Holding EF in something other than cash?

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tomwood
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Holding EF in something other than cash?

Post by tomwood »

My EF is held in my checking/savings account, which I’m going to refer to as cash for this question. I would assume a majority of BH hold their EF in cash, but I’ve noticed some BH’s use bonds for their EF.

Do BHs using bonds still typically have a few months EF in cash but the rest in bonds? Which bonds or bond funds are most commonly used for EF?

Does anyone hold anything different as their EF? Why?
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nisiprius
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Re: Holding EF in something other than cash?

Post by nisiprius »

For years, we used to have "checkwriting" access to our Vanguard bond funds--Total Bond and Short-Term Bond Index. For current details, see: Vanguard's checkwriting service. I remember doing some spot checking on which "select Vanguard mutual funds" offered it, and it seemed to be bond funds in their "risk category 3" and below. We may have written a total of three or four checks on these accounts. They all worked.

They are physical paper checks with the usual MICR numerals, and a printed notice on them saying something like "not valid for amounts less than $250."

Vanguard says
Checks are considered drafts. You may not be able to use them to get cash immediately from a bank, and you cannot use them to set up electronic banking or bill-paying services.
Our limited experience is that businesses like e.g. medical facilities will accept them if they accept "checks," they likely just deposit them and as long as they get paid don't fuss about the technicalities. On the other hand, our favorite home improvement contractor takes our check physically to the issuing bank and cashes them--the bank always phones me when that happens!--and they would probably not work for that.

I think it would work to pay off a credit card balance, but it would be interesting to know that for sure.

Emergency fund discussions always get snarled up in opinion and anecdote due to lack of any kind of solid information on what kinds of "emergencies" people have, what the statistical distribution of amounts is, and what forms of payment work for what kinds of emergency. One of the bizarre features is that the most commonly mentioned emergency is job loss, yet it is rare for people to discuss, or even know, if they are eligible for unemployment compensation and if so how much they will receive. Based solely on the numbers when I had had a good job and drew unemployment back in 2008-2009, for a "mass affluent" wage-earner, unemployment insurance is effectively something in the ballpark of a $15,000 to $20,000 emergency fund.

The characteristics I think an emergency fund needs to have are that a) it is liquid enough to serve the purpose, and b) it is in an asset that is stable enough that you don't mind selling it into a down market.

A checkwriting feature on a bond fund probably ain't bad. In real life, if you need to pay a bill quickly, and you don't have the necessary amount in a bank account, you can write a check and "pay" instantly and it's done. The person you pay will still experience a redemption delay, but it's done. You don't need to get to the Internet, issue a "sell" order, wait for it to settle, wait for the ACH transfer to hit your bank, and show up as "available funds."

(Why don't we have them now? We eventually shredded them because they had sort of become clutter, and because we felt comfortable with the amount we actually had in the bank.)

(No, I have no idea what the exact rules are about fluctuating values if the number you write in the check is close to the current value of the fund).
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samsoes
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Re: Holding EF in something other than cash?

Post by samsoes »

During a recent post here about a month ago during the first precipitous drop, and after the second emergency rate cut (sorry, I don't have the link), there was concern about MM funds "breaking the buck," as happened briefly in 2008. The consensus was that in such a potentially unstable and near-chaotic environment that cash is king, so to speak.

I took that to heart and converted - from an MM fund plus a bond fund, which had appreciated slightly during the mayhem - about two years worth of living expenses to cash in my post-tax brokerage account. (Yes, I incurred LTCG, but I will likely TLH those away at some point soon.)

Keep a cash balance. 'Cuz ya never know.
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tomwood
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Re: Holding EF in something other than cash?

Post by tomwood »

nisiprius wrote: Sat Apr 11, 2020 6:13 am Emergency fund discussions always get snarled up in opinion and anecdote due to lack of any kind of solid information on what kinds of "emergencies" people have, what the statistical distribution of amounts is, and what forms of payment work for what kinds of emergency. One of the bizarre features is that the most commonly mentioned emergency is job loss, yet it is rare for people to discuss, or even know, if they are eligible for unemployment compensation and if so how much they will receive. Based solely on the numbers when I had had a good job and drew unemployment back in 2008-2009, for a "mass affluent" wage-earner, unemployment insurance is effectively something in the ballpark of a $15,000 to $20,000 emergency fund.
I can’t believe I haven’t ever read anything about this exact point. It’s absolutely something that needs to be taken into account when forming an EF, and until today, I haven’t. Thank you so very much for this great comment.

