Three years of emergency fund too much in this time?

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van_sun_38
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Three years of emergency fund too much in this time?

Post by van_sun_38 » Sun May 17, 2020 4:49 pm

I know it totally depends on personal preference but I wonder if I am missing out on something if I keep too much emergency fund (currently in high yield saving account).

This is my situation: Double income family with one year old kid in HCLA. We have maxed out on 401k, Roth IRA and also have around 200k in taxable account. Both of our companies are heavily impacted by the Covid-19, hence the large amount of cash in emergency fund. However, the job market where we live is not bad, so we can find a new job within 1 year. We recently refinanced our house to get better rate and put additional $ into the principal.

We were planning on investing in a rental house before this all happened. Though I am glad we have cash in this time, I can't help but thinking we should put the money to work harder than the current low interest rate. So my question is: are we on the too conservative? What are your recommendations given our situation? Thank you!

fabdog
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Re: Three years of emergency fund too much in this time?

Post by fabdog » Sun May 17, 2020 5:05 pm

Only you can answer the question... sure it sounds like a lot... but I bet you sleep better at night

You mention both of your companies have been impacted by COVID, but job market where you live not bad, and you assume you could get a job in a year... that's likely true... but no one knows how all this will play out. I personally am glad to have a large cash buffer right now, and although I am sure I might make more money investing it... I might not..

Buying a rental right now (unless you get a screaming deal) is just asking for another cash flow drain... what happens when you can't find renters, or they can't pay the rent... and the authorities say that you can't kick them out till all this passes...

Mike

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JoMoney
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Re: Three years of emergency fund too much in this time?

Post by JoMoney » Sun May 17, 2020 5:14 pm

Nobody can tell you what your risk tolerance should be. People have different reactions to the severe losses that can be expected to happen over time in the stock market. I sleep better knowing I have a good chunk of cash in savings that I can rely on being there if/when I need it, regardless of what the stock market is doing this year. In the past I never really had a fixed constant-mix percentage, just a dollar figure that amounted to a couple months or more that I thought was enough given my situation and job. Over time my equity investments have grown, and the relative proportion of my cash/bonds to the rest of the portfolio shrunk. In recent years, I've been wrestling with the "how much?" question. I eventually settled on the idea of a 90/10 portfolio. Warren Buffett's comments were influential on my decision to move to a simple index portfolio, a 90/10 portfolio is what he suggested he would use in the bequest for his wife, I still feel like that's too much money lingering around in cash and short-term investments at my age, it probably amounts to 2.5 years of expenses at a 4% withdrawal rate... but nobody around here would consider that a "conservative allocation" - most insist that's way to risky. I feel that I've got a pretty good tolerance for the risk, but having 10% in something safe is hardly moving the needle, most of the time that would leave me feeling under-invested in stocks, but after recent events, it is nice to know that I have no reason to care about what the stock market does this year.
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pennsylvania211
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Re: Three years of emergency fund too much in this time?

Post by pennsylvania211 » Sun May 17, 2020 5:17 pm

fabdog wrote:
Sun May 17, 2020 5:05 pm
Only you can answer the question... sure it sounds like a lot... but I bet you sleep better at night

You mention both of your companies have been impacted by COVID, but job market where you live not bad, and you assume you could get a job in a year... that's likely true... but no one knows how all this will play out. I personally am glad to have a large cash buffer right now, and although I am sure I might make more money investing it... I might not..

Buying a rental right now (unless you get a screaming deal) is just asking for another cash flow drain... what happens when you can't find renters, or they can't pay the rent... and the authorities say that you can't kick them out till all this passes...

Mike
This.

Only you can answer how much cash let’s you sleep soundly at night. For us, it’s about 2 years of expenses at 120-150k.

Saving less would keep us worried about potential rainy days. Saving more would keep us worried about money sitting idle, it’s basically keeping up with inflation but nothing more.
"In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses." - Jack Bogle

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Re: Three years of emergency fund too much in this time?

Post by Jack FFR1846 » Sun May 17, 2020 6:30 pm

If you do buy a rental house, you really need to consider that any renters could be hit by covid and be incapable of paying the rent. Having watched my dad and father in law go through this, although not due to covid, they had to deal with renters who would find free legal aid and drag eviction out for a year. The rent, when these people did go was never paid. They knew what they were getting into, renting to lower paid people. You can end up with a well paid renter losing his job because his company goes belly up.

As far as 3 years EF.....Counting my savings bonds, I've got 8. 1 in cash and 7 in bonds.
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anon_investor
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Re: Three years of emergency fund too much in this time?

