangngo wrote:
Mon Jan 15, 2018 11:08 am
In my opinion, advice on emergency funds is mostly for young people who start out saving and investing. They don't have a stable positive net cash flow (due to debt, car loan, mortgage, etc.) In the events that they lose their jobs or in an economic downturn, they would need to take out their retirement savings (i.e. 401k, Roth IRA) at great expense.

If you already have 500k in taxable account, it seems to me that 20k you have in online saving is for irregular expenses (property taxes, car/house repair, etc.). If you can plan those irregular expenses with your normal cash in-flows, you don't need to have 20k in online savings. Even if you're out of the job market for a year or so, your taxable account should be able to cover your expenses. In your situation, emergency funds is a moot point. Think about it like managing your cash flows with minimal impact.
Yes, I agree. Once well established, the primary need for liquidity relates to “lumpy” expenses. For those less well established emergency cash is really needed to cover the risk of job loss.

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DaftInvestor
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Re: why emergency savings?

Post by DaftInvestor » Mon Jan 15, 2018 12:15 pm

A large market downturn directly corresponds for when I'm most likely to lose my job. Thus my EF is not in the market as I don't want to be forced to sell at the bottom.

rbaldini
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Re: why emergency savings?

Post by rbaldini » Mon Jan 15, 2018 12:43 pm

DaftInvestor wrote:
Mon Jan 15, 2018 12:15 pm
A large market downturn directly corresponds for when I'm most likely to lose my job. Thus my EF is not in the market as I don't want to be forced to sell at the bottom.
I don't think that argument works. You're saying "I don't want to have to pull stock out of the market when it has dropped." So as a consequence you hold $20k (or whatever) out the market indefinitely? The money you'd be pulling out would be money that would have never been in the market in the first place, had you kept it in a separate savings account.

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willthrill81
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Re: why emergency savings?

Post by willthrill81 » Mon Jan 15, 2018 4:42 pm

rbaldini wrote:
Mon Jan 15, 2018 12:43 pm
DaftInvestor wrote:
Mon Jan 15, 2018 12:15 pm
A large market downturn directly corresponds for when I'm most likely to lose my job. Thus my EF is not in the market as I don't want to be forced to sell at the bottom.
I don't think that argument works. You're saying "I don't want to have to pull stock out of the market when it has dropped." So as a consequence you hold $20k (or whatever) out the market indefinitely? The money you'd be pulling out would be money that would have never been in the market in the first place, had you kept it in a separate savings account.
Right, that argument doesn't make sense. Let's say that I buy into a balanced fund at $100 per share, and it then goes up to $150. Then there's a downturn, and it falls to $125, at which point I need the money and sell. Yes, it would have been preferable to sell for $150, but I'm still better off than having had no return on the initial $100.

There is the risk that you'll invest the money and the investment immediately drop significantly in value and you need the money right away, but that's unlikely to happen. And the resulting problems from even that unlikely scenario can be solved by overfunding your EF by enough to cover a likely drawdown. If overfunding your EF by 25%, for instance, enables you to get a decent return on 125% of your needed EF rather than no return on 100% of your needed EF, that sounds mathematically advantageous to me.
“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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mhc
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Re: why emergency savings?

Post by mhc » Mon Jan 15, 2018 5:27 pm

rbaldini wrote:
Mon Jan 15, 2018 12:43 pm
DaftInvestor wrote:
Mon Jan 15, 2018 12:15 pm
A large market downturn directly corresponds for when I'm most likely to lose my job. Thus my EF is not in the market as I don't want to be forced to sell at the bottom.
I don't think that argument works. You're saying "I don't want to have to pull stock out of the market when it has dropped." So as a consequence you hold $20k (or whatever) out the market indefinitely? The money you'd be pulling out would be money that would have never been in the market in the first place, had you kept it in a separate savings account.
Also, if stocks dropped that much, you wouldn't be selling stocks. You would be selling bonds to rebalance your portfolio. Bonds are not that dissimilar to cash.

mortfree
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Re: why emergency savings?

Post by mortfree » Mon Jan 15, 2018 5:38 pm

To the person who handles the finances. If you drop dead will your spouse know how to go about liquidating the funds in an emergency?

Also one less thing for them to worry about after your death. Easy access to cash for expenses (non-funeral)

This was something that was mentioned by the member corn18

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Toons
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Re: why emergency savings?

Post by Toons » Mon Jan 15, 2018 5:43 pm

I think I would let the 20k stay where it is.
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Dandy
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Re: why emergency savings?

