Are emergency funds for suckers?

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scrabbler1
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Re: Are emergency funds for suckers?

Post by scrabbler1 »

Like many people here, I have my EF-type funds in layers, or tiers. The first tier is an extra ~$700 in my local bank's checking account I often tap into when I have small, unforeseen expenses. This money is easily accessible, from ATM cash withdrawals to personal checks to simple ACH transfers. It earns no interest, but I keep the buffer to avoid paying any monthly account fees.

The next tier is ~$40k in a national muni bond fund. It earns about 2-2.5% mostly tax-free interest per year, as I hate the idea of tying up that much money in something earning zilch or nearly zilch. Also, and nearly as important, this account has checkwriting privileges so it is pretty easily and quickly accessible. I realize I may lose (or gain) money when I sell shares from the bond fund, but that's okay. I have had this fund for 26 years and average just under 1 check per year. Overall, I have made a $97 profit on sales of $87k, so I'm basically even.
Ivygirl
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Joined: Sun Apr 06, 2014 1:36 pm

Re: Are emergency funds for suckers?

Post by Ivygirl »

willthrill81 wrote: Thu Aug 20, 2020 10:51 pm
Ivygirl wrote: Thu Aug 20, 2020 8:12 pm
willthrill81 wrote: Thu Aug 20, 2020 4:06 pm
Ivygirl wrote: Thu Aug 20, 2020 1:32 pm Money in a traditional IRA is not "fungible" with money in a Roth.
A pre-tax dollar is rarely equivalent to a post-tax dollar, if that's what you're getting at. But any dollar is equivalent to any other dollar, which is what fungibility refers to. Precious stones are not fungible, by comparison.
No, the statement I disagreed with was "Money is fungible." Precious stones are not money, and thus not relevant.

If "a pre-tax dollar is rarely equivalent to a post-tax dollar," then I think you agree with me: money is not always fungible, and buckets are not mere "mental" accounting, they are actual accounting.
Money is fungible in the sense that all dollars are created equal (unlike precious stones, which was merely an illustration of something that lacks fungibility). But pre-tax money is not equivalent to post-tax money. Similarly, dollars in an HSA dollars are not equivalent to dollars in a 401k , which are not equivalent to dollars in a 457, etc.
So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
sam1838
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Joined: Fri Nov 08, 2019 11:28 am

Re: Are emergency funds for suckers?

Post by sam1838 »

I have tried a number of different strategies since I graduated from college. I finally settled on 12 months in cash in a high yield savings account; the rest is dumped into VTWAX or equivalent every month. Putting some money in bonds or a lower emergency fund requires more thought and/or unfortunately will periodically make me nervous. But with 12 months in cash, I can happily just keep dumping more money into global stocks and go on with my life no matter what the market is doing. Others can certainly follow different strategies.
Jags4186
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Re: Are emergency funds for suckers?

Post by Jags4186 »

I keep an emergency fund and I consider it part of my bond portfolio.

So, for example, if I had a $1,000,000 portfolio that I wanted 70% equities and 30% fixed income and I wanted a $50,000 emergency fund I would hold:

$700,000 equities
$250,000 bonds
$50,000 cash

If you want to get cute, you could hold slightly longer duration bonds to counterbalance the zero-term position that is cash.

If you're just starting out this isn't really feasible for example if you only have $50,000 to your name but you want a $30,000 emergency fund and desire an 80/20 AA. In that case you just add all new money to equities until you get where you need to be.
Cunobelinus
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Re: Are emergency funds for suckers?

Post by Cunobelinus »

I never really thought an emergency fund was necessary in my situation. I have a stable, well-paying job. My wife did too. I kept about $10k in a savings account as a “just in case” buffer. My job sent me overseas and I spent two months in hotels until I could get into permanent housing. Two months of hotel expenses exceeded the amount I was making every month, and my wife cannot work in this country, at least not for anything close to what she was making in the US. While the hotel expenses are reimbursable, it takes somewhere between 3-9 months to be reimbursed. I was informed about a month before I went overseas that I should routinely keep $20-30k in savings because it can take a long time to get reimbursed for moving expenses, if indeed you ever get reimbursed. I figured I would be okay.. and we got by, using some of that $10k buffer.

Then, after getting settled this new country, a non-COVID-19 medical emergency forced us to go back to the US for treatment. Three months in hotels in the US was building up a substantial balance on credit cards, again exceeding my monthly income. This is reimbursable (again somewhere around 3-9 months), but paying for housing overseas and hotels in the US was not what I was expecting. I did end up selling some individual stocks that I had purchased before embracing index funds in order to pay the full balance on my credit cards. I sold only the shares that had a loss though so that I did not incur a tax penalty though.

Even if we hadn't moved overseas, where we had been living in the US did not have the facilities to provide treatment, so I would've been paying for housing and hotels concurrently anyhow.

I have since rethought my original views on emergency funds and I will probably keep $20-$30k in cash or cash-like instruments (CDs) for ease of access. Fool me once..
patrick
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Location: Mega-City One

Re: Are emergency funds for suckers?

Post by patrick »

Ivygirl wrote: Fri Aug 21, 2020 8:13 am So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
Get two plastic buckets. Place a dollar bill in each one. Use a magic marker to write "emergency fund" on one bucket but not the other. These two dollars are still fungible even though only one of them is in the "emergency fund" bucket.

The same applies if you have two checking accounts and mentally consider only one as an "emergency fund" or if you have one checking account and mentally account for a certain amount of the money in it as the "emergency fund" portion.
Ivygirl
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Joined: Sun Apr 06, 2014 1:36 pm

Re: Are emergency funds for suckers?

Post by Ivygirl »

patrick wrote: Fri Aug 21, 2020 10:17 am
Ivygirl wrote: Fri Aug 21, 2020 8:13 am So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
Get two plastic buckets. Place a dollar bill in each one. Use a magic marker to write "emergency fund" on one bucket but not the other. These two dollars are still fungible even though only one of them is in the "emergency fund" bucket.

The same applies if you have two checking accounts and mentally consider only one as an "emergency fund" or if you have one checking account and mentally account for a certain amount of the money in it as the "emergency fund" portion.
Two dollar bills in two plastic buckets are indeed fungible. They are alike, and totally movable. But I'm not sure why you would want to put dollar bills in buckets.

A dollar in one checking account, and a dollar in a different checking account, are alike, movable, fungible, so long as neither account has restrictions that would complicate things.

What about the list I provided above, of instances when $1 is either more or less than $1? It would be a behavioral error to treat $1 in home equity the same as $1 in your wallet. The $1 in home equity is in the bucket labeled "can be tapped with a loan if I don't mind the chance of losing my house, or can be available when I sell." The other $1 can buy you a pack of gum right now.