Post by anon_investor » Sun May 17, 2020 6:33 pm

If I had that much cash I would buy I Bonds and EE Bonds.

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Re: Three years of emergency fund too much in this time?

Post by whereskyle » Sun May 17, 2020 6:36 pm

van_sun_38 wrote:
Sun May 17, 2020 4:49 pm
I know it totally depends on personal preference but I wonder if I am missing out on something if I keep too much emergency fund (currently in high yield saving account).

This is my situation: Double income family with one year old kid in HCLA. We have maxed out on 401k, Roth IRA and also have around 200k in taxable account. Both of our companies are heavily impacted by the Covid-19, hence the large amount of cash in emergency fund. However, the job market where we live is not bad, so we can find a new job within 1 year. We recently refinanced our house to get better rate and put additional $ into the principal.

We were planning on investing in a rental house before this all happened. Though I am glad we have cash in this time, I can't help but thinking we should put the money to work harder than the current low interest rate. So my question is: are we on the too conservative? What are your recommendations given our situation? Thank you!
Put a year's worth to work and then you have two years. Most people would kill to be in such a situation frankly. If you want to put 1/3 of it to work, I could not blame you.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

millennialmillions
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Re: Three years of emergency fund too much in this time?

Post by millennialmillions » Sun May 17, 2020 6:41 pm

Yes, three years of emergency fund is too much. At that point, it is no longer an emergency fund and is instead a significant portion of your asset allocation. It's fine if you determine that an asset allocation with cash is appropriate for your risk tolerance, but I feel calling it an "emergency fund" distracts from making intentional changes/decisions on an overall portfolio level.

Also, I would consider the likelihood of a scenario in which you need three years of expenses with no income. Based on the solid job market for both you and your spouse, I imagine that likelihood is small enough to be negligible. If you invest the money instead, you can always sell if needed (and this strategy wins in the end vs. holding a larger emergency fund).

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Re: Three years of emergency fund too much in this time?

Post by Triple digit golfer » Sun May 17, 2020 6:59 pm

How many years of expenses do you have not part of the 3 year emergency fund?

Are there any bonds in it?

We simply keep an 80/20 portfolio invested tax efficiently. Our taxable account is 2.5-3 years of expenses and invested in all equities. In an emergency, we would draw from the taxable account. Goal is to always maintain 80/20. Currently we're at 77/23 so we would draw from taxable equities and exchange from bonds to equities in tax deferred accounts, effectively selling bonds.

Why in an emergency, when you may have no income coming in, would it be appropriate to make your portfolio MORE aggressive by drawing from cash? Why not just draw from whichever asset in your AA is heavy and maintain that AA at all times?

If it's an aversion to selling equities at a loss, consider this. If you sell all cash, then your AA will change significantly, and you'll spend a lot of time after you regain employment building it back up. You'll spend an entire period of unemployment plus a while after not contributing anything to equities. Why not just maintain a constant AA in all scenarios, and contribute/withdraw to/from whichever asset is light/heavy?

Just some food for thought.

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Re: Three years of emergency fund too much in this time?

Post by hudson » Sun May 17, 2020 7:03 pm

van_sun_38 wrote:
Sun May 17, 2020 4:49 pm
too much emergency fund (currently in high yield saving account).

have around 200k in taxable account. I can't help but thinking we should put the money to work harder than the current low interest rate.

So my question is: are we on the too conservative? What are your recommendations given our situation? Thank you!
Do your homework, do the math, and shop around...but consider this....

#1
30K in High Yield Savings
100K in a 2% CD....2-5 years...I like 5
70K in VWIUX or BMBIX...high quality intermediate muni funds..if your tax bracket allows.

#2
If munis don't fit,
30K in HY Savings
170K in various length 2% CDs

Too conservative? Conservative is good!

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Sandtrap
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Re: Three years of emergency fund too much in this time?

Post by Sandtrap » Sun May 17, 2020 7:07 pm

The "right" amount of cash-like reserves and/or EF Emergency Fund for each person is what fit's that person's financial needs, family dynamics, and need to sleep well at night.

For some, with solid pensions or employment and minimal debt, a minimal EF amount fit's their needs and they sleep well at night.

For others, they might not sleep well with anything less than $500,000 in cash in the bank.

There's a certain amount of this that can be inputed on a spreadsheet and calculated per appropriate financial theorem.
And, there's a certain amount of this that is "just because it feels right" and that is just as, if not more, valid.

j :happy
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mortfree
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Re: Three years of emergency fund too much in this time?

