Multi-tired emergency fund

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Blue456
Posts: 107
Joined: Tue Jun 04, 2019 5:46 am

Multi-tired emergency fund

Post by Blue456 » Sun Nov 17, 2019 9:25 am

https://www.bogleheads.org/wiki/Emergency_fund

I found the above article on multi-tired emergency fund. Im curious if anybody is using this strategy. Basically its 30% cash, 30% CDs and 30% short term bonds.

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Atomic
Posts: 72
Joined: Sat Mar 13, 2010 12:14 am
Location: Minnesota

Re: Multi-tired emergency fund

Post by Atomic » Sun Nov 17, 2019 9:36 am

Yes, but instead of CDs, I use ibonds.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Multi-tired emergency fund

Post by livesoft » Sun Nov 17, 2019 9:37 am

I clearly saw the word "could" in the text of the link you gave, so the example was just an example or a suggestion.

I have a multi-tiered emergency fund of another kind:

1. Credit cards
2. Sell stock ETFs in my taxable account.
3. Sell shares in my tax-deferred accounts.
4. Borrow money from relatives.
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runner3081
Posts: 2575
Joined: Mon Aug 22, 2016 3:22 pm

Re: Multi-tired emergency fund

Post by runner3081 » Sun Nov 17, 2019 9:41 am

Our EF Order:

-Credit Cards
-Savings Account
-CD's
-iBonds
-Taxable Savings
-HSA
-ROTH IRA

mbasherp
Posts: 257
Joined: Mon Jun 26, 2017 8:48 am

Re: Multi-tired emergency fund

Post by mbasherp » Sun Nov 17, 2019 12:31 pm

Our emergency plan goes:

- cash flow/reduced contributions
- extra $1k buffer in checking
- High interest savings account
- Vanguard Prime Money Market (although the yield has dropped enough that I may roll this back into savings)
- I Bonds
- equities in taxable account

stan1
Posts: 7721
Joined: Mon Oct 08, 2007 4:35 pm

Re: Multi-tired emergency fund

Post by stan1 » Sun Nov 17, 2019 12:46 pm

In rough order of what we'd do (although could make arguments order would be different depending upon specific circumstances):

- Credit card, paid off within 30 days
- Checking (for places that won't take credit card)
- Money market or high yield savings (where depends on yield)
- Credit card, paid off over time
- Muni bond funds or other bonds in taxable
- CDs (would be higher on the list but many have large withdrawal penalties now)
- 401K Loan if employment not at risk
- HELOC
- Equity funds/ETFs in taxable

In short if you have assets there are many ways to get liquidity and you can have quite a few options. If you don't have assets that can be sold easily then there's more need for a cash emergency fund. Have to assess the likelihood of needing this cash, too. Someone who works in RV sales is going to have greater likelihood of needing to access an emergency fund than someone who is a government employee. If the likelihood of needing this money is low reasonable to accept a few fees or inconveniences to get it.

dru808
Posts: 181
Joined: Sat Oct 15, 2011 2:42 pm

Re: Multi-tired emergency fund

Post by dru808 » Sun Nov 17, 2019 1:55 pm

Our emergency fund



-1 month in checking at local credit union
-2 month+ dollar bills and change in three 5 gallon buckets
-2 months expenses. in ally no penalty cd’s
-1-3 months of random in demand not used items in the garage that would be sold.
-2 months expenses. Some silver I bought back in 2009
-4+ months credit cards, pay minimum to buy time.
-1+ years, Taxable account and or 6 years of Roth contributions.
-300k equity in house that would be sold

Iphone5
Posts: 2
Joined: Mon Nov 18, 2019 12:52 pm

Re: Multi-tired emergency fund

Post by Iphone5 » Mon Nov 18, 2019 1:03 pm

livesoft wrote:
Sun Nov 17, 2019 9:37 am
I clearly saw the word "could" in the text of the link you gave, so the example was just an example or a suggestion.

I have a multi-tiered emergency fund of another kind:

1. Credit cards
2. Sell stock ETFs in my taxable account.
3. Sell shares in my tax-deferred accounts.
4. Borrow money from relatives.
Hi livesoft,

I have a 12 month EF earning 1.9%.

I am also trying to reduce and transition over to a more aggressive emergency fund. A few questions:

1. Say you have a $10,000 emergency and now you pay with your CC. Do you know sell stock or etf in your taxable account ? How do you handle taxes and capital gains if any?

2. What do you do if the market drops 40%? This is something that holds me back from going 100% etf stock on my EF.

3. The aggressive approach you have on your EF is it to maximize every single dollar? Or is there another reason?

4. Any other advise on why 100% invested EF is better?

Thank you

livesoft
Posts: 68616
Joined: Thu Mar 01, 2007 8:00 pm

Re: Multi-tired emergency fund

Post by livesoft » Mon Nov 18, 2019 2:07 pm

Iphone5 wrote:
Mon Nov 18, 2019 1:03 pm
livesoft wrote:
Sun Nov 17, 2019 9:37 am
I clearly saw the word "could" in the text of the link you gave, so the example was just an example or a suggestion.