I'm not sure why "mental accounting" seems to draw ire. I would hope we are all mentally accounting for all our dollars, and know what the purpose is for each of them.
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abuss368
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Re: Are emergency funds for suckers?

Post by abuss368 »

There is an old saying, and for good reason, that “cash is king”.

I would hold as much cash as needed or wanted. If you sleep well at night, you have the right balance for you.
John C. Bogle: “Simplicity is the master key to financial success."
jmw
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Re: Are emergency funds for suckers?

Post by jmw »

My whole portfolio except my in-service 401k and pension is the emergency fund. Although in-service loans can be taken out of the 401k, that results in a cashflow issue with loan payments so I don't count it.

I don't count HELOC and credit cards as a reliable source of funds. Both can be cut at any time unilaterally by the lender.
shess
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Re: Are emergency funds for suckers?

Post by shess »

Ivygirl wrote: Fri Aug 21, 2020 8:13 am
willthrill81 wrote: Thu Aug 20, 2020 10:51 pm
Ivygirl wrote: Thu Aug 20, 2020 8:12 pm
willthrill81 wrote: Thu Aug 20, 2020 4:06 pm
Ivygirl wrote: Thu Aug 20, 2020 1:32 pm Money in a traditional IRA is not "fungible" with money in a Roth.
A pre-tax dollar is rarely equivalent to a post-tax dollar, if that's what you're getting at. But any dollar is equivalent to any other dollar, which is what fungibility refers to. Precious stones are not fungible, by comparison.
No, the statement I disagreed with was "Money is fungible." Precious stones are not money, and thus not relevant.

If "a pre-tax dollar is rarely equivalent to a post-tax dollar," then I think you agree with me: money is not always fungible, and buckets are not mere "mental" accounting, they are actual accounting.
Money is fungible in the sense that all dollars are created equal (unlike precious stones, which was merely an illustration of something that lacks fungibility). But pre-tax money is not equivalent to post-tax money. Similarly, dollars in an HSA dollars are not equivalent to dollars in a 401k , which are not equivalent to dollars in a 457, etc.
So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
If your car breaks down, and you need $500 to fix it, you can use $500 from your wallet, or you can charge $500 on your credit card, or you can take a $500 payday loan, or you can withdraw $500 from your 401k, or you can draw $500 on your home-equity loan, or you can withdraw $500 from your Roth. You can't pay with $500 from 1980 or $500 from 2035. The fact that the long-term cost of each result isn't the same doesn't mean that the money spent is not money.
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SmileyFace
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Re: Are emergency funds for suckers?

Post by SmileyFace »

There are two reasons that always come up for Emergency Funds:
1) Unforseen expenses
2) Expenses that need coverage in the case of unexpected Job loss.

As an example of #1 - if I am a homeowner and need a new roof - new roof costs me $10,000. Can I cover this without doing something stupid? (e.g. pulling cash out on a credit card or pulling money out of a retirement account). I would argue you are a 'sucker' if you aren't prepared for such financial emergencies. Some folks have paid many thousands in credit-card charges over the years because they weren't prepared (or live with a leaking roof, etc.).
As an example of #2 - stock market crashes and I lose my job. Can I pay my mortgage and feed my kids without doing something stupid? (Cashing out all my equity at market low; or robbing tax-deferred retirement accounts). I would argue that you are a 'sucker' if you aren't prepared for such a circumstance. Some folks have had foreclosures on their homes because they weren't prepared.

(DISCLOSURE: I didn't read any of the blog posts in the Original Post - but I've read all the arguments before and I can pretty much guarantee the types of things these blogs say and can pretty much guarantee none of the blogs will convince me against having emergency funds).
wfrobinette
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Re: Are emergency funds for suckers?

Post by wfrobinette »

Shorty wrote: Thu Aug 20, 2020 9:37 am In my case, I have a solid job.
Said almost everyone before the pandemic started. There is no such thing as a 100% solid job.
Blue456
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Re: Are emergency funds for suckers?

Post by Blue456 »

Shorty wrote: Thu Aug 20, 2020 9:37 am I believe an adequate emergency fund is a necessary milestone for most Americans who live paycheck to paycheck or are in an immature financial position.

However, for Bogleheads and those with assets and discipline is an e-fund a wasted effort? In my case, I have a solid job. My "lean" proposal would be 1-2 months expense, which covers bank autopays (mortgage, HOA, utilities) and credit card full monthly autopays (maximize spend through CC). The rationale is that credit cards can cover emergencies, taxable investment >> emergency fund requirements (although tax implication to withdraw, which is a low likely event). We make a good amount more than we spend, so things like auto or household repair easily "catch up" with the credit card cycle in the next paycheck period or two and we're good about tracking predicted large expenses. I'm basically proposing the use of my active checking account as a "buffer", which I do anyways, without a separate e-fund. More safety margin would translate to a larger buffer (e.g. 3 months instead of 1-2).

Thoughts on these?
Our emergency fund is exactly $0.00
Top 10 reasons for having an emergency fund – debunked (Part 1)
Top 10 reasons for having an emergency fund – debunked (Part 2)

Frugal Professor seems to agree.

In my particular case, DW likes to keep a lot of cash available for her comfort. It drives me less crazy than usual with such low interest rates. I'd love to have it "ready" for a buying opportunity, but that's not an option (we watched the market recently fall and recover with this money). However, I'm tempted to transfer ~$100k to my home loan at 2.75%, since it would otherwise sit for several years. Or I could play games with shifting new account welcome bonuses. This is the "compromise" of very different risk/investment styles. If it were entirely me, I'd carry max loan at 2.75% and invest (leverage without margin), but that's not an option. Our most probable "emergency" situation is wanting to move quickly (career change) and losing money getting out of the property (we decided to buy expensive at the beginning of COVID...yeah, I know...). Either way, I'll rebuild cash savings for the transaction (e.g. repairs, painting, etc) prior to selling. All other likely "emergency" scenarios are covered by our stable jobs and upcoming pensions, plus we have assets and are both very employable. No kids. Own everything. Disciplined with our budget. Supportive families. Life insurance. It's hard to imaging a de-railing emergency event short of a combination of simultaneous contrived events (auto accident, medical problems, get sued, robbed and identity stolen, stock and housing market crashes). In that case, I'm not sure how much help an e-fund would be.
1. What makes you think that you can’t loose your job?
2. What will you do when you do both loose your jobs while US stock market is on 90% fire sale?
phxjcc
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Re: Are emergency funds for suckers?