Post by mortfree » Sun May 17, 2020 7:16 pm

Is the 200k taxable account your emergency fund or is that in addition to your cash emergency fund?

I originally thought the taxable account was investments.

How much cash are we talking?

Everyone’s situation is different but I think 100k cash would be my limit. That’s probably 2-2.5 years

I recently went from 40k to around 60k

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van_sun_38
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Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Sun May 17, 2020 7:35 pm

Jack FFR1846 wrote:
Sun May 17, 2020 6:30 pm
If you do buy a rental house, you really need to consider that any renters could be hit by covid and be incapable of paying the rent. Having watched my dad and father in law go through this, although not due to covid, they had to deal with renters who would find free legal aid and drag eviction out for a year. The rent, when these people did go was never paid. They knew what they were getting into, renting to lower paid people. You can end up with a well paid renter losing his job because his company goes belly up.

As far as 3 years EF.....Counting my savings bonds, I've got 8. 1 in cash and 7 in bonds.
Thanks for the insight. yeah it seems like the rental investment is not always as rosy as our real estate agent painted to us.
What types of bonds do you invest in?

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van_sun_38
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Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Sun May 17, 2020 7:39 pm

Do your homework, do the math, and shop around...but consider this....

#1
30K in High Yield Savings
100K in a 2% CD....2-5 years...I like 5
70K in VWIUX or BMBIX...high quality intermediate muni funds..if your tax bracket allows.
What do you mean by "if your tax bracket allows? I am not familiar with either fund.
#2
If munis don't fit,
30K in HY Savings
170K in various length 2% CDs

Too conservative? Conservative is good!
Where do you see 2% CDs? most I have seen these days are like 1.4-1.5%.
Last edited by van_sun_38 on Sun May 17, 2020 7:50 pm, edited 1 time in total.

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van_sun_38
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Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Sun May 17, 2020 7:45 pm

millennialmillions wrote:
Sun May 17, 2020 6:41 pm
Yes, three years of emergency fund is too much. At that point, it is no longer an emergency fund and is instead a significant portion of your asset allocation. It's fine if you determine that an asset allocation with cash is appropriate for your risk tolerance, but I feel calling it an "emergency fund" distracts from making intentional changes/decisions on an overall portfolio level.

Also, I would consider the likelihood of a scenario in which you need three years of expenses with no income. Based on the solid job market for both you and your spouse, I imagine that likelihood is small enough to be negligible. If you invest the money instead, you can always sell if needed (and this strategy wins in the end vs. holding a larger emergency fund).
Thanks for the link, interesting read. I am curious why from 2007-2008, both"No EF Net Worth" and "EF Net Worth" decreased at the similar rate? Shouldn't the "No EF Net Worth" decrease at the lower rate than the other one? I am missing something?

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Re: Three years of emergency fund too much in this time?

Post by 260chrisb » Sun May 17, 2020 7:46 pm

millennialmillions wrote:
Sun May 17, 2020 6:41 pm
Yes, three years of emergency fund is too much. At that point, it is no longer an emergency fund and is instead a significant portion of your asset allocation. It's fine if you determine that an asset allocation with cash is appropriate for your risk tolerance, but I feel calling it an "emergency fund" distracts from making intentional changes/decisions on an overall portfolio level.

Also, I would consider the likelihood of a scenario in which you need three years of expenses with no income. Based on the solid job market for both you and your spouse, I imagine that likelihood is small enough to be negligible. If you invest the money instead, you can always sell if needed (and this strategy wins in the end vs. holding a larger emergency fund).
I think this says it best and I also believe three years is a bit excessive but ultimately it depends on your risk tolerance. I also wonder what percentage of your total portfolio this represents. My guess is that if you're maxing out retirement options you've probably done it for a while and this is not an unreasonable amount of money. From the way you laid things out it doesn't seem to me that you would need three years since you're not relying on it as maybe you would if you were retired. With a 1 year old I'm guessing your not!! :D

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Re: Three years of emergency fund too much in this time?

Post by bearwithbear » Sun May 17, 2020 7:56 pm

OP,

If you count your 3 year emergency fund as part of your total portfolio (retirement accounts, taxable, emergency fund) at you at least 50% stocks?
While I did not see your age listed, with a one year old there is probably a long time to retirement. While the emergency fund is larger than most would think necessary, if you are at least 50% stocks it probably works. And you get to sleep well. If the one year old lets you.