I assume job loss is a combination of the most likely & most problematic for a household. Some events might be worse and less likely, while others might be more likely but not as problematic. On this topic though, what are some other emergent events in which an EF is truly designed to combat?
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Re: Holding EF in something other than cash?

Post by Dude2 »

nisiprius wrote: Sat Apr 11, 2020 6:13 am One of the bizarre features is that the most commonly mentioned emergency is job loss, yet it is rare for people to discuss, or even know, if they are eligible for unemployment compensation and if so how much they will receive. Based solely on the numbers when I had had a good job and drew unemployment back in 2008-2009, for a "mass affluent" wage-earner, unemployment insurance is effectively something in the ballpark of a $15,000 to $20,000 emergency fund.
My experience with unemployment compensation was such that I can understand why nobody takes it into account. I was able to collect benefits when I got out of the military. Some see this as an expected benefit to help get you on your feet. The problem was that in order to collect the benefits, you had to actively be looking for a job and report 2-3 interviews per week. You were required to keep a log book of data, and you could be audited at any time where failure to comply meant not only forfeiture of future benefits but also payback of benefits received. I was going back to school at the time and didn't want a job, but, sure enough, I got offered one. This put me in an ethical dilemma, so I opted to cancel my benefits and not take the job. [Humble brag.] Note that this was Florida, not a high-tax state.

The impression I get is that in other states and at various times, there are no rules imposed on you. It's just "free money". During the 2008-2009 downturn, I recall a woman I knew in New York that received around 18 months of benefits and didn't have to report anything to anyone nor look for work, but that was not my experience. I definitely do not factor it into the equation.
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Re: Holding EF in something other than cash?

Post by Watty »

tomwood wrote: Sat Apr 11, 2020 5:48 am My EF is held in my checking/savings account, which I’m going to refer to as cash for this question. I would assume a majority of BH hold their EF in cash, but I’ve noticed some BH’s use bonds for their EF.

Do BHs using bonds still typically have a few months EF in cash but the rest in bonds? Which bonds or bond funds are most commonly used for EF?

Does anyone hold anything different as their EF? Why?
When looking how to handle your emergency money you need to consider your different phases of life. When I was in my 20s an expensive car repair would have been an emergency. As I became more financially secure about the only type of real emergency would have been a layoff or a long hospital stay. Now that I am retired most things would just be an unexpected expense so I just keep some liquid investments in case something comes up. How to invest your emergency money will depend on what phase of life you are in.

With the current interest rates you really don't gain much by going from something like a money market fund to bonds, but there is a lot more risk with the bonds if interest rates go up. Getting an extra 1%(before taxes) might not be worth the extra 1%.

Some people will use iBonds for some of their emergency money since it has tax advantages and in some situations it can be used when you have qualified educational expenses for even more tax advantages.

That said people often have tiers of emergency funds like.

1) A couple of hundred, or thousand, dollars in physical paper cash at home.
2) Money at a local brick and mortar bank or credit union that they can quickly get more cash, or write a check.
3) Money at someplace like a mutual fund company or iBonds that is available for a long term emergency like a job layoff.

If you would not otherwise be maxing it out you can also use a Roth for part of your emergency fund.
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

One other thing to also keep in mind is not all "emergencies" are bad. I know people that have had "emergencies" like going on a last minute trip for a quarter the normal price or buying a car from a elderly relative at a great price when they just wanted get rid of the car quickly and easily. You will likely have a few times in your life when there will be some unexpected deal that you can only take advantage of if you can quickly come up with the cash or write a check for it.
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Re: Holding EF in something other than cash?

Post by afan »

A short term Treasury bond fund, CDs, T bills are almost cash equivalents. Almost as liquid as a money market fund and carry federal protection against default. The funds do have drawbacks in times of extreme volatility, as we have seen.

If you keep a sizeable amount in your fund then the low yields currently available on these assets could be enough more dollars than in a checking account to matter.