Post by phxjcc »

livesoft wrote: Thu Aug 20, 2020 9:43 am Money is money. Money is fungible. If you can pay for an emergency without having an emergency fund, then that means you have money that is not in an emergency fund. That's all there is to it. One doesn't need 3 to 20 blog articles to tell you that.
Labels.

It used to be called “savings”, or a “rainy day fund”, or ...

If you have cash, you have an “emergency fund”
jmw
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Re: Are emergency funds for suckers?

Post by jmw »

Solid job LOL. Many workers think they're irreplaceable unicorns but don't realize they are actually easily replaced. Sometimes by foreign workers to save the employer money.

Many doctors thought they had the immunity idol and then the pandemic hit. You'd think doctors would be making money hand over fist during a long term global medical emergency but that turned out to be very wrong. There are many, many doctors right now hurting for money. Same for registered nurses and IT workers. They think their jobs are solid or they're fed the lie that there is a nursing/IT worker shortage when it's not true at all.
Ivygirl
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Joined: Sun Apr 06, 2014 1:36 pm

Re: Are emergency funds for suckers?

Post by Ivygirl »

shess wrote: Fri Aug 21, 2020 12:44 pm
Ivygirl wrote: Fri Aug 21, 2020 8:13 am
willthrill81 wrote: Thu Aug 20, 2020 10:51 pm
Ivygirl wrote: Thu Aug 20, 2020 8:12 pm
willthrill81 wrote: Thu Aug 20, 2020 4:06 pm

A pre-tax dollar is rarely equivalent to a post-tax dollar, if that's what you're getting at. But any dollar is equivalent to any other dollar, which is what fungibility refers to. Precious stones are not fungible, by comparison.
No, the statement I disagreed with was "Money is fungible." Precious stones are not money, and thus not relevant.

If "a pre-tax dollar is rarely equivalent to a post-tax dollar," then I think you agree with me: money is not always fungible, and buckets are not mere "mental" accounting, they are actual accounting.
Money is fungible in the sense that all dollars are created equal (unlike precious stones, which was merely an illustration of something that lacks fungibility). But pre-tax money is not equivalent to post-tax money. Similarly, dollars in an HSA dollars are not equivalent to dollars in a 401k , which are not equivalent to dollars in a 457, etc.
So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
If your car breaks down, and you need $500 to fix it, you can use $500 from your wallet, or you can charge $500 on your credit card, or you can take a $500 payday loan, or you can withdraw $500 from your 401k, or you can draw $500 on your home-equity loan, or you can withdraw $500 from your Roth. You can't pay with $500 from 1980 or $500 from 2035. The fact that the long-term cost of each result isn't the same doesn't mean that the money spent is not money.
I agree - if your car breaks down and you need $500 to fix it - that money can come from a variety of places, and it is all nominally "$500." That doesn't mean it was a $500 consequence, equally, to you in your personal finances.

$500 from wallet is $500
$500 on credit card - you paid more than $500, and possibly set yourself up for a debt problem later
$500 payday loan - danger Will Robinson
$500 from home equity loan - you paid more than $500, but maybe it was the best choice available
$500 from 401k - goodbye future compounding on that $500 and hello penalty, you paid more than nominal amount
$500 from Roth - well it's your money. Too bad it didn't stay in until you were 70, but OK
Use duct tape and baling wire to make your car run one more year, pay for the repair with a slightly inflated dollar, just at a guess you paid $490

So the money can move around, change locations, trade places with other dollars in another place, it is all the US dollar - but while it is moving around it can lose value to you if you don't do it right. It can also lose value over time, due to inflation. I will need more money to buy my retirement in 2035 than I would need to buy it right now.

I would say you are anchored to the idea that it is "always" $500, when it really isn't.
patrick
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Re: Are emergency funds for suckers?

Post by patrick »

Ivygirl wrote: Fri Aug 21, 2020 11:25 amTwo dollar bills in two plastic buckets are indeed fungible. They are alike, and totally movable. But I'm not sure why you would want to put dollar bills in buckets.

A dollar in one checking account, and a dollar in a different checking account, are alike, movable, fungible, so long as neither account has restrictions that would complicate things.
Some talk of strategies using "buckets" for "emergency" funds. They do not physically place dollar bills in labeled plastic buckets, but placing the money in different accounts (or thinking of some money in one account as different from the rest) is the same in principle. Either way you treat some of your dollars differently than others just because of the "emergency" label.
What about the list I provided above, of instances when $1 is either more or less than $1? It would be a behavioral error to treat $1 in home equity the same as $1 in your wallet. The $1 in home equity is in the bucket labeled "can be tapped with a loan if I don't mind the chance of losing my house, or can be available when I sell." The other $1 can buy you a pack of gum right now.

I'm not sure why "mental accounting" seems to draw ire. I would hope we are all mentally accounting for all our dollars, and know what the purpose is for each of them.
There is certainly a difference between a dollar bill and dollar of home equity. "Mental accounting" as criticized refers to treating some of your money differently because of a mental label that is separate from actual accounting (this also includes treating money received as an inheritance differently).
lstone19
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Re: Are emergency funds for suckers?

Post by lstone19 »

To me, the idea of what an emergency fund is has evolved as I've become older. It also can depend on your financial discipline. Some people lack the discipline to consider part of their everyday savings to be an EF and need it in a separate account.

Now that my wife and I are north 59.5, we consider all our retirement funds to be our EF as it is our intent to draw it down as needed. For tax reasons, it now makes sense to have as little as possible in taxable accounts so funds will be retained in retirement accounts until needed. I do have an amount that I believe we can safely withdraw each month so rather than taking that amount each month, I track a balance on paper that is the surplus (or shortage) of that monthly withdrawal amount.

Part of this is having a plan of how to get the funds we need should it be needed.While it would take a few days to actually be able to convert a large sum to currency (should that actually be needed) or in a checking account, there are plenty of stopgaps to get us through those few days. Credit cards, which we pay off monthly, will get us through 30 to 60 days. We also have a target for taxable income for the year and where we are in the year and the amount needed will determine do we take from traditional or Roth. Although we hold mostly equities in Roth with almost all fixed income in traditional, if we need to take from Roth, it's easy to "reverse convert" equities back to traditional by selling $x of equities in the Roth to get cash to withdraw while on the same day exchanging $x of a bond fund into equities in the traditional.
H-Town
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Re: Are emergency funds for suckers?

Post by H-Town »

Ivygirl wrote: Fri Aug 21, 2020 2:34 pm
shess wrote: Fri Aug 21, 2020 12:44 pm
Ivygirl wrote: Fri Aug 21, 2020 8:13 am
willthrill81 wrote: Thu Aug 20, 2020 10:51 pm
Ivygirl wrote: Thu Aug 20, 2020 8:12 pm
No, the statement I disagreed with was "Money is fungible." Precious stones are not money, and thus not relevant.