Best,
Bear

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Re: Three years of emergency fund too much in this time?

Post by hudson » Sun May 17, 2020 7:59 pm

van_sun_38 wrote:
Sun May 17, 2020 7:39 pm
Do your homework, do the math, and shop around...but consider this....

#1
30K in High Yield Savings
100K in a 2% CD....2-5 years...I like 5
70K in VWIUX or BMBIX...high quality intermediate muni funds..if your tax bracket allows.
What do you mean by "if your tax bracket allows? I am not familiar with either fund.
#2
If munis don't fit,
30K in HY Savings
170K in various length 2% CDs

Too conservative? Conservative is good!
The two muni funds listed are high quality intermediate muni funds. What else do you want to know about them?
Where do you see 2% CDs? most I have seen these days are like 1.4-1.5%.
If you are in the 22% tax bracket or above, municipal bond funds could work. You have to do the math. As you know, municipal bond interest is not taxed at the federal level. Some states don't tax muni interest. Consider reading Swedroe's bond book.

2% CDs 5 Year...other searches are available: https://www.depositaccounts.com/cd/5-year-cd-rates.html

What do you want to know about the 2 muni funds. They are worth a look IF it fits your situation.

Consider following this discussion: viewtopic.php?f=10&t=292085&p=5258269#p5258269
Last edited by hudson on Sun May 17, 2020 8:11 pm, edited 1 time in total.

millennialmillions
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Re: Three years of emergency fund too much in this time?

Post by millennialmillions » Sun May 17, 2020 8:03 pm

van_sun_38 wrote:
Sun May 17, 2020 7:45 pm

Thanks for the link, interesting read. I am curious why from 2007-2008, both"No EF Net Worth" and "EF Net Worth" decreased at the similar rate? Shouldn't the "No EF Net Worth" decrease at the lower rate than the other one? I am missing something?
Depending on how curious you are, there is a link at the bottom of that post to download the Excel file. Basically, the No-EF investor loses more value in the stock market but immediately starts reinvesting in the market during the upswing. The EF investor faces a slightly less impactful portfolio drop but must rebuild the emergency fund before investing in stocks again.

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Re: Three years of emergency fund too much in this time?

Post by Ferdinand2014 » Sun May 17, 2020 8:23 pm

I keep 3 years expenses in cash (treasury bills). It represents about 10% of my total portfolio. I hold the rest in the S&P 500 index. Some say holding 10% in cash/bonds is risky. Some say 3 years in cash is way to conservative. I could care less if my cash represents 5% or 50% - as long as it represents 3 years. I don’t bother with an allocation nor do I rebalance - as I have nothing to rebalance. I just add to my S&P 500 index every Friday to all of my accounts. No decisions. Easy. Simple. I sleep well. In the end ask yourself - do you sleep well with the cash you have?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Three years of emergency fund too much in this time?

Post by gr7070 » Sun May 17, 2020 9:39 pm

Three years of emergency fund too much in this time?
Yes. Unquestionably.

I'd disagree that it's not that personal, as well. I can concede that 6 months is a rather personal decision. However, three years, especially for a two income family, is simply a waste.

Does that three years include UI? Does it include all expenses or would you pare down expenses further if laid off. So is it actually greater than three years?

How many years is it with the lowest Income still working? Five years?

It's insanely unlikely for one person with viable skills to be unemployed for over one year. No, the anecdotes of known individuals doesn't add anything to that discussion. Three years would be insane to an exponent.

If one put two years into the TSM and lost 50% value, which itself is also highly unlikely they'd still have a 2 year EF. Add in the items above about two incomes, UI, bare budget, plus some intermittent work, etc. And that "1-year" cash EF (plus taxable investing) is still likely three years.

It's your personal decision to make, but it's still a waste if the choice is three years cash.

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van_sun_38
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Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Sun May 17, 2020 10:23 pm

gr7070 wrote:
Sun May 17, 2020 9:39 pm
Three years of emergency fund too much in this time?
Yes. Unquestionably.

I'd disagree that it's not that personal, as well. I can concede that 6 months is a rather personal decision. However, three years, especially for a two income family, is simply a waste.

Does that three years include UI? Does it include all expenses or would you pare down expenses further if laid off. So is it actually greater than three years?

How many years is it with the lowest Income still working? Five years?

It's insanely unlikely for one person with viable skills to be unemployed for over one year. No, the anecdotes of known individuals doesn't add anything to that discussion. Three years would be insane to an exponent.