I am reluctant to use credit cards as an emergency fund. Depending on the circumstances, a bank could cut your credit limit or cancel your card at any time. If the emergency that made you need your fund was one that hit your credit rating, that source of money could dry up just when you need it.
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Re: Holding EF in something other than cash?

Post by Stormbringer »

I keep half in a money market account, and the other half in I-bonds.
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tomwood
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Re: Holding EF in something other than cash?

Post by tomwood »

samsoes wrote: Sat Apr 11, 2020 6:23 am there was concern about MM funds "breaking the buck,"
I’m not familiar with breaking the buck, what does that mean? Are these MM funds at banks & credit unions?
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Re: Holding EF in something other than cash?

Post by scrabbler1 »

My EF is set up in tiers like what Watty described. After the small amount of cash I have at home ($100-$200), I keep about $2,000 in my local bank's checking account available to take out as cash or by writing a personal check. Then, I keep about $40k in an intermediate-term muni bond fund which has checkwriting privileges, increasing the speed and ease of access to it compared to a bond fund which lacks that valuable feature. An intermediate-term muni bond fund has a NAV which bounces around a little, but not a lot. Over the 26 years I have been in that fund, I have written just under 20 checks. Sometimes, I have made a profit, sometimes not. Overall, I have just about broken even. I like seeing that fund gain a little bit of mostly tax-free dividends every month, slowly adding to the fund's balance.
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Re: Holding EF in something other than cash?

Post by nisiprius »

tomwood wrote: Sat Apr 11, 2020 10:05 am
samsoes wrote: Sat Apr 11, 2020 6:23 am there was concern about MM funds "breaking the buck,"
I’m not familiar with breaking the buck, what does that mean? Are these MM funds at banks & credit unions?
NO.

Excuse the all capitals, but it drives me bananas that banks are allowed to use this confusing terminology.

You get "money market deposit accounts" (MMDAs) at a bank. They are a name for a higher-interest bank account. "Breaking the buck" is not a concept that applies to them. Assuming that they are FDIC-insured (I've never seen one that wasn't), they are no different from any other savings account except for interest rates and rules about how many withdrawals you can make and such.

You get "money market funds" at a brokerage--Vanguard, for example. They are really "money market mutual funds." They have five-letter ticker symbols ending in -XX, like VMFXX. They are not FDIC-insured. "Breaking the buck" is a possible concern.

These "money market funds" are a special kind of mutual fund with special rules. When you sell a share of a regular mutual fund, the mutual fund company determines the actual market value of the assets at the close of the trading day and gives you that amount. "Retail" money market mutual funds are allowed to pay you $1/share regardless of the true value of the assets. A money market mutual fund tries its best to maintain that $1/share redemption. In a severe crisis it might not be able to; that is "breaking the buck." Here is some typical weasel-word language--this is from the VMFXX summary prospectus:
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Some history might help here.

1) In the 1970s, inflation soared to over 10% per year. Bank accounts were capped by "Regulation Q" at about 6%. Furthermore, at that time checking accounts were not allowed to pay interest.

2) Money market mutual funds were invented. In my opinion, they were a sneaky way of providing a bank-like service while avoiding bank regulations. In any case, they worked like checking accounts and paid 10% interest.

3) As you can imagine, given the choice between a 0% checking account, a 5-3/4% savings account, and a 10% pseudo-checking account, money market funds took off.

4) Limits on bank interest rates were gradually eased. One of the forms they took was the "money market deposit account," in which banks were allowed to pay higher interest but required to impose restrictions. I don't know why they were allowed to call them that, but my belief is that it was just supposed to mean "interest rates competitive with money market funds."
Last edited by nisiprius on Sat Apr 11, 2020 10:41 am, edited 1 time in total.
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Re: Holding EF in something other than cash?

Post by Silence Dogood »

I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
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Re: Holding EF in something other than cash?

Post by Clever_Username »

tomwood wrote: Sat Apr 11, 2020 5:48 am Does anyone hold anything different as their EF? Why?
I have an emergency plan, which in my view is different than a dedicated pile of money.

I have some cash in my checking account at the moment -- a few months' worth of expenses, even. I have a plan for that money: I'm shoveling my paycheck into tax advantaged space. This was my plan for 2020 even before the situation, since I'll have more tax advantaged space to fill than money coming in, and using cash to pay expenses and depositing my full paycheck into 403/457/mega-backdoor Roth effectively lets me write a check into tax advantaged. But I don't consider that my emergency fund.