I have a multi-tiered emergency fund of another kind:

1. Credit cards
2. Sell stock ETFs in my taxable account.
3. Sell shares in my tax-deferred accounts.
4. Borrow money from relatives.
Hi livesoft,

I have a 12 month EF earning 1.9%.

I am also trying to reduce and transition over to a more aggressive emergency fund. A few questions:

1. Say you have a $10,000 emergency and now you pay with your CC. Do you know sell stock or etf in your taxable account ? How do you handle taxes and capital gains if any?

2. What do you do if the market drops 40%? This is something that holds me back from going 100% etf stock on my EF.

3. The aggressive approach you have on your EF is it to maximize every single dollar? Or is there another reason?

4. Any other advise on why 100% invested EF is better?

Thank you
Answers:
1. Yes, I sell shares in my taxable account to pay my credit card bills. I am now in a tax bracket where long-term capital gains and qualified dividedns are taxed at 0% (that is, they are not taxed). However, I have plenty of carry over losses from tax-loss harvesting that any of my realized capital gains would be offset by those pre-booked losses. Thus no taxes. But let me remind you that one pays taxes on the interest earned in savings accounts at one's full marginal rate, so when comparing an emergency fund in a taxable interest-bearing account and a taxable account of mutual fund or ETF shares, then the income taxes are never going to be at a higher rate when selling shares versus earning interest.

2. If the market drops 40%, I don't care because whenever I sell shares in taxable, I buy similar shares in my 401(k) or IRA by exchanging from a bond fund to the equity fund. This is described in this wiki article: https://www.bogleheads.org/wiki/Placing ... ed_account Indeed, I prefer to sell shares at a loss in a tax-loss harvesting move. Once one realizes that selling losers is a real positive, then one's entire outlook on investing changes. The freedom of Enlightenment is a great feeling.

3. I wasn't really worried about maximizing, but just used common sense. I have no fear of losses because over the long term the stock market goes up. If the stock market didn't go up, then we would all be screwed.

4. I am now retired and essentially jobless. My entire portfolio is an emergency fund nowadays. You'll like it when you get there. However, perhaps the hard part of how I go cashless is getting to the point where the taxable account is large enough so that a 50% drop is not a big deal. You do have to start somewhere and sometime and build up your taxable account.
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surfstar
Posts: 1850
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: Multi-tired emergency fund

Post by surfstar » Mon Nov 18, 2019 2:21 pm

Iphone5 wrote:
Mon Nov 18, 2019 1:03 pm
livesoft wrote:
Sun Nov 17, 2019 9:37 am
I clearly saw the word "could" in the text of the link you gave, so the example was just an example or a suggestion.

I have a multi-tiered emergency fund of another kind:

1. Credit cards
2. Sell stock ETFs in my taxable account.
3. Sell shares in my tax-deferred accounts.
4. Borrow money from relatives.
Hi livesoft,

I have a 12 month EF earning 1.9%.

I am also trying to reduce and transition over to a more aggressive emergency fund. A few questions:

1. Say you have a $10,000 emergency and now you pay with your CC. Do you know sell stock or etf in your taxable account ? How do you handle taxes and capital gains if any?

2. What do you do if the market drops 40%? This is something that holds me back from going 100% etf stock on my EF.

3. The aggressive approach you have on your EF is it to maximize every single dollar? Or is there another reason?

4. Any other advise on why 100% invested EF is better?

Thank you
How often do you have $10k emergencies?
If often, then maybe you shouldn't use livesoft's recommendation. However, if never and not likely more accurately describe your $10k scenarios (as would be the case with the majority of bogleheads), then sure, why not do it?

Iphone5
Posts: 2
Joined: Mon Nov 18, 2019 12:52 pm

Re: Multi-tired emergency fund

Post by Iphone5 » Mon Nov 18, 2019 8:09 pm

livesoft wrote:
Mon Nov 18, 2019 2:07 pm
Iphone5 wrote:
Mon Nov 18, 2019 1:03 pm
livesoft wrote:
Sun Nov 17, 2019 9:37 am
I clearly saw the word "could" in the text of the link you gave, so the example was just an example or a suggestion.

I have a multi-tiered emergency fund of another kind:

1. Credit cards
2. Sell stock ETFs in my taxable account.
3. Sell shares in my tax-deferred accounts.
4. Borrow money from relatives.
Hi livesoft,

I have a 12 month EF earning 1.9%.

I am also trying to reduce and transition over to a more aggressive emergency fund. A few questions:

1. Say you have a $10,000 emergency and now you pay with your CC. Do you know sell stock or etf in your taxable account ? How do you handle taxes and capital gains if any?