If one put two years into the TSM and lost 50% value, which itself is also highly unlikely they'd still have a 2 year EF. Add in the items above about two incomes, UI, bare budget, plus some intermittent work, etc. And that "1-year" cash EF (plus taxable investing) is still likely three years.

It's your personal decision to make, but it's still a waste if the choice is three years cash.
Initially the money was supposed to be for a rental property, but it has been postponed due to Covid-19 and everything else going on. Not sure if we will visit the rental income idea in the near future, but at the moment the money is still sitting in the saving account. It doesn't include UI, but it does reflect no child care cost if one person stays home for the time w/o job. So do you recommend putting 1 year away and investing 2 year cash?

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Re: Three years of emergency fund too much in this time?

Post by gr7070 » Sun May 17, 2020 10:59 pm

van_sun_38 wrote:
Sun May 17, 2020 10:23 pm
Initially the money was supposed to be for a rental property, but it has been postponed due to Covid-19 and everything else going on. Not sure if we will visit the rental income idea in the near future

So do you recommend putting 1 year away and investing 2 year cash?
I like a 3-6 month EF. With a minimum of 3 months cash. That's what we do; we have the 4th - 6th months (and more) invested. Some in balanced funds some in total stock.

We do have two highly stable incomes. Were we less stable I might do 6 months cash???

Were I you...

First is determine how much I want in my EF. Then determine how much EF is cash and how much at risk. I'd do 6 months EF. Sounds like you prefer 1 year. I think that's more than necessary, but it's not crazy, especially today. Reassess post-Covid-19?

Then figure out how you're going to invest the remainder above that.

If it's being held to invest in a year or two in other assets then I'd hold it in cash - the markets aren't for short-term holdings.

If it's going to be invested in the financial markets then do that. I prefer to pay down the mortgage over typical taxable investing, as well. Though I certainly don't have any real issues with investing instead.

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Re: Three years of emergency fund too much in this time?

Post by gr7070 » Sun May 17, 2020 11:16 pm

I should add, if one has investment RE they should have a RE EF, retained earnings, what have you.

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Re: Three years of emergency fund too much in this time?

Post by cashboy » Mon May 18, 2020 11:50 am

given your situation, cut it back to 2 years and call it a day. :happy
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Re: Three years of emergency fund too much in this time?

Post by Jack FFR1846 » Mon May 18, 2020 11:58 am

van_sun_38 wrote:
Sun May 17, 2020 7:35 pm
Jack FFR1846 wrote:
Sun May 17, 2020 6:30 pm
If you do buy a rental house, you really need to consider that any renters could be hit by covid and be incapable of paying the rent. Having watched my dad and father in law go through this, although not due to covid, they had to deal with renters who would find free legal aid and drag eviction out for a year. The rent, when these people did go was never paid. They knew what they were getting into, renting to lower paid people. You can end up with a well paid renter losing his job because his company goes belly up.

As far as 3 years EF.....Counting my savings bonds, I've got 8. 1 in cash and 7 in bonds.
Thanks for the insight. yeah it seems like the rental investment is not always as rosy as our real estate agent painted to us.
What types of bonds do you invest in?
US Savings bonds (mostly i Bonds) that I've bought for years. All are paper. Now, I only get $5k a year as part of my federal tax return.
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Re: Three years of emergency fund too much in this time?

Post by 8foot7 » Mon May 18, 2020 12:26 pm

millennialmillions wrote:
Sun May 17, 2020 6:41 pm
Yes, three years of emergency fund is too much. At that point, it is no longer an emergency fund and is instead a significant portion of your asset allocation.
I am a fan of liquidity but if your goal is 25x expenses, your 3 year "emergency fund" is actually 12% of what you need to retire.

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Re: Three years of emergency fund too much in this time?

Post by abuss368 » Mon May 18, 2020 2:24 pm

van_sun_38 wrote:
Sun May 17, 2020 4:49 pm
I know it totally depends on personal preference but I wonder if I am missing out on something if I keep too much emergency fund (currently in high yield saving account).

This is my situation: Double income family with one year old kid in HCLA. We have maxed out on 401k, Roth IRA and also have around 200k in taxable account. Both of our companies are heavily impacted by the Covid-19, hence the large amount of cash in emergency fund. However, the job market where we live is not bad, so we can find a new job within 1 year. We recently refinanced our house to get better rate and put additional $ into the principal.

We were planning on investing in a rental house before this all happened. Though I am glad we have cash in this time, I can't help but thinking we should put the money to work harder than the current low interest rate. So my question is: are we on the too conservative? What are your recommendations given our situation? Thank you!
I feel as if the amount of cash that needs or should be held is highly personal and often contingent on what allows the person to sleep well at night.