Short-term emergencies are easy at my point in life. Car repair in a hurry? Need a repair in my home? Credit card, with no trouble paying it off when the bill comes due, especially with the funds available that don't involve going to tax advantaged space.

I have well over two years' worth of expenses in bond funds in taxable space. Roughly half of that is CA Long-Term Munis and the other half is federal short-term. The latter is very low volatility and its balance is well over one year's expenses right now. That's where I go first if I need money in an emergency.

I also have over one year's expenses in Series I Bonds. I'd rather pull from the taxable bonds than these.

If an emergency comes beyond that, I could pull from tax advantaged accounts if need be.
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Re: Holding EF in something other than cash?

Post by anon_investor »

Silence Dogood wrote: Sat Apr 11, 2020 10:39 am I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
After you get past the required 1 year holding period (loss of 3 months interest if redeemed earlier than 5 years), electronic I Bonds are extremely liquid. You can redeem all or part of the balance and have the proceeds electronically deposited to your linked checking account.
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Re: Holding EF in something other than cash?

Post by tomwood »

anon_investor wrote: Sat Apr 11, 2020 12:13 pm
Silence Dogood wrote: Sat Apr 11, 2020 10:39 am I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
After you get past the required 1 year holding period (loss of 3 months interest if redeemed earlier than 5 years), electronic I Bonds are extremely liquid. You can redeem all or part of the balance and have the proceeds electronically deposited to your linked checking account.
What happens if they are redeemed prior to year 1?
Do I bonds all mature in 5 years?
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Re: Holding EF in something other than cash?

Post by anon_investor »

tomwood wrote: Sat Apr 11, 2020 1:56 pm
anon_investor wrote: Sat Apr 11, 2020 12:13 pm
Silence Dogood wrote: Sat Apr 11, 2020 10:39 am I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
After you get past the required 1 year holding period (loss of 3 months interest if redeemed earlier than 5 years), electronic I Bonds are extremely liquid. You can redeem all or part of the balance and have the proceeds electronically deposited to your linked checking account.
What happens if they are redeemed prior to year 1?
Do I bonds all mature in 5 years?
I don't think you can redeem them before 1 year. I Bonds can be held for 30 years. If held for longer than 5 years they can be redeemed penalty free.

https://www.treasurydirect.gov/indiv/pr ... glance.htm
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Re: Holding EF in something other than cash?

Post by hookemhorns »

We keep about 2 months worth of expenses in cash and money markets. We have another ~6 months in VBIAX and Wellesley and another 6 months in Wellington. The basic idea is to use a "lines of defense" approach to avoid having to draw down quickly on more risky investments, while at the same time not keeping too much tied up in low/zero yielding investments.

By the way, I think concerns about money market funds "breaking the buck" are overstated. There have been <5 mmkt funds that have done so over the past 50 years. In those rare cases, the investors received >= 95 cents on the dollar, so it wasn't like they took a huge haircut. I'm comfortable taking that extremely low risk vs. the certain loss of >= 1% p.a. that one takes by keeping the money in a zero yielding checking account instead.
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tomwood
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Re: Holding EF in something other than cash?

Post by tomwood »

anon_investor wrote: Sat Apr 11, 2020 2:13 pm
I don't think you can redeem them before 1 year. I Bonds can be held for 30 years. If held for longer than 5 years they can be redeemed penalty free.

https://www.treasurydirect.gov/indiv/pr ... glance.htm
Thank you
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Re: Holding EF in something other than cash?

Post by tomwood »

nisiprius wrote: Sat Apr 11, 2020 10:35 am
tomwood wrote: Sat Apr 11, 2020 10:05 am
samsoes wrote: Sat Apr 11, 2020 6:23 am there was concern about MM funds "breaking the buck,"
I’m not familiar with breaking the buck, what does that mean? Are these MM funds at banks & credit unions?
NO.

Excuse the all capitals, but it drives me bananas that banks are allowed to use this confusing terminology.

You get "money market deposit accounts" (MMDAs) at a bank. They are a name for a higher-interest bank account. "Breaking the buck" is not a concept that applies to them. Assuming that they are FDIC-insured (I've never seen one that wasn't), they are no different from any other savings account except for interest rates and rules about how many withdrawals you can make and such.