If "a pre-tax dollar is rarely equivalent to a post-tax dollar," then I think you agree with me: money is not always fungible, and buckets are not mere "mental" accounting, they are actual accounting.
Money is fungible in the sense that all dollars are created equal (unlike precious stones, which was merely an illustration of something that lacks fungibility). But pre-tax money is not equivalent to post-tax money. Similarly, dollars in an HSA dollars are not equivalent to dollars in a 401k , which are not equivalent to dollars in a 457, etc.
So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
If your car breaks down, and you need $500 to fix it, you can use $500 from your wallet, or you can charge $500 on your credit card, or you can take a $500 payday loan, or you can withdraw $500 from your 401k, or you can draw $500 on your home-equity loan, or you can withdraw $500 from your Roth. You can't pay with $500 from 1980 or $500 from 2035. The fact that the long-term cost of each result isn't the same doesn't mean that the money spent is not money.
I agree - if your car breaks down and you need $500 to fix it - that money can come from a variety of places, and it is all nominally "$500." That doesn't mean it was a $500 consequence, equally, to you in your personal finances.

$500 from wallet is $500
$500 on credit card - you paid more than $500, and possibly set yourself up for a debt problem later
$500 payday loan - danger Will Robinson
$500 from home equity loan - you paid more than $500, but maybe it was the best choice available
$500 from 401k - goodbye future compounding on that $500 and hello penalty, you paid more than nominal amount
$500 from Roth - well it's your money. Too bad it didn't stay in until you were 70, but OK
Use duct tape and baling wire to make your car run one more year, pay for the repair with a slightly inflated dollar, just at a guess you paid $490

So the money can move around, change locations, trade places with other dollars in another place, it is all the US dollar - but while it is moving around it can lose value to you if you don't do it right. It can also lose value over time, due to inflation. I will need more money to buy my retirement in 2035 than I would need to buy it right now.

I would say you are anchored to the idea that it is "always" $500, when it really isn't.
I see your point of view and understand where you're coming from.

But note that it takes more than $500 pre-tax income to produce $500 in Roth, but it takes exactly $500 pre-tax income to produce $500 in traditional 401k. In reality, you don't compare $500 in Roth vs. $500 in 401k. You start with your gross income and then you allocate the saving to your accounts accordingly. Discussion about tax deferred, taxable, and tax free accounts is for tax planning purpose. Although minimizing taxes is important, I don't think it's relevant to our discussion on money being fungible.

It still remains the fact that money is fungible. When it's time to pay your $500 bill, it doesn't matter where the money come from. It matters if you have it or not.
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Re: Are emergency funds for suckers?

Post by patrick »

DaftInvestor wrote: Fri Aug 21, 2020 1:00 pm There are two reasons that always come up for Emergency Funds:
1) Unforseen expenses
2) Expenses that need coverage in the case of unexpected Job loss.
Both of these happened to me less than a week apart. I had no need of a traditional emergency fund.
As an example of #1 - if I am a homeowner and need a new roof - new roof costs me $10,000. Can I cover this without doing something stupid? (e.g. pulling cash out on a credit card or pulling money out of a retirement account). I would argue you are a 'sucker' if you aren't prepared for such financial emergencies. Some folks have paid many thousands in credit-card charges over the years because they weren't prepared (or live with a leaking roof, etc.).
There is no finance charge on a credit card if you pay in full by the due date, at least 20 days after making the charge. You don't need an emergency fund to cover that, unless anything that can be cashed in within 20 days constitutes an emergency fund.

Most do not save enough to max all retirement accounts and build non-retirement emergency savings at the same time. Cutting retirement contributions to fill emergency funds leaves you with less money in retirement, just as if you put in money in retirement and then pull it out.
As an example of #2 - stock market crashes and I lose my job. Can I pay my mortgage and feed my kids without doing something stupid? (Cashing out all my equity at market low; or robbing tax-deferred retirement accounts). I would argue that you are a 'sucker' if you aren't prepared for such a circumstance. Some folks have had foreclosures on their homes because they weren't prepared.
If you have no emergency fund an an investment portfolio of $100000 fixed income and $300000 equities, you have the same risk exposure as someone with a $100000 cash emergency fund and a $300000 all-equity investment portfolio. Whether you call things an "emergency fund" makes no difference to whether you would need to sell after a market crash.
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Re: Are emergency funds for suckers?

Post by H-Town »

Ivygirl wrote: Fri Aug 21, 2020 2:34 pm
@Ivygirl:

Let me give you a real life example. I have 80k cash in saving accounts. When I had to replace the A/C which cost $10k, I didn't have to touch the cash reserve. I took the offer of no interest 24 month financing. I used monthly cash surplus to pay it off in 2 months. Another time when stocks declined 40% back in March, I put the full 80k to VTI. Since then I've replenished the cash balance to 50k.

What happened if I lost my job during market downturn? My plan is to sell stocks in tax brokerage account (as part of TLH), move bonds into stocks in my 401k, and use the cash to pay for my expenses. Again, the cash reserve would serve as an opportunity to buy stock in taxable accounts at lower cost basis. I don't even plan to use cash reserve to pay for monthly expenses. This further demonstrates that money is fungible.

I don't see it's beneficial to have an emergency fund and keep it untouched for many many years. You would lose the battle against inflation for your emergency fund.

There is always exception to the rule. When young professional started out, they should save 3-6 months expenses in cash reserve before being serious with taxable investing. At that young age, they may need cash more than other people in their 30's and older.
Last edited by H-Town on Fri Aug 21, 2020 3:17 pm, edited 1 time in total.
stoptothink
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Re: Are emergency funds for suckers?

Post by stoptothink »

wfrobinette wrote: Fri Aug 21, 2020 1:30 pm
Shorty wrote: Thu Aug 20, 2020 9:37 am In my case, I have a solid job.
Said almost everyone before the pandemic started. There is no such thing as a 100% solid job.
There is no such thing as a 100% solid anything. I happen to be in an industry that greatly benefits from health pandemics. My company can't hire enough people right now. While there is always a chance, if I lose my job due to something other than me making a catastrophic mistake which warrants firing, it's very likely that I (and the rest of the world) have a lot more to worry about than money. My wife is in an industry that doesn't benefit, but is in no way effected by health pandemics. Half of either of our incomes (not to mention multiple 6-figures in other very accessible funds) could quite easily support our standard of living, which makes us quite comfortable not having an EF in the traditional sense (we generally have a few $K sitting at ALLY).
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Re: Are emergency funds for suckers?