I do not use any metrics such as number of months, percentage, etc. I simply add to cash each pay period and I am happy with that. I have a goal when we retire in terms of ballpark. No emergency or other earmarked funds.

I simply use Vanguard Prime Index Fund and one checking account. Nothing more has been needed.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Three years of emergency fund too much in this time?

Post by abuss368 » Mon May 18, 2020 2:25 pm

There is an old saying and for good reason that "cash is king"!
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Three years of emergency fund too much in this time?

Post by Money Market » Mon May 18, 2020 4:01 pm

I have a 2 year emergency fund that is small relative to my portfolio. I opted for 2 years rather than 1 since my AA is 100/0 and I don't qualify for UI.

Even for me, 3 years is way too much with a dual income family. I can't imagine having an extra 2 years of expenses in an EF unless it's intended to cover non-essential expenses or your non-immediate family's expenses.

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Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Tue May 19, 2020 11:36 am

hudson wrote:
Sun May 17, 2020 7:59 pm
van_sun_38 wrote:
Sun May 17, 2020 7:39 pm
Do your homework, do the math, and shop around...but consider this....

#1
30K in High Yield Savings
100K in a 2% CD....2-5 years...I like 5
70K in VWIUX or BMBIX...high quality intermediate muni funds..if your tax bracket allows.
What do you mean by "if your tax bracket allows? I am not familiar with either fund.
#2
If munis don't fit,
30K in HY Savings
170K in various length 2% CDs

Too conservative? Conservative is good!
The two muni funds listed are high quality intermediate muni funds. What else do you want to know about them?
Where do you see 2% CDs? most I have seen these days are like 1.4-1.5%.
If you are in the 22% tax bracket or above, municipal bond funds could work. You have to do the math. As you know, municipal bond interest is not taxed at the federal level. Some states don't tax muni interest. Consider reading Swedroe's bond book.

2% CDs 5 Year...other searches are available: https://www.depositaccounts.com/cd/5-year-cd-rates.html

What do you want to know about the 2 muni funds. They are worth a look IF it fits your situation.

Consider following this discussion: viewtopic.php?f=10&t=292085&p=5258269#p5258269
Thanks, is there any disadvantage to put too much in Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares? I was thinking of putting ~100k there. Would you recommend dividing it up to other Bond account(s)?

hudson
Posts: 2899
Joined: Fri Apr 06, 2007 9:15 am

Re: Three years of emergency fund too much in this time?

Post by hudson » Tue May 19, 2020 11:54 am

van_sun_38 wrote:
Tue May 19, 2020 11:36 am
Thanks, is there any disadvantage to put too much in Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares? I was thinking of putting ~100k there. Would you recommend dividing it up to other Bond account(s)?
I own VWIUX and think that it's a good fund...with high quality holdings.
It dropped pretty hard when the panic hit, but it's come back.
I won't make any recommendations except to consider reading Swedroe's bond book. and W. Bernstein's Ages of the Investor.

Swedroe recommends only AAA/AA Munis; VWIUX isn't quite there....but it's fine with me...although BMBIX fits Swedroe's AAA/AA description.
Bernstein says it's ok to own munis but you should also back them up with CDs and treasuries.

Maybe read this discussion?
viewtopic.php?f=10&t=310578#p5155705

VWIUX's distribution yield is tough to beat if munis are a good fit for you tax bracket wise.

User avatar
dratkinson
Posts: 4937
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Three years of emergency fund too much in this time?

Post by dratkinson » Tue May 19, 2020 6:58 pm

FOMO: fear of missing out. Been there, done that, worried about cash drag from too large an EF (checking, savings, CDs,...). What to do?



Extended EF tier. We need bonds in retirement. So I used my excess cash to buy bonds in my taxable account, to create a multi-duty extended EF tier: EFs if needed, home projects, new car, dry powder, retirement bonds if not used otherwise.



Risk of bonds. But since bonds are more risky than cash, we must make allowances for the extra risk.

During a crash:
--Stocks can lose 50-90%.
--Bonds can lose 5-15%.

So I overfill my extended-tier bonds in taxable to ~120% (=1/(1-.15)) of the anticipated need. And stopped worrying.

Worst case, I may get a tax deduction when I withdraw money.



Which bonds?

In total return investing, the major component of bond fund total return comes from dividends, not NAV appreciation. So within reason, I prefer more dividends to less---longer duration bonds---and plan to TLH (tax-loss harvest) any risk that appears.



