Best way to build an emergency fund?

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djpeteski
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Re: Best way to build an emergency fund?

Post by djpeteski »

AC1984 wrote: Tue Sep 08, 2020 2:01 pm I'm in Michigan, cost of living isn't too high. My expenses are roughly $8k monthly, though I'm sure we could trim it a bit. We have student loans, car notes, and some other fixed expenses (cars were before my current job, and my wife's loans are on a regular payment plan). To be sure, in a true emergency I would absolutely use the $5k account before breaking into anything else. I'm just trying to figure out the best way to add more cash in the least amount of time without sacrificing more than I have to as far as investments.
To me this is your problem. While your house is not on fire, I would slow down your investments, get out of consumer debt, and then save an emergency fund. There is nothing magical about it just hard work. You need some focus.
pasadena
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Re: Best way to build an emergency fund?

Post by pasadena »

Re: budget. Apps like Mint or Personal Capital are *not* budgeting apps. They're looking back, when a budget should be looking forward. I would definitely recommend YNAB for this. It's based on the enveloppe budgeting system. It's the only budgeting app that has ever worked for me. The only things it has against it are a fair learning curve (but lots of very good learning content) and I find the current price a little too steep. But again, I still think it's the best out there, by far. It has a 34 days free trial, so you should check it out.

With regards to your nieces and nephews savings, it's a very nice idea, but you need to get your own finances in order before you think of others.
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JoeRetire
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Re: Best way to build an emergency fund?

Post by JoeRetire »

AC1984 wrote: Tue Sep 08, 2020 1:35 pm Currently I have $4,000 in my primary savings account, $2,500 in the emergency fund savings account

My thought is that I should pause the Roth contributions until the emergency fund is around $40-50k (roughly 3.5-4 months expenses) so I still get the tax break for a $39k income reduction with the deferred retirement accounts./quote]

Yes, this. Emergency fund first, then retirement funds.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

lakpr wrote: Thu Sep 10, 2020 8:39 amFirst, auto-loans are not tax deductible, so a 3% after-tax interest rate for a person in the 24% tax bracket (which you are in since you file MFS), is equivalent to a before-tax interest rate of 3.94%. If you include any state taxes into consideration, then the before-tax equivalent shoots up north of 4%.

The SEC yield of the total bond market fund, today is yielding just about 1.4%, and its yield is also before-tax.
Yup, OP needs a budget and can save more. And no point in borrowing at 3-5% rates to invest at 1.4%.
AC1984 wrote: Thu Sep 10, 2020 8:30 amThe "gift" account is not specifically earmarked if we really need it, but we thought it would be nice. I'm nearly positive our (at this point 5) nieces' and nephews' parents don't have any savings to speak of and we don't have kids, so whether a small boost for school or getting out on their own or any pressing need was our thought.

...we are paying at this point $200 principal every two weeks. My student loans are typically $800/month - but for now they're suspended and will be forgiven by 2025. My wife's student loans are about $225/month and will be paid off in 2025.

As far as your suggestion for bonds, I have none at this point but could buy a total bond market fund with future contributions for a while. Am I right in thinking they would have to be in a taxable account to access without penalty? I'm hesitant though because I keep hearing they're not tax efficient or typically recommended in a taxable account. I also don't know from my prior question whether you can withdraw nondeductible tIRA contributions without a 10% penalty, which if so could be a good place.
I'm assuming that aside from he extra $200/month mortgage, everything else is minimum, so you're barely threading water. But great job maxing out the tax advantage accounts! Where is the $800/month suspended student loan going now? And how did you manage before it was suspended? I'd just raid the nieces and nephews fund (write an IOU) and call that about a month of the emergency fund. I'd think of $30k in taxable, assuming 30% drop when you need it is good for 2-3 months. Focus on saving more and building up that cash reserve before spending too much on nieces and nephews and the trailer.

Don't bother investing in bonds until all the loans (especially higher rates) are paid off. Also, take another look at the example and also specially at "Why it works". Took me a while to understand the idea, so don't give up if it doesn't make sense immediately. It will be a while for you anyway.

https://www.bogleheads.org/wiki/Placing ... y_it_works
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CyclingDuo
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Re: Best way to build an emergency fund?