Post by patrick »

Ivygirl wrote: Fri Aug 21, 2020 2:34 pm I agree - if your car breaks down and you need $500 to fix it - that money can come from a variety of places, and it is all nominally "$500." That doesn't mean it was a $500 consequence, equally, to you in your personal finances.

$500 from wallet is $500
$500 on credit card - you paid more than $500, and possibly set yourself up for a debt problem later
There is no extra consequence to you if you pay the credit card statement in full before the due date. If you are unable, the problem is a lack of assets in general, not specifically lacking an emergency fund.
$500 from Roth - well it's your money. Too bad it didn't stay in until you were 70, but OK
If you have money outside retirement accounts, it is better to spend that money first. But if you save less than the retirement maximum (as most people do) then you have to forgo retirement savings to build non-retirement savings. In that case, the money still isn't going to stay in the retirement account since it never got there in the first place!
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Re: Are emergency funds for suckers?

Post by azianbob »

EF is only necessary until your net worth (especially in taxable accounts) hits a certain point.

Like lets say that you have 200k in taxable investments. At that point, you probably only need 5-10k at most in your checking, and that's just to make sure you have enough to pay bills and do day to day stuff and maybe a big purchase here or there without having to transfer money (ease of life). The amount of extra gain on 5k vs the hassle of having to sell stock and transfer money is probably not worth the hassle of keeping your checking account at $0 to maximize investments. Even worst case if you lose your job and stock market drops 50%, you still have 100k left, which is plenty to get you through at least a year of expenses I am guessing.

EF is more important when your non-retirement assets are low, you want to avoid having to go into credit card debt or penalties on 401k withdrawals if some big payment or emergency arises. After that, 99% of the people on this forum probably don't need to hold cash for a years worth of expenses. Like someone mentioned, you'd get much more returns being 100% invested in the market.

However you do have to consider the mental side of it. If your wife will be constantly under stress if you have no cash, and then it will rub off on your relationship, is getting an extra gain on that 50k or 100k really worth having a bad relationship and stress over? I think you should just keep the cash where it is and keep your wife happy. A happy wife will live up to her "sucker" moniker you gave her, which in turn makes you the winner right?
eco_eco
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Re: Are emergency funds for suckers?

Post by eco_eco »

nisiprius wrote: Thu Aug 20, 2020 12:53 pm
In my particular case, DW likes to keep a lot of cash available for her comfort.
Keep your wife comfortable. That what money is for.

Oh, and don't forget: Why women are better at investing
This.

There are two of you involved and (in my opinion) people should invest with the risk profile of the most risk averse person involved. There is very little downside really - your wife is happier and your money is safer, and all you are giving up is probably a small amount of actual cash returns.

What about setting up a term deposit / money market account in your wife’s name and having statements sent to her. That way you could think of it as money spent and gone and she can have the satisfaction of knowing it’s there if she needs it?
Ivygirl
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Re: Are emergency funds for suckers?

Post by Ivygirl »

patrick wrote: Fri Aug 21, 2020 3:18 pm
Ivygirl wrote: Fri Aug 21, 2020 2:34 pm I agree - if your car breaks down and you need $500 to fix it - that money can come from a variety of places, and it is all nominally "$500." That doesn't mean it was a $500 consequence, equally, to you in your personal finances.

$500 from wallet is $500
$500 on credit card - you paid more than $500, and possibly set yourself up for a debt problem later
There is no extra consequence to you if you pay the credit card statement in full before the due date. If you are unable, the problem is a lack of assets in general, not specifically lacking an emergency fund.
$500 from Roth - well it's your money. Too bad it didn't stay in until you were 70, but OK
If you have money outside retirement accounts, it is better to spend that money first. But if you save less than the retirement maximum (as most people do) then you have to forgo retirement savings to build non-retirement savings. In that case, the money still isn't going to stay in the retirement account since it never got there in the first place!
I think we are not wrangling over the word, "fungible," so much as talking past each other because of different experience with money. The lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.

It's really, really important that a person with a modest level of wealth does not make a mistake and allow his or her dollar to become less than a dollar. As a person goes up in wealth, choices like where $500 comes from become less and less important, because there is just more of it, in more places, providing more choices. And maybe money does become more fungible. So we could both be right.
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PicassoSparks
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Re: Are emergency funds for suckers?

Post by PicassoSparks »

Ivygirl wrote: Fri Aug 21, 2020 8:13 am So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
This is a good post.
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Re: Are emergency funds for suckers?

Post by patrick »

Ivygirl wrote: Fri Aug 21, 2020 3:52 pm I think we are not wrangling over the word, "fungible," so much as talking past each other because of different experience with money. The lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.

It's really, really important that a person with a modest level of wealth does not make a mistake and allow his or her dollar to become less than a dollar. As a person goes up in wealth, choices like where $500 comes from become less and less important, because there is just more of it, in more places, providing more choices. And maybe money does become more fungible. So we could both be right.
I tried to mention different situations at different wealth levels, but perhaps I was unclear. Regarding credit cards versus an emergency fund:

Very modest wealth: no choice. If your cash and easily sold assets are worth less than $500, you don't have a $500 emergency fund and cannot readily build one. Either you borrow the money or you don't get the $500.

At least $500: you have a choice, but choosing the credit card is not a mistake. You can use $500 from your assets to pay off the credit card before the statement due date, and then you won't have to pay any interest at all.

For the retirement account, a person with very high wealth has less choice in some ways:

Saving more than the retirement account limit: your options are limited. You can't put 100% of savings in retirement. You must put something in non-retirement savings, and using the non-retirement savings first is indeed the best choice for your expenses.

Saving less than that limit: your options are wide open. You can put anywhere from 0% to 100% of your savings into retirement. Traditional emergency fund advice tells you to keep a lot outside retirement accounts. Using retirement accounts for expenses is often criticized because you would end up with less money for retirement. However, for those who have a choice here, the alternative to using the retirement account for emergencies is to put less money into retirement to begin with.
teamDE
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Re: Are emergency funds for suckers?

Post by teamDE »

Shorty wrote: Thu Aug 20, 2020 9:56 am Cool, thanks. I get that. Point taken about "buffer" versus "e-fund" - no difference. Contrived example on the fungible side regarding liquidity.

Suppose I have the following:
1. Cash account with 2 years expenses.
2. Taxable account holding ~10 years expenses worth of TSLA stock with very little basis purchased 4 months ago.
3. $1M home loan @ 5%
A non-sucker would be refinancing that mortgage ASAP.
Bama12
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Re: Are emergency funds for suckers?

Post by Bama12 »

Sucker or not...