Post by Dandy » Tue Jan 16, 2018 9:43 am

Most investors have a decent allocation to fixed income. Total Bond is popular with a current yield of 2.61%. Another popular choice for an emergency fund is Intermediate Tax Free Fund with a current yield of 2.04%. Both tend to be "a drag" on long term performance vs having more assets in equities.

You can get an online savings account paying about 1.4% or so and a no penalty Ally Bank CD for 1.6%. So the difference in yield can be as little as about 1%. And for most the purpose of the fixed income allocation is stability/less risk so the risk can be taken on the equity side.

I don't think having a small portion of your normal fixed income allocation in Savings or that CD will make a meaningful difference in performance. People have a tendency of undervaluing "cash" but it does have it's merits especially in a rising interest rate environment.

I faced a loss of job and a rapidly declining equity market in 2008 and was especially glad I had ample cash-like assets. Nothing terribly problematic with either approach but I always favored a decent allocation to cash-like products - even now in retirement with ample assets.

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DaftInvestor
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Re: why emergency savings?

Post by DaftInvestor » Tue Jan 16, 2018 1:37 pm

mhc wrote:
Mon Jan 15, 2018 5:27 pm
rbaldini wrote:
Mon Jan 15, 2018 12:43 pm
DaftInvestor wrote:
Mon Jan 15, 2018 12:15 pm
A large market downturn directly corresponds for when I'm most likely to lose my job. Thus my EF is not in the market as I don't want to be forced to sell at the bottom.
I don't think that argument works. You're saying "I don't want to have to pull stock out of the market when it has dropped." So as a consequence you hold $20k (or whatever) out the market indefinitely? The money you'd be pulling out would be money that would have never been in the market in the first place, had you kept it in a separate savings account.
Also, if stocks dropped that much, you wouldn't be selling stocks. You would be selling bonds to rebalance your portfolio. Bonds are not that dissimilar to cash.
Except right now all my bonds are in tax-deferred accounts - only stock is in taxable - so I wouldn't be selling bonds in the case of a dire emergency. Also - if someone has a 100/0 allocation they may hold no bonds (not my case).
> So as a consequence you hold $20k (or whatever) out the market indefinitely?
Yes I do. Its at the ready - if I lose my job and the market tanks I've got cash on hand to live on without having to sell at the bottom. In the meantime - it also provides a slush fund for any home-repair emergencies, etc. that come up,
>The money you'd be pulling out would be money that would have never been in the market in the first place, had you kept it in a separate savings account.
Not sure I understand this statement? Yes - my emergency fund is NOT in the market - its in a high-yield savings account - so I will never have to pull it out of the market.

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9-5 Suited
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Re: why emergency savings?

Post by 9-5 Suited » Tue Jan 16, 2018 1:57 pm

rbaldini wrote:
Mon Jan 15, 2018 12:02 pm
So is the best argument for keeping the emergency fund "it doesn't matter anyway"? That doesn't strike me as particularly strong.
I'm in your camp on this, but besides inertia the only other reason I keep my emergency fund in a savings account is perceived simplicity since withdrawals don't create taxable events like they would from my portfolio. My savings are a part of my bond allocation, so the spread on 1.3% vs. the yield of a bond fund on $20K hopefully won't be an impactful amount on my life :)

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siamond
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Re: why emergency savings?

Post by siamond » Tue Jan 16, 2018 1:58 pm

Dedicated emergency funds are for young people with little savings and limited credit, that's it. I never saw the point of a dedicated EF, otherwise. Letting months of living expenses take dust in a savings account or a money market account runs contrary to everything I do as a careful investor.

In case of emergency, first off, I'll pay whatever is due with credit cards if the situation requires absolute immediacy. Then I'll tap whatever fund is the highest at that point (stocks or bonds) relative to my AA -- reverse-balancing, if you wish. If this happens to be bonds (say during a stock crisis), my bonds are in tax-sheltered, but this doesn't matter, I would just sell stock in taxable, and rebalance across accounts.

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Re: why emergency savings?

Post by Pajamas » Tue Jan 16, 2018 2:20 pm

siamond wrote:
Tue Jan 16, 2018 1:58 pm
Dedicated emergency funds are for young people with little savings and limited credit, that's it. I never saw the point of a dedicated EF, otherwise. Letting months of living expenses take dust in a savings account or a money market account runs contrary to everything I do as a careful investor.
Agreed. Many young people can also rely on their parents in an emergency.