Post by CyclingDuo »

AC1984 wrote: Thu Sep 10, 2020 12:50 pm
CyclingDuo wrote: Thu Sep 10, 2020 9:17 am
AC1984 wrote: Thu Sep 10, 2020 8:44 amSticking to a budget is the one obvious part we haven't done. I don't know why it's so hard to start, but definitely worth exploring.
Download one of the free budget apps - and enter everything religiously for a few months to get the true picture of what comes in and what goes out. It's well worth it - especially the first few months - to get a handle on your household cash flow. Once you get the true picture after a few months of collecting receipts, logging in online to enter every purchase/bill/deposit/etc..., you can make decisions on where any potential trims and cuts could occur in your budget.

I never saw the answer, but why are you saving money for a niece & nephew? Conventional wisdom is you take care of your immediate family first and foremost. Let your siblings take care of their own children. Your house must be in order as the number one thing you focus on.

Are you absolutely 100% positive that your student loans will be forgiven?

Simple answer in my mind would be for you to stop maxing out all 3 plans (the two 457b's, and one 401k) plus the backdoor Roth IRA's until you get all of your debt paid off ASAP for the cars and student loans, and you build up your EF. At your rate of income, that should be able to be done in very little time compared to decades of investing you have during all of your accumulation years. Once all those loans are paid off, then you can make some serious hay. If that means a year or two, so be it. You'll be debt free (outside of your mortgage) and can go right back to your high rate of savings.

Tear drop camper? Why purchase yet another depreciating asset? Why even contemplate it when you have debt beyond your mortgage to take care of first? Buy a tent and do some real camping. :mrgreen: Or rent a pull behind every year for a week or two for your vacation.

CyclingDuo
I'll look into the budget apps. I have Personal Capital for overall snapshot, but it wrongly categorizes so many things it's a pain to redo it...not to say I shouldn't try for a while and see, unless you have another suggestion for an app to try.

Saving for nieces and nephews because we don't have kids and their parents have no significant savings (just guessing, but pretty sure), and we'd like to be able to help them out with a little boost for living expenses or whatever they need when they're moving out of the house or a head start for their own investing. If we get into an emergency situation I'd for sure use that cash before pulling any investments, so I guess it is part of the EF until it's not.

My wife's student loans are on a regular 10-yr plan and will be paid off, my loans are on track for PSLF and I'm sure they'll be forgiven. I mean how can I be 100% till they are? but I've gotten 70 out of 120 qualifying payments certified and I have no plans to change my job or loan type.

I appreciate the suggestion of not maxing out the retirement accounts, it is a ton of money over the course of a year. As for the tear drop, it's a lifestyle decision more than a financial asset. We're not pulling that trigger till we have cash to do so. We also do a lot of tent camping/backpacking, but the teardrop is with longer road trips in mind. It's a fantasy, but doesn't have to be forever 8-)
Well, we all tried out best to offer advice. :oops:

Budget App? I would recommend the free version of Every Dollar App as it is a budgeting tool that forces you to tell it where every dollar, every month goes. It takes a few months to get it all dialed in, but the manual entry will be good for you to get a grasp on the reality. If you want to pay for the version that downloads all the transactions, that's fine as well. However, the exercise of you having to do it manually is worth the learning experience. Pay for everything with only your debit card or Bill Pay from the same account at your bank.

I'm a big advocate of dumping your debt and moving on with life. We haven't had debt (outside of a mortgage we carried for 17 years) since I paid off my student loans in 1989.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

CyclingDuo wrote: Thu Sep 10, 2020 5:58 pm
AC1984 wrote: Thu Sep 10, 2020 12:50 pm
CyclingDuo wrote: Thu Sep 10, 2020 9:17 am Simple answer in my mind would be for you to stop maxing out all 3 plans (the two 457b's, and one 401k) plus the backdoor Roth IRA's until you get all of your debt paid off ASAP for the cars and student loans, and you build up your EF. At your rate of income, that should be able to be done in very little time compared to decades of investing you have during all of your accumulation years. Once all those loans are paid off, then you can make some serious hay. If that means a year or two, so be it. You'll be debt free (outside of your mortgage) and can go right back to your high rate of savings.