Earn additional 2%/yr tax-free on 1st-tier EF cash. Above takes care of my excess cash, but what about the cash sitting my low-yield bank/CU accounts?

Since money is fungible, you can earn an additional ~2%/yr tax-free on the money you keep in low-interest checking, savings, mmkt,... How? Search forum for "ABP by CC technique".



Disclosure. I'm in 22% fed tax bracket, 5% state tax bracket. I prefer VWLUX (LT national muni) and third-party single-state muni funds. Why? Both provide more after-tax income than TBM (total bond market index fund).

My 1st-tier EFs earn ~2%/yr tax-free by "ABP by CC technique". I have 1yr of living expenses here, with 2mos of living expenses in checking as an ABP CYA.

My extended-tier EF bonds earn the market return. I have >3yrs of living expenses here.

I did TLH both munis in Dec 2018. Recent crisis did not present another TLH opportunity.

Real estate? As a former landlord for an absentee owner, I only saw problems, so the only way I'd touch rental property again is by REITs. But there are current/former rental property owners on the forum who can give a more positive perspective.



Enough. I now follow the advice of senior BHs who say, "When we have enough (as defined by us), then we don't need a dedicated EF, because all of our investments become our EFs."

But by structuring my investments/EFs as above, I've scratched the itch to be doing something to reach for more yield, so I do not feel like I'm leaving money on the table.



Simplicity. And since I don't feel like I'm missing out, I don't feel the need to chase bank teaser rates and account opening bonuses. This keeps my life simple because I can focus on the bank/CU products that do simplify my life.

In my case, I like accounts that are easy to live with: low hurdles, zero fees, and mailed statements and tax documents. This keeps life simple for myself, and for my heirs.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

Topic Author
van_sun_38
Posts: 69
Joined: Tue Apr 07, 2020 12:56 pm

Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Tue May 19, 2020 7:39 pm

hudson wrote:
Tue May 19, 2020 11:54 am
van_sun_38 wrote:
Tue May 19, 2020 11:36 am
Thanks, is there any disadvantage to put too much in Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares? I was thinking of putting ~100k there. Would you recommend dividing it up to other Bond account(s)?
I own VWIUX and think that it's a good fund...with high quality holdings.
It dropped pretty hard when the panic hit, but it's come back.
I won't make any recommendations except to consider reading Swedroe's bond book. and W. Bernstein's Ages of the Investor.

Swedroe recommends only AAA/AA Munis; VWIUX isn't quite there....but it's fine with me...although BMBIX fits Swedroe's AAA/AA description.
Bernstein says it's ok to own munis but you should also back them up with CDs and treasuries.

Maybe read this discussion?
viewtopic.php?f=10&t=310578#p5155705

VWIUX's distribution yield is tough to beat if munis are a good fit for you tax bracket wise.
What do you mean by "back them up with CDs and treasuries"? I have never invested in treasuries. How do you invest in those? ( newbie here :) )
Do you recommend opening multiple CDs with different banks? I am trying to keep it simple, so curious if it's worth the work of opening a lot of them..

Thank you!

hudson
Posts: 2899
Joined: Fri Apr 06, 2007 9:15 am

Re: Three years of emergency fund too much in this time?

Post by hudson » Tue May 19, 2020 8:28 pm

van_sun_38 wrote:
Tue May 19, 2020 7:39 pm
hudson wrote:
Tue May 19, 2020 11:54 am
van_sun_38 wrote:
Tue May 19, 2020 11:36 am
Thanks, is there any disadvantage to put too much in Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares? I was thinking of putting ~100k there. Would you recommend dividing it up to other Bond account(s)?
I own VWIUX and think that it's a good fund...with high quality holdings.
It dropped pretty hard when the panic hit, but it's come back.
I won't make any recommendations except to consider reading Swedroe's bond book. and W. Bernstein's Ages of the Investor.

Swedroe recommends only AAA/AA Munis; VWIUX isn't quite there....but it's fine with me...although BMBIX fits Swedroe's AAA/AA description.
Bernstein says it's ok to own munis but you should also back them up with CDs and treasuries.

Maybe read this discussion?
viewtopic.php?f=10&t=310578#p5155705

VWIUX's distribution yield is tough to beat if munis are a good fit for you tax bracket wise.
What do you mean by "back them up with CDs and treasuries"? I have never invested in treasuries. How do you invest in those? ( newbie here :) )
Do you recommend opening multiple CDs with different banks? I am trying to keep it simple, so curious if it's worth the work of opening a lot of them..