An emergency fund for me is some cash stashed at home in case I need to wash clothes and my laundry card has a low balance and my wallet is empty and the ATM network is down.

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Re: why emergency savings?

Post by UpsetRaptor » Tue Jan 16, 2018 2:29 pm

I've been trying to think of a situation where I may need access to EF funds immediately, as opposed to waiting a few days for settlement/transfer from selling taxable funds, and I've been having problems coming up with a reasonable one. Bail maybe?

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Re: why emergency savings?

Post by tesuzuki2002 » Tue Jan 16, 2018 2:30 pm

delamer wrote:
Mon Jan 15, 2018 11:05 am
If $20,000 is such a small portion of someone’s liquid assets, then why are they worried about losing a couple percentage points in interest by keeping it in a savings account?
I keep $52K in savings /checking.. Probably 16 months of expenses.. but I'm also earning 4% on it. Thus I haven't had the thought to invest it. If I wasn't earning that 4% I'd invest atleast 1/2 then just carry a smaller balance.

quantAndHold
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Re: why emergency savings?

Post by quantAndHold » Tue Jan 16, 2018 2:59 pm

An emergency fund is the initial level of savings. Something everyone should start with, even if their overall net worth is negative.

As someone starts to invest, their first investment money usually goes into tax advantaged accounts. Depending on income, all of their investments may always be in tax advantaged accounts. At very least, a separate savings account outside of the 401k is necessary in case of job loss. Also many young investors are at 90-100% stock. They need some stable investment to tap when they lose their job during a market downturn.

For investors with more assets and a more balanced AA, then the “emergency fund” can just be part of the overall AA. This is where we are now. But we certainly went through the earlier stages before we got here.

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Re: why emergency savings?

Post by bloom2708 » Tue Jan 16, 2018 3:12 pm

Step 1: Do nothing
Step 2: Wait for a true Emergency
Step 3: I hope Step 2 never happens

If Step 2 never happens, then the return on that $20k won't impact your overall rate of return by enough to matter.
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Re: why emergency savings?

Post by KATNYC » Tue Jan 16, 2018 5:43 pm


fposte
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Re: why emergency savings?

Post by fposte » Tue Jan 16, 2018 5:51 pm

Except I wouldn't need funds in cash in the event of a sudden layoff. I'd just need funds I can get to within the next couple of weeks.

Sheepdog's 2008 panic and survival thread is a slightly more relevant scenario to me; not so much that it would need to be immediately liquid as that having a first-few-years-of-retirement emergency fund in the event of an unfortunately timed market downturn might not be a bad plan.

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Re: why emergency savings?

Post by Global100 » Tue Jan 16, 2018 10:51 pm

johne417 wrote:
Tue Jan 16, 2018 2:29 pm
I've been trying to think of a situation where I may need access to EF funds immediately, as opposed to waiting a few days for settlement/transfer from selling taxable funds, and I've been having problems coming up with a reasonable one. Bail maybe?
Here is a thread on the topic: viewtopic.php?f=2&t=237969

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Re: why emergency savings?

Post by TravelforFun » Wed Jan 17, 2018 12:32 am

No emergency fund for this semi-boglehead. I budget every month so regular expenses are taken care of. If an unanticipated major expense occurs, I would pay for it using my credit card, then I would sell a few of my bond shares and transfer the money to my checking account to pay the credit card balance.

I don't see a merit in keeping tens of thousands of dollars in a saving account.

TravelforFun

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Re: why emergency savings?

Post by willthrill81 » Wed Jan 17, 2018 1:11 am

TravelforFun wrote:
Wed Jan 17, 2018 12:32 am
No emergency fund for this semi-boglehead. I budget every month so regular expenses are taken care of. If an unanticipated major expense occurs, I would pay for it using my credit card, then I would sell a few of my bond shares and transfer the money to my checking account to pay the credit card balance.

I don't see a merit in keeping tens of thousands of dollars in a saving account.

TravelforFun
The problem with that strategy for some of us is that virtually all of our investments are in tax-advantaged accounts that are not easily accessed without penalties. The obvious exception is contributions to Roth IRAs, and I actually put about 2/3 of our EF in mine a little over a year ago since I had some 'space' at the time for it. It went up 10% last year, and I'm quite pleased.
“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: why emergency savings?

Post by Finridge » Wed Jan 17, 2018 9:30 pm

Jags4186 wrote:
Mon Jan 15, 2018 11:52 am

Who says you need a separate account? You could use a rewards checking account, like I have at Consumers Credit Union. They pay me 4.59% APY interest on $20k
Did I read that right? 4.59% APY? Given the current interest rates, how can they afford to do that? Sounds like it''s "too good to be true" So expect there must be some kind of catch--what is it? Is this a teaser rate? Are there hidden fees?