2. What do you do if the market drops 40%? This is something that holds me back from going 100% etf stock on my EF.

3. The aggressive approach you have on your EF is it to maximize every single dollar? Or is there another reason?

4. Any other advise on why 100% invested EF is better?

Thank you
Answers:
1. Yes, I sell shares in my taxable account to pay my credit card bills. I am now in a tax bracket where long-term capital gains and qualified dividedns are taxed at 0% (that is, they are not taxed). However, I have plenty of carry over losses from tax-loss harvesting that any of my realized capital gains would be offset by those pre-booked losses. Thus no taxes. But let me remind you that one pays taxes on the interest earned in savings accounts at one's full marginal rate, so when comparing an emergency fund in a taxable interest-bearing account and a taxable account of mutual fund or ETF shares, then the income taxes are never going to be at a higher rate when selling shares versus earning interest.

2. If the market drops 40%, I don't care because whenever I sell shares in taxable, I buy similar shares in my 401(k) or IRA by exchanging from a bond fund to the equity fund. This is described in this wiki article: https://www.bogleheads.org/wiki/Placing ... ed_account Indeed, I prefer to sell shares at a loss in a tax-loss harvesting move. Once one realizes that selling losers is a real positive, then one's entire outlook on investing changes. The freedom of Enlightenment is a great feeling.

3. I wasn't really worried about maximizing, but just used common sense. I have no fear of losses because over the long term the stock market goes up. If the stock market didn't go up, then we would all be screwed.

4. I am now retired and essentially jobless. My entire portfolio is an emergency fund nowadays. You'll like it when you get there. However, perhaps the hard part of how I go cashless is getting to the point where the taxable account is large enough so that a 50% drop is not a big deal. You do have to start somewhere and sometime and build up your taxable account.
Hi Livesoft,

Thank you for your response.

1. Question regarding your #2 answer. What percentage of stocks and bonds do you own? Currently I’m 100% stock in my 401k and IRAs. I’m thinking about reducing to 80-20.

2. I forgot to mention that I have a 50k heloc. I’m not planning on touching it.

So would the following EF tier make sense?

1. Brokerage/Checking- everyday spending I have in my fidelity account earning 1.6%. Plan to keep about $5k
2. Credit cards
3. Taxable accounts- plan to buy VTI from my fidelity account
4. Roth IRA contributions
5. Traditional IRA
6. 401k
7. Heloc


3. Last question, when you were employed were you also aggressive with your tiered EF? You didn’t hold cash just incase you lost your job ?

Thank you again

livesoft
Posts: 68616
Joined: Thu Mar 01, 2007 8:00 pm

Re: Multi-tired emergency fund

Post by livesoft » Mon Nov 18, 2019 8:19 pm

1. I was about 90/10 while working until near retirement when I went to 70/30. Now at about 60/40.

2. What's the point of having a HELOC if you will never touch it? Your tiers make sense otherwise. I don't know your age, but I would not pay a 10% early withdrawal penalty on IRA or 401(k) withdrawals. One may be able to borrow from 401(k) though. The reality is probably that you will think of something if you need more money in an emergency at the time of the emergency.

3. I didn't hold cash in case I lost my job because I could live cheaply for many months. That is, I think it would be rare for someone who lost their job to need 6 months of expenses instantly on a Friday afternoon. Also my spouse worked and we always lived off of one person's income and invested the higher earner's income. I may have out-mustached Mr. Money M himself.
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User avatar
HueyLD
Posts: 7221
Joined: Mon Jan 14, 2008 10:30 am

Re: Multi-tired emergency fund

Post by HueyLD » Mon Nov 18, 2019 9:11 pm

Multi-tired? Is this an automobile thread? :)

Topic Author
Blue456
Posts: 107
Joined: Tue Jun 04, 2019 5:46 am

Re: Multi-tired emergency fund

Post by Blue456 » Mon Nov 18, 2019 9:40 pm

HueyLD wrote:
Mon Nov 18, 2019 9:11 pm
Multi-tired? Is this an automobile thread? :)
Spelling has never been my greatest strength.

downshiftme
Posts: 1089
Joined: Sun Mar 11, 2007 6:11 pm

Re: Multi-tired emergency fund

Post by downshiftme » Mon Nov 18, 2019 9:44 pm

I used to have a classic 6 months expenses in a High Yield savings account Emergency Fund. But it turned out that I never used it. Even when I lost my job at the worst possible time in an economic downturn, I managed to limp along with cutting expenses, letting credit card balances grow and using some of the padding from my regular checking account.

I've since gone to a tiered approach. I have about one month expenses as padding in my main checking account, so I don't have to pay much attention to monthly cash flow. I spend from the padding and deposit paychecks to collect next as month's padding. I put the rest of the "emergency fund" into an equity income fund that's about 50/50 equity/bonds split. In the intervening years of not using the Emergency Fund, it's grown so much that even if I have to access it at the bottom of a huge stock decline I'll still be ahead of where I would have been if it was in a savings account.

Meanwhile as unexpected "emergencies" arise I'm still covering them with a combination of cutting/shifting expenses, using credit cards and when necessary dipping into the checking account padding. I also have a HELOC unused standing by. I think tiers work for me.

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