Tear drop camper? Why purchase yet another depreciating asset? Why even contemplate it when you have debt beyond your mortgage to take care of first? Buy a tent and do some real camping. :mrgreen: Or rent a pull behind every year for a week or two for your vacation.
I appreciate the suggestion of not maxing out the retirement accounts, it is a ton of money over the course of a year. As for the tear drop, it's a lifestyle decision more than a financial asset. We're not pulling that trigger till we have cash to do so. We also do a lot of tent camping/backpacking, but the teardrop is with longer road trips in mind. It's a fantasy, but doesn't have to be forever 8-)
I'm a big advocate of dumping your debt and moving on with life. We haven't had debt (outside of a mortgage we carried for 17 years) since I paid off my student loans in 1989.
My priority would be to keep maximizing retirement accounts. I wouldn't reduce retirement accounts to pay debts. The debts have been manageable (barely), but keep you on budget (forced budget). Just imagine or calculate where you'd be if you had paid off debt 5 years ago instead of funding retirement accounts. You'd probably have close to 0 debt and zero invested. What was your net worth 5 years ago vs. today? If you had paid off debt instead of invest in the market, your net worth would be substantially less.

If all goes well, you can easily afford the trailer. Better to save for it, but if you must, sell some equities in taxable or borrow (yes, borrow at 7% or 10% if you must, just pay it off ASAP) instead of putting off retirement savings. When you have to pay high interest, you see the expense. The missing $14,000 from retirement that was to grow to over $100,000 over decades is forgotten.

https://www.americafirst.com/loans/vehi ... loans.html
https://www.bankrate.com/loans/personal-loans/rv-loans/
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CyclingDuo
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Re: Best way to build an emergency fund?

Post by CyclingDuo »

inbox788 wrote: Thu Sep 10, 2020 7:09 pmMy priority would be to keep maximizing retirement accounts. I wouldn't reduce retirement accounts to pay debts. The debts have been manageable (barely), but keep you on budget (forced budget).

If all goes well, you can easily afford the trailer. Better to save for it, but if you must, sell some equities in taxable or borrow (yes, borrow at 7% or 10% if you must, just pay it off ASAP) instead of putting off retirement savings. When you have to pay high interest, you see the expense. The missing $14,000 from retirement that was to grow to over $100,000 over decades is forgotten.
I think the exception here being we are not talking about just maxing out both spouse's 401k and Roth IRA's. They are maxing out an additional plan by doing two 401k's and one 457b (for a total of 3 pre-tax retirement plans), plus the two Roth IRA's, and contributing into an account for the niece/nephew fund, and their additional taxable account investing. 42% of gross income going to the three pre-tax funds and the Roth IRA's alone before we even get to the niece/nephew and taxable account investing while having debt to service on cars and student loans.

I'd stop at least one of the $19.5K plans ASAP and send that money to servicing the debt to start with as this would hardly put a dent in their long range wealth accumulation since two plans + two Roth IRA's would still be maxed out. I would also nix the niece/nephew fund and taxable account investing in lieu of sending that money to service the debt along with the aforementioned third pre-tax retirement plan to get those cars and student loans paid off ASAP, and an EF built up. After that, they are free to go right back to maxing out all 3 (instead of just 2) of their pre-tax retirement plans + Roth IRA's and their taxable account with an even higher amount since they are no longer servicing the car and student loan debts.

Meanwhile, they're not even really sure of their monthly budget and talking about purchasing another depreciating asset before they have even paid off the two they already own. You even suggested they could take a loan out to pay for it!
:oops:

My suggestion to you: I would not advocate encouraging that kind of financial behavior. :shock:

At age 36 with a nest egg of $330K which is exactly 2X their salary has them right on track for the Fidelity suggested "journey" for their $165K salary and age.

Image

CyclingDuo
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inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

CyclingDuo wrote: Thu Sep 10, 2020 8:53 pmI think the exception here being we are not talking about just maxing out both spouse's 401k and Roth IRA's. They are maxing out an additional plan by doing two 401k's and one 457b (for a total of 3 pre-tax retirement plans), plus the two Roth IRA's, and contributing into an account for the niece/nephew fund, and their additional taxable account investing. 42% of gross income going to the three pre-tax funds and the Roth IRA's alone before we even get to the niece/nephew and taxable account investing while