I keep 10k in savings at local credit union, this money is for things happen.

I keep 13 weeks of my income at Vanguard in money market, this money is for job lose.

I may never need either one of them but it helps me sleep at night.
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SmileyFace
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Re: Are emergency funds for suckers?

Post by SmileyFace »

PicassoSparks wrote: Fri Aug 21, 2020 4:07 pm
Ivygirl wrote: Fri Aug 21, 2020 8:13 am So to sum up, we have:

$1 in your wallet = $1
$1 in credit card debt = worse than $1
$1 in payday loan debt = magnitudes worse than $1
$1 in 401(k) money = less than $1 at time of withdrawal, probably more than $1 due to compounding if left alone
$1 in home equity = really hard to get a handle on, until you sell, could go up or down for reasons outside your control
$1 in a Roth = more than a dollar
$1 in a Health Savings Account = more than more than a dollar
$1 in 1980 = much more than $1 in 2020
$1 in 2035 = much less than $1 in 2020

So in what sense is money - at the personal finance level anyway, where it matters to us as people - actually fungible? Folks here create elaborate Excel sheets to try to capture the value of all their dollars. Why is it so hard? I mean if all dollars are created equal.

No, I don't believe that money is fungible. Buckets (for example an emergency fund) exist for a reason, and no we are not suckers for having them.
This is a good post.
+1 - good post. Point I was trying to make when someone responded "just use a credit card"
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Re: Are emergency funds for suckers?

Post by willthrill81 »

Ivygirl wrote: Fri Aug 21, 2020 3:52 pmThe lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.
The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
“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
Ivygirl
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Re: Are emergency funds for suckers?

Post by Ivygirl »

willthrill81 wrote: Sat Aug 22, 2020 2:30 pm
Ivygirl wrote: Fri Aug 21, 2020 3:52 pmThe lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.
The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
You can do that. Except sometimes a dollar in your investment portfolio is less than a dollar. Like it was last March.

Emergency funds are insurance that keep you from having to bother your investment dollars while they are making money for you. Why distract them from their job to pay your bills for you?

A big problem in personal finance is what the YNAB people call "double-counting your dollars." It's what a hopeful naive person does when they put an expense on a credit card and optimistically think "I can pay that off before the due date." On average, each household with a credit card carries $6,124 to $8,393 in debt (a range of figures I found from doing a search). Maybe you carry $0, that's great, I carry $0 as well. But all those people would be so much better off not to imagine their one pot of money is enough to cover half a dozen overlapping eventualities. The situation got too complex for them to manage, they double-counted some dollars, and their debt grew.

An emergency fund will keep you from double-counting your investment dollars as emergency dollars or as big-purchase dollars.
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willthrill81
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Re: Are emergency funds for suckers?

Post by willthrill81 »

Ivygirl wrote: Sat Aug 22, 2020 9:07 pm
willthrill81 wrote: Sat Aug 22, 2020 2:30 pm
Ivygirl wrote: Fri Aug 21, 2020 3:52 pmThe lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.
The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
You can do that. Except sometimes a dollar in your investment portfolio is less than a dollar. Like it was last March.
Sometimes your portfolio goes down in value, but over the long-term, it should perform better than a savings account. A cash allocation is not inherently superior for retirees than a bond allocation, for instance.

I suspect that you're a big proponent of the bucket strategy for retirees.
“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
Ivygirl
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Re: Are emergency funds for suckers?

Post by Ivygirl »

willthrill81 wrote: Sat Aug 22, 2020 9:14 pm
Ivygirl wrote: Sat Aug 22, 2020 9:07 pm
willthrill81 wrote: Sat Aug 22, 2020 2:30 pm
Ivygirl wrote: Fri Aug 21, 2020 3:52 pmThe lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.
The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
You can do that. Except sometimes a dollar in your investment portfolio is less than a dollar. Like it was last March.
Sometimes your portfolio goes down in value, but over the long-term, it should perform better than a savings account. A cash allocation is not inherently superior for retirees than a bond allocation, for instance.

I suspect that you're a big proponent of the bucket strategy for retirees.
Well I'm not your personal scold or anything. Yes I think "buckets" are better for most people, psychologically. Including me. And maybe you. :wink:

To your point about retirees: I read that many retirees overspend in the first few years of their retirement. They indulge in travel, or helping the grandkids, or starting a vanity business they always wanted to try like a coffee shop or a dog biscuit bakery - decisions they might have thought about more carefully if they had not retired and suddenly had available what looks like a massive pot of money. The big pot is not divided up into what they are going to need, and what they can spend on their wants, and it all looks just too available. Then later they have to move into subsidized housing and cut back on visiting the grandkids.

A good argument for buckets for retirees, yes?
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willthrill81
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Re: Are emergency funds for suckers?

Post by willthrill81 »

Ivygirl wrote: Sat Aug 22, 2020 9:25 pm
willthrill81 wrote: Sat Aug 22, 2020 9:14 pm
Ivygirl wrote: Sat Aug 22, 2020 9:07 pm
willthrill81 wrote: Sat Aug 22, 2020 2:30 pm
Ivygirl wrote: Fri Aug 21, 2020 3:52 pmThe lists I have been making, when a dollar can be more or less than a dollar, are really choices. When you need $500 right now, what do you do? The emergency fund of cash is the optimal decision.
The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
You can do that. Except sometimes a dollar in your investment portfolio is less than a dollar. Like it was last March.
Sometimes your portfolio goes down in value, but over the long-term, it should perform better than a savings account. A cash allocation is not inherently superior for retirees than a bond allocation, for instance.

I suspect that you're a big proponent of the bucket strategy for retirees.
Well I'm not your personal scold or anything. Yes I think "buckets" are better for most people, psychologically. Including me. And maybe you. :wink:

To your point about retirees: I read that many retirees overspend in the first few years of their retirement. They indulge in travel, or helping the grandkids, or starting a vanity business they always wanted to try like a coffee shop or a dog biscuit bakery - decisions they might have thought about more carefully if they had not retired and suddenly had available what looks like a massive pot of money. The big pot is not divided up into what they are going to need, and what they can spend on their wants, and it all looks just too available. Then later they have to move into subsidized housing and cut back on visiting the grandkids.

A good argument for buckets for retirees, yes?
What you're describing is overspending, a problem that buckets cannot solve per se. The solution is to not withdraw too much.
“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: Are emergency funds for suckers?