Jags4186
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Re: why emergency savings?

Post by Jags4186 » Wed Jan 17, 2018 11:02 pm

Finridge wrote:
Wed Jan 17, 2018 9:30 pm
Jags4186 wrote:
Mon Jan 15, 2018 11:52 am

Who says you need a separate account? You could use a rewards checking account, like I have at Consumers Credit Union. They pay me 4.59% APY interest on $20k
Did I read that right? 4.59% APY? Given the current interest rates, how can they afford to do that? Sounds like it''s "too good to be true" So expect there must be some kind of catch--what is it? Is this a teaser rate? Are there hidden fees?
There are some hoops to jump through but the only risk is not getting the high rate of interest. There are no fees that I’ve run into.

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Re: why emergency savings?

Post by thangngo » Wed Jan 17, 2018 11:37 pm

Jags4186 wrote:
Wed Jan 17, 2018 11:02 pm
Finridge wrote:
Wed Jan 17, 2018 9:30 pm
Jags4186 wrote:
Mon Jan 15, 2018 11:52 am

Who says you need a separate account? You could use a rewards checking account, like I have at Consumers Credit Union. They pay me 4.59% APY interest on $20k
Did I read that right? 4.59% APY? Given the current interest rates, how can they afford to do that? Sounds like it''s "too good to be true" So expect there must be some kind of catch--what is it? Is this a teaser rate? Are there hidden fees?
There are some hoops to jump through but the only risk is not getting the high rate of interest. There are no fees that I’ve run into.
How did you get 4.59% APY?

Jags4186
Posts: 2006
Joined: Wed Jun 18, 2014 7:12 pm

Re: why emergency savings?

Post by Jags4186 » Thu Jan 18, 2018 8:30 am

thangngo wrote:
Wed Jan 17, 2018 11:37 pm
Jags4186 wrote:
Wed Jan 17, 2018 11:02 pm
Finridge wrote:
Wed Jan 17, 2018 9:30 pm
Jags4186 wrote:
Mon Jan 15, 2018 11:52 am

Who says you need a separate account? You could use a rewards checking account, like I have at Consumers Credit Union. They pay me 4.59% APY interest on $20k
Did I read that right? 4.59% APY? Given the current interest rates, how can they afford to do that? Sounds like it''s "too good to be true" So expect there must be some kind of catch--what is it? Is this a teaser rate? Are there hidden fees?
There are some hoops to jump through but the only risk is not getting the high rate of interest. There are no fees that I’ve run into.
How did you get 4.59% APY?
https://www.myconsumers.org/

scrabbler1
Posts: 2124
Joined: Fri Nov 20, 2009 2:39 pm

Re: why emergency savings?

Post by scrabbler1 » Thu Jan 18, 2018 8:31 am

BolderBoy wrote:
Mon Jan 15, 2018 11:46 am
rbaldini wrote:
Mon Jan 15, 2018 11:00 am
So suppose I pull $20k out of savings and put it into stocks and bonds. Maybe to slightly increase my sense of security I increase my bond allocation by 1-2%. Now I have more money invested, and I can still virtually guarantee that I'll be able to sell up to $20k when I need to. What do you think?
Before I retired, my emergency fund was in the VG Int-Term Tax-Exempt fund. Never regretted it.
I have layers, or tiers, within my portfolio to protect me in case I need to get unusually fast access to part of it. The first tier is a small cushion in my local bank's checking account beyond the minimum balance to avoid account fees. I used to have this cushion set at about $750 but have cut it down to $500. This is money I can quickly access via personal check or as cash from a nearby ATM. I often dip into this cushion, as small, unforeseen expenses can arise in a given month.

My next tier is like BolderBoy's, an intermediate-term muni bond fund. I keep about $40k in there, and the account has checkwriting privileges for quicker and easier access. It earns in the 2-2.5% range, mostly tax-free, because I hate the idea of tying up that large a pile of money earning next to nothing. I am willing to risk having to sell shares from that fund at a loss, albeit a small loss (because the fund's NAV can vary but not a whole lot), in order to get a small but meaningful amount of added money every month (about $90 now).

I have averaged less than one check per year in the ~25 years I have been in this fund, and a few of them were for rebalancing purposes, as this fund is part of my overall portfolio and I used to hold more in it when I was in a higher tax bracket.

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