Thank you!
Back them up with CDs or treasuries: Bernstein's words....He means don't put everything in munis....also have CDs or treasuries...or the equivalent...very safe stuff. I don't own any treasuries because they aren't paying anything. I like FDIC/NCUA CDs...up to 250 K. There are ways to go over 250K in one bank or credit union. You don't have to open a lot of small CDs. Today 2% CDs were available. If you have more than 250K, check the FDIC or NCUA websites for more details or ask. Did my answer work?

The easiest way to get treasuries is through a Vanguard low expense mutual fund...or the equivalent. You can also buy them at Treasury Direct or through your broker. Again....I'm not buying any...CDs are as safe and pay more.

Consider reading the 2 books that I listed above before you make any big moves. I left a lot unsaid.

Topic Author
van_sun_38
Posts: 69
Joined: Tue Apr 07, 2020 12:56 pm

Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Wed May 20, 2020 10:25 am

hudson wrote:
Tue May 19, 2020 8:28 pm
van_sun_38 wrote:
Tue May 19, 2020 7:39 pm
hudson wrote:
Tue May 19, 2020 11:54 am
van_sun_38 wrote:
Tue May 19, 2020 11:36 am
Thanks, is there any disadvantage to put too much in Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares? I was thinking of putting ~100k there. Would you recommend dividing it up to other Bond account(s)?
I own VWIUX and think that it's a good fund...with high quality holdings.
It dropped pretty hard when the panic hit, but it's come back.
I won't make any recommendations except to consider reading Swedroe's bond book. and W. Bernstein's Ages of the Investor.

Swedroe recommends only AAA/AA Munis; VWIUX isn't quite there....but it's fine with me...although BMBIX fits Swedroe's AAA/AA description.
Bernstein says it's ok to own munis but you should also back them up with CDs and treasuries.

Maybe read this discussion?
viewtopic.php?f=10&t=310578#p5155705

VWIUX's distribution yield is tough to beat if munis are a good fit for you tax bracket wise.
What do you mean by "back them up with CDs and treasuries"? I have never invested in treasuries. How do you invest in those? ( newbie here :) )
Do you recommend opening multiple CDs with different banks? I am trying to keep it simple, so curious if it's worth the work of opening a lot of them..

Thank you!
Back them up with CDs or treasuries: Bernstein's words....He means don't put everything in munis....also have CDs or treasuries...or the equivalent...very safe stuff. I don't own any treasuries because they aren't paying anything. I like FDIC/NCUA CDs...up to 250 K. There are ways to go over 250K in one bank or credit union. You don't have to open a lot of small CDs. Today 2% CDs were available. If you have more than 250K, check the FDIC or NCUA websites for more details or ask. Did my answer work?

The easiest way to get treasuries is through a Vanguard low expense mutual fund...or the equivalent. You can also buy them at Treasury Direct or through your broker. Again....I'm not buying any...CDs are as safe and pay more.

Consider reading the 2 books that I listed above before you make any big moves. I left a lot unsaid.
Thanks! What is the exact title of Swedroe's bond book?

hudson
Posts: 2899
Joined: Fri Apr 06, 2007 9:15 am

Re: Three years of emergency fund too much in this time?

Post by hudson » Wed May 20, 2020 10:35 am


Topic Author
van_sun_38
Posts: 69
Joined: Tue Apr 07, 2020 12:56 pm

Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Wed May 20, 2020 12:45 pm

Thank you for all your recommendations. I have decided to allocate the EF as follow:
32% in high yield accounts
42% in CDs and bonds
26% investing in total market

This is to be reevaluated in 6 months.

BlackwaterPark10
Posts: 41
Joined: Mon May 13, 2019 10:43 am

Re: Three years of emergency fund too much in this time?

Post by BlackwaterPark10 » Wed May 20, 2020 1:18 pm

Really feels like posts like this are brag posts about how wealthy they are

Topic Author
van_sun_38
Posts: 69
Joined: Tue Apr 07, 2020 12:56 pm

Re: Three years of emergency fund too much in this time?

Post by van_sun_38 » Wed May 20, 2020 2:54 pm

BlackwaterPark10 wrote:
Wed May 20, 2020 1:18 pm
Really feels like posts like this are brag posts about how wealthy they are
I wish that was the case.. Reality is that we both work for hospitality/tourism related industries, so the future doesn't look too bright right now. Just trying to get some perspectives as a lot of people here have more experience in investing.

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