Post by teddytimtam »

Shorty wrote: Thu Aug 20, 2020 9:37 am
However, I'm tempted to transfer ~$100k to my home loan at 2.75%, since it would otherwise sit for several years. Or I could play games with shifting new account welcome bonuses.
Ask this question in reverse. If your home had the additional $100k equity, would you borrow $100k today against your home at 2.75% to play games with new accounts welcome bonuses, invest in stock market, etc. Or would you not even consider this?
RomeoMustDie
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Re: Are emergency funds for suckers?

Post by RomeoMustDie »

Shorty wrote: Thu Aug 20, 2020 9:37 am I believe an adequate emergency fund is a necessary milestone for most Americans who live paycheck to paycheck or are in an immature financial position.

However, for Bogleheads and those with assets and discipline is an e-fund a wasted effort? In my case, I have a solid job. My "lean" proposal would be 1-2 months expense, which covers bank autopays (mortgage, HOA, utilities) and credit card full monthly autopays (maximize spend through CC). The rationale is that credit cards can cover emergencies, taxable investment >> emergency fund requirements (although tax implication to withdraw, which is a low likely event). We make a good amount more than we spend, so things like auto or household repair easily "catch up" with the credit card cycle in the next paycheck period or two and we're good about tracking predicted large expenses. I'm basically proposing the use of my active checking account as a "buffer", which I do anyways, without a separate e-fund. More safety margin would translate to a larger buffer (e.g. 3 months instead of 1-2).

Thoughts on these?
Our emergency fund is exactly $0.00
Top 10 reasons for having an emergency fund – debunked (Part 1)
Top 10 reasons for having an emergency fund – debunked (Part 2)

Frugal Professor seems to agree.

In my particular case, DW likes to keep a lot of cash available for her comfort. It drives me less crazy than usual with such low interest rates. I'd love to have it "ready" for a buying opportunity, but that's not an option (we watched the market recently fall and recover with this money). However, I'm tempted to transfer ~$100k to my home loan at 2.75%, since it would otherwise sit for several years. Or I could play games with shifting new account welcome bonuses. This is the "compromise" of very different risk/investment styles. If it were entirely me, I'd carry max loan at 2.75% and invest (leverage without margin), but that's not an option. Our most probable "emergency" situation is wanting to move quickly (career change) and losing money getting out of the property (we decided to buy expensive at the beginning of COVID...yeah, I know...). Either way, I'll rebuild cash savings for the transaction (e.g. repairs, painting, etc) prior to selling. All other likely "emergency" scenarios are covered by our stable jobs and upcoming pensions, plus we have assets and are both very employable. No kids. Own everything. Disciplined with our budget. Supportive families. Life insurance. It's hard to imaging a de-railing emergency event short of a combination of simultaneous contrived events (auto accident, medical problems, get sued, robbed and identity stolen, stock and housing market crashes). In that case, I'm not sure how much help an e-fund would be.
The have your cake and eating it too answer is to use ibkr or m1 and take advantage of margin loans.
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Re: Are emergency funds for suckers?

Post by Ivygirl »

willthrill81 wrote: Sat Aug 22, 2020 10:07 pm
Ivygirl wrote: Sat Aug 22, 2020 9:25 pm
willthrill81 wrote: Sat Aug 22, 2020 9:14 pm
Ivygirl wrote: Sat Aug 22, 2020 9:07 pm
willthrill81 wrote: Sat Aug 22, 2020 2:30 pm

The last statement is demonstrably false in many situations. For instance, retirees don't need an emergency fund separate from their investment portfolio. When they need cash, they just withdraw it from their investment portfolio.
You can do that. Except sometimes a dollar in your investment portfolio is less than a dollar. Like it was last March.
Sometimes your portfolio goes down in value, but over the long-term, it should perform better than a savings account. A cash allocation is not inherently superior for retirees than a bond allocation, for instance.

I suspect that you're a big proponent of the bucket strategy for retirees.
Well I'm not your personal scold or anything. Yes I think "buckets" are better for most people, psychologically. Including me. And maybe you. :wink:

To your point about retirees: I read that many retirees overspend in the first few years of their retirement. They indulge in travel, or helping the grandkids, or starting a vanity business they always wanted to try like a coffee shop or a dog biscuit bakery - decisions they might have thought about more carefully if they had not retired and suddenly had available what looks like a massive pot of money. The big pot is not divided up into what they are going to need, and what they can spend on their wants, and it all looks just too available. Then later they have to move into subsidized housing and cut back on visiting the grandkids.

A good argument for buckets for retirees, yes?
What you're describing is overspending, a problem that buckets cannot solve per se. The solution is to not withdraw too much.
But I think you are mistaken, buckets can solve overspending, when such overspending is caused by double-counting the commitments your one pot of money must fulfill.

Limiting the withdrawal is a tactic of "artificial scarcity," where you choose a means and then make yourself live within it. And it can work. But I think buckets are better because sometimes a problem needs to be thought about in its parts, and not only in its whole. The parts are the various things your money needs to do for you, and the whole is your own best life you want to live.

I choose to preferentially fund my Health Savings Account before anything else. The two big expenses every retiree will have, the two biggest parts of the problem to solve, are housing and health care. My house will be paid off (that solves housing mostly) and my HSA balance will tell me how much of the health care problem I have solved. Once the two big things are solved then I can better judge whether that dog biscuit bakery or trip to China is within prudent consideration.

Nothing else matters at retirement if I have not solved housing and health care. If I just think of my money as one big pot, how do I know I actually am on track to solve them?

The HSA has particular advantages, designed by law, to make it the most effective "bucket" for health care expenses. The mortgage has particular advantages, designed by law, to make it the most effective "bucket" for housing expenses (the mortgage being replaced by home equity as the debt is paid off by inflated dollars, at low interest, over time).
2tall4economy
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Re: Are emergency funds for suckers?

Post by 2tall4economy »

bloom2708 wrote: Thu Aug 20, 2020 9:56 am Once you have a taxable account with 2x or 3x your Emergency Fund, that makes an Emergency Fund not really necessary.
+1
You can do anything you want in life. The rub is that there are consequences.
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ram
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Re: Are emergency funds for suckers?

Post by ram »

willthrill81 wrote: Thu Aug 20, 2020 10:26 am
When you take into account the fact that money invested at a 7.2% real return (for the sake of illustration) doubles every decade, $50k when you're 25 is like $200k when you're 45, $400k when you're 55, and $800k when you're 65, the opportunity cost of holding on to so much cash when you're young seems to me to be at least as great as almost any sudden financial emergency they are likely at all to encounter, especially if they are insured appropriately.

I'm always saddened when I hear people rattle off 'everyone needs 3-6 months of expense in a very safe instrument' with no regard to individuals' specific needs. Certainly some people need that and even more, but many do not. Circumstances should weigh heavily when determining how much of one's capital one is willing to put on the sidelines and not in the game.
Willthrill,
I agree with your premise. Perhaps using a real rate of return (rather than nominal) would be more appropriate.