You get "money market funds" at a brokerage--Vanguard, for example. They are really "money market mutual funds." They have five-letter ticker symbols ending in -XX, like VMFXX. They are not FDIC-insured. "Breaking the buck" is a possible concern.

These "money market funds" are a special kind of mutual fund with special rules. When you sell a share of a regular mutual fund, the mutual fund company determines the actual market value of the assets at the close of the trading day and gives you that amount. "Retail" money market mutual funds are allowed to pay you $1/share regardless of the true value of the assets. A money market mutual fund tries its best to maintain that $1/share redemption. In a severe crisis it might not be able to; that is "breaking the buck." Here is some typical weasel-word language--this is from the VMFXX summary prospectus:
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Some history might help here.

1) In the 1970s, inflation soared to over 10% per year. Bank accounts were capped by "Regulation Q" at about 6%. Furthermore, at that time checking accounts were not allowed to pay interest.

2) Money market mutual funds were invented. In my opinion, they were a sneaky way of providing a bank-like service while avoiding bank regulations. In any case, they worked like checking accounts and paid 10% interest.

3) As you can imagine, given the choice between a 0% checking account, a 5-3/4% savings account, and a 10% pseudo-checking account, money market funds took off.

4) Limits on bank interest rates were gradually eased. One of the forms they took was the "money market deposit account," in which banks were allowed to pay higher interest but required to impose restrictions. I don't know why they were allowed to call them that, but my belief is that it was just supposed to mean "interest rates competitive with money market funds."
I’m glad you used caps because it caught my attention and this is something I was unaware of.

Is the true money market playing an interest rate similar to what would be found in a short term bond fund? And I’d think it’s safe to assume a money market deposit account is basically offering savings account rates. Do I have this about right?
If the brokerage money market account pays less than $1/share is that the same as would happen when any bond fund decreases in price? Past interest would be earned and possibly reinvested but there would be a slight loss of principal. Is my understanding correct?
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Re: Holding EF in something other than cash?

Post by corey407woc »

Beanie Babies and Pokemon cards
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Re: Holding EF in something other than cash?

Post by tomwood »

corey407woc wrote: Sat Apr 11, 2020 6:57 pm Beanie Babies and Pokemon cards
Brilliant
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Re: Holding EF in something other than cash?

Post by gr7070 »

I keep about 3 months expense in a money market.

Additionally, long ago I put at least 3 months into balanced mutual funds - I didn't like the idea of that opportunity cost of a full 6 months in cash. I didn't like the idea of half my EF in all equities, and wasn't as knowledgeable regrading tax efficiency - still was not the worst decision.

I have more than the above 6 months in taxable accounts, which in theory could be considered part of an EF, though I don't frame it that way personally. However, at the end of the day in reality it is party of an EF.

I also have added cash savings for property taxes, vacation funds, large purchases, rental property retained earnings, etc.

Additionally, we have Roth IRAs if the situation truly becomes dire.

Lastly, a two income family changes the math and statistical odds *drastically*.
My wife works. While she doesn't make much by comparison she does earn a professional wage. That with unemployment pay our 6 month EF can last a very long time assuming we stop retirement savings. My income is enough if she lost her job.

Set aside anxieties as best one can, especially today, and make the best rational decision you can regarding your EF. One does not need a year EF. Certainly not the 4 years I've seen some Boglehead's say is not enough. Depending upon how big the EF is it does not need to be in cash; all equities is truly a viable option if large enough.
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tomwood
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Re: Holding EF in something other than cash?

Post by tomwood »

scrabbler1 wrote: Sat Apr 11, 2020 10:31 am My EF is set up in tiers like what Watty described. After the small amount of cash I have at home ($100-$200), I keep about $2,000 in my local bank's checking account available to take out as cash or by writing a personal check. Then, I keep about $40k in an intermediate-term muni bond fund which has checkwriting privileges, increasing the speed and ease of access to it compared to a bond fund which lacks that valuable feature. An intermediate-term muni bond fund has a NAV which bounces around a little, but not a lot. Over the 26 years I have been in that fund, I have written just under 20 checks. Sometimes, I have made a profit, sometimes not. Overall, I have just about broken even. I like seeing that fund gain a little bit of mostly tax-free dividends every month, slowly adding to the fund's balance.
Is this account through VG?
When you wrote those 20 checks over the years, are there any taxes also due the next April?
Does this fund reinvest the interest and, to that, are there annual taxes owed for keeping money in this account?
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tomwood
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Re: Holding EF in something other than cash?

Post by tomwood »

Watty wrote: Sat Apr 11, 2020 8:13 am
tomwood wrote: Sat Apr 11, 2020 5:48 am My EF is held in my checking/savings account, which I’m going to refer to as cash for this question. I would assume a majority of BH hold their EF in cash, but I’ve noticed some BH’s use bonds for their EF.

Do BHs using bonds still typically have a few months EF in cash but the rest in bonds? Which bonds or bond funds are most commonly used for EF?

Does anyone hold anything different as their EF? Why?
When looking how to handle your emergency money you need to consider your different phases of life. When I was in my 20s an expensive car repair would have been an emergency. As I became more financially secure about the only type of real emergency would have been a layoff or a long hospital stay. Now that I am retired most things would just be an unexpected expense so I just keep some liquid investments in case something comes up. How to invest your emergency money will depend on what phase of life you are in.

With the current interest rates you really don't gain much by going from something like a money market fund to bonds, but there is a lot more risk with the bonds if interest rates go up. Getting an extra 1%(before taxes) might not be worth the extra 1%.

Some people will use iBonds for some of their emergency money since it has tax advantages and in some situations it can be used when you have qualified educational expenses for even more tax advantages.

That said people often have tiers of emergency funds like.

1) A couple of hundred, or thousand, dollars in physical paper cash at home.
2) Money at a local brick and mortar bank or credit union that they can quickly get more cash, or write a check.
3) Money at someplace like a mutual fund company or iBonds that is available for a long term emergency like a job layoff.

If you would not otherwise be maxing it out you can also use a Roth for part of your emergency fund.
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

One other thing to also keep in mind is not all "emergencies" are bad. I know people that have had "emergencies" like going on a last minute trip for a quarter the normal price or buying a car from a elderly relative at a great price when they just wanted get rid of the car quickly and easily. You will likely have a few times in your life when there will be some unexpected deal that you can only take advantage of if you can quickly come up with the cash or write a check for it.
The tier system sounds intriguing. I know the different life phases matter but just as a rule of thumb where would you list total money in terms of EF?
And then would you be willing to break down how much of that (by % or by months) should be held in each tier?

It might be a very difficult ask so let me say again that I’m just trying to gain a general understanding about these tiers and not asking for a bulletproof, one size fits all plan, please.
scrabbler1
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Re: Holding EF in something other than cash?

Post by scrabbler1 »

tomwood wrote: Sun Apr 12, 2020 7:01 pm
scrabbler1 wrote: Sat Apr 11, 2020 10:31 am My EF is set up in tiers like what Watty described. After the small amount of cash I have at home ($100-$200), I keep about $2,000 in my local bank's checking account available to take out as cash or by writing a personal check. Then, I keep about $40k in an intermediate-term muni bond fund which has checkwriting privileges, increasing the speed and ease of access to it compared to a bond fund which lacks that valuable feature. An intermediate-term muni bond fund has a NAV which bounces around a little, but not a lot. Over the 26 years I have been in that fund, I have written just under 20 checks. Sometimes, I have made a profit, sometimes not. Overall, I have just about broken even. I like seeing that fund gain a little bit of mostly tax-free dividends every month, slowly adding to the fund's balance.
Is this account through VG?
When you wrote those 20 checks over the years, are there any taxes also due the next April?
Does this fund reinvest the interest and, to that, are there annual taxes owed for keeping money in this account?
The account is not through Vanguard. With those 20 checks, I had to report those redemptions/sales on Schedule D/Form 8949. If I made money, I had to pay taxes on the gain (unless it was taxed at 0%). If I lost money, it would reduce my other cap gain income.

Most of the time, I was reinvesting the dividends (and rare cap gain distributions). Sometimes, I took it as cash, sometimes, I invested it into another fund. Simply keeping the money in the account was not a taxable event.
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Sandtrap
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Re: Holding EF in something other than cash?