Edit: Sorry. I missed the part where Willthrill clearly mention "real" return.
Last edited by ram on Sun Aug 23, 2020 10:25 am, edited 1 time in total.
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000
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Re: Are emergency funds for suckers?

Post by 000 »

Ivygirl wrote: Sat Aug 22, 2020 10:44 pm The mortgage has particular advantages, designed by law, to make it the most effective "bucket" for housing expenses (the mortgage being replaced by home equity as the debt is paid off by inflated dollars, at low interest, over time).
Are you 100% stocks? Or are you borrowing to invest in bonds?
Ivygirl
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Re: Are emergency funds for suckers?

Post by Ivygirl »

000 wrote: Sat Aug 22, 2020 11:11 pm
Ivygirl wrote: Sat Aug 22, 2020 10:44 pm The mortgage has particular advantages, designed by law, to make it the most effective "bucket" for housing expenses (the mortgage being replaced by home equity as the debt is paid off by inflated dollars, at low interest, over time).
Are you 100% stocks? Or are you borrowing to invest in bonds?
Can you restate the question?
000
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Re: Are emergency funds for suckers?

Post by 000 »

Ivygirl wrote: Sat Aug 22, 2020 11:22 pm
000 wrote: Sat Aug 22, 2020 11:11 pm
Ivygirl wrote: Sat Aug 22, 2020 10:44 pm The mortgage has particular advantages, designed by law, to make it the most effective "bucket" for housing expenses (the mortgage being replaced by home equity as the debt is paid off by inflated dollars, at low interest, over time).
Are you 100% stocks? Or are you borrowing to invest in bonds?
Can you restate the question?
Are you a proponent of borrowing in the mortgage bucket while investing in bonds in another bucket?

In other words, holding bonds instead of using the bonds to pay down the mortgage?
Ivygirl
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Re: Are emergency funds for suckers?

Post by Ivygirl »

000 wrote: Sat Aug 22, 2020 11:24 pm
Ivygirl wrote: Sat Aug 22, 2020 11:22 pm
000 wrote: Sat Aug 22, 2020 11:11 pm
Ivygirl wrote: Sat Aug 22, 2020 10:44 pm The mortgage has particular advantages, designed by law, to make it the most effective "bucket" for housing expenses (the mortgage being replaced by home equity as the debt is paid off by inflated dollars, at low interest, over time).
Are you 100% stocks? Or are you borrowing to invest in bonds?
Can you restate the question?
Are you a proponent of borrowing in the mortgage bucket while investing in bonds in another bucket?

In other words, holding bonds instead of using the bonds to pay down the mortgage?
I think the answer is yes, I am a proponent of borrowing in the mortgage bucket while investing in bonds in another bucket.

The bonds I own are in my HSA and 401(k), as part of a target retirement fund and a large blend fund. I can't use those bonds to pay down the mortgage.
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Re: Are emergency funds for suckers?

Post by hudson »

My emergency fund for years was credit cards or a home equity loan.
I started saving so I began to use Vanguard holdings as an emergency fund...but funds took 2 days to get to my credit union checking account.
I think this was the optimal way to take care of emergencies.

I came up short two times last summer, so I decided that I want same business day money as my so called emergency fund. I keep most at Amex Bank as they do same day transfers if you have the online request in by 10:30. I realize that this method is not optimal, but I like it. I think of it more of a ready cash fund than an emergency fund.
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willthrill81
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Re: Are emergency funds for suckers?

Post by willthrill81 »

ram wrote: Sat Aug 22, 2020 11:10 pm
willthrill81 wrote: Thu Aug 20, 2020 10:26 am
When you take into account the fact that money invested at a 7.2% real return (for the sake of illustration) doubles every decade, $50k when you're 25 is like $200k when you're 45, $400k when you're 55, and $800k when you're 65, the opportunity cost of holding on to so much cash when you're young seems to me to be at least as great as almost any sudden financial emergency they are likely at all to encounter, especially if they are insured appropriately.

I'm always saddened when I hear people rattle off 'everyone needs 3-6 months of expense in a very safe instrument' with no regard to individuals' specific needs. Certainly some people need that and even more, but many do not. Circumstances should weigh heavily when determining how much of one's capital one is willing to put on the sidelines and not in the game.
Willthrill,
I agree with your premise. Perhaps using a real rate of return (rather than nominal) would be more appropriate.
I specified "real return" in the first sentence of the quoted post.
“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
JGoneRiding
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Re: Are emergency funds for suckers?

Post by JGoneRiding »

Hub wrote: Thu Aug 20, 2020 10:36 am My personal checking is one of those high interest accounts that requires transactions, but pays currently 2.5% on the 1st $30k. That works out to be plenty of cash on hand to also count as my "emergency fund," but it's all just in my main checking and not earmarked specifically.
Is this a bank anyone can access? Given ally significant drop I am looking at other options for banking.
bling
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Re: Are emergency funds for suckers?

Post by bling »

emergency plan > emergency fund.

the numbers will always work in your favor by avoiding an emergency fund. the problem is you can't put a price tag on "piece of mind".

also, there are so many tools at your disposal...

1) credit card cash advance. yes the interest sucks but will your next paycheck cover the emergency?
2) HELOCs. easy to get and is a good source of cash at low interest when you need it.
3) taxable accounts. cash available in 2 days.
4) tax-advantaged accounts. takes longer, but is there.

remember, *emergency* by definition means rare event. if an emergency is happening a couple times a year IMO that is not an emergency, that's a planned event.

i have personally never had an emergency fund. i can count on one hand the number of times in the past decade where i had legitimate emergencies that required me to plan ahead a little.
1) a major unexpected car repair. put it all on the credit card, cut upcoming spending, paid it off after the grace period. if my income wasn't enough i'd continue cutting spending until it was paid off.
2) house repair where they wanted cash and i didn't have enough. i didn't have a HELOC during this time, so i took a cash advance, sold some stocks, paid it off 2 days later.

at the end of the day it's just a mind game you're playing with yourself. IMO there's no difference between someone with a 75/25 allocation with no EF vs someone with a 75/20/5 where 5 is the EF.
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willthrill81
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Re: Are emergency funds for suckers?

Post by willthrill81 »

bling wrote: Sun Aug 23, 2020 10:31 amthe numbers will always work in your favor by avoiding an emergency fund. the problem is you can't put a price tag on "piece of mind".
Actually, you can put a price tag on it in the form of an opportunity cost. Whether the piece of mind is worth the price paid is subjective though.
“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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