Post by Sandtrap »

tomwood wrote: Sat Apr 11, 2020 5:48 am My EF is held in my checking/savings account, which I’m going to refer to as cash for this question. I would assume a majority of BH hold their EF in cash, but I’ve noticed some BH’s use bonds for their EF.

Do BHs using bonds still typically have a few months EF in cash but the rest in bonds? Which bonds or bond funds are most commonly used for EF?

Does anyone hold anything different as their EF? Why?
Cash or “cash like” will work well.
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Silence Dogood
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Re: Holding EF in something other than cash?

Post by Silence Dogood »

anon_investor wrote: Sat Apr 11, 2020 12:13 pm
Silence Dogood wrote: Sat Apr 11, 2020 10:39 am I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
After you get past the required 1 year holding period (loss of 3 months interest if redeemed earlier than 5 years), electronic I Bonds are extremely liquid. You can redeem all or part of the balance and have the proceeds electronically deposited to your linked checking account.
anon_investor,

I have read that using the Treasury Direct website is extremely onerous. Has that been your experience?

When you redeem your bonds, how quickly do the funds arrive in your checking account?
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anon_investor
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Re: Holding EF in something other than cash?

Post by anon_investor »

Silence Dogood wrote: Sun Apr 12, 2020 7:26 pm
anon_investor wrote: Sat Apr 11, 2020 12:13 pm
Silence Dogood wrote: Sat Apr 11, 2020 10:39 am I keep my emergency fund in an FDIC-insured savings account.

I've considered using Series I savings bonds for my emergency fund, but I have concerns about liquidity.

As I understand it, it used to be possible to buy (paper) savings bonds at the bank/credit union. It's too bad that it's not possible to buy electronic savings bonds at the bank/credit union. That would largely solve the issue of liquidity for me*.

*There would still be the 1-year minimum-holding and 5-year early-redemption penalty to contend with.
After you get past the required 1 year holding period (loss of 3 months interest if redeemed earlier than 5 years), electronic I Bonds are extremely liquid. You can redeem all or part of the balance and have the proceeds electronically deposited to your linked checking account.
anon_investor,

I have read that using the Treasury Direct website is extremely onerous. Has that been your experience?

When you redeem your bonds, how quickly do the funds arrive in your checking account?
It is not a slick website, but works fine, I have never had any issues. I would say no worse than many bank websites. My spouse and I were able to each open accounts online with needing to jump through any hoops. I have heard some people have to mail in things to verify identity.

I have never actually redeemed any I Bonds before but their website says it takes 2 business days to receive the funds. That is my experience with T Bills (obviously not buying anymore at current near 0 yields). I would definitely not use I Bonds as my first level of emergency fund, but what big emergency needs more than $10k in less than 2 business days?
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Watty
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Re: Holding EF in something other than cash?

Post by Watty »

tomwood wrote: Sun Apr 12, 2020 7:07 pm
...
The tier system sounds intriguing. I know the different life phases matter but just as a rule of thumb where would you list total money in terms of EF?
And then would you be willing to break down how much of that (by % or by months) should be held in each tier?

It might be a very difficult ask so let me say again that I’m just trying to gain a general understanding about these tiers and not asking for a bulletproof, one size fits all plan, please.
I am retired now so it is a lot different but I keep several months expenses in my local bank.
RevFran
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Re: Holding EF in something other than cash?

Post by RevFran »

OP may want to look at this thread, where some people discuss using a heloc as an EF

viewtopic.php?t=287916
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abuss368
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Re: Holding EF in something other than cash?

Post by abuss368 »

I use Vanguard Prime Money Market. Closed our low yield savings account years ago.
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mokaThought
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Re: Holding EF in something other than cash?

Post by mokaThought »

Prior to the most recent downturn, I would have pointed you to ICSH. Turns out there's no free lunch. :P
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3504PIR
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Re: Holding EF in something other than cash?

Post by 3504PIR »

Looking back at the most recent 3-4 weeks, imagine if you were or are to become one of the possible 60,000,000 or more unemployed and ask yourself where would be the best place to have those funds. Everything I’ve read on the matter over that time would seem to suggest both an increase in savings rates (whenever that becomes possible), and a radically more conservative approach to retirement savings.

I am interested in why you asked this question and where you are considering putting emergency funds? I am not calling you out but the majority of the country will be looking for access in the near future, and not for exotic yield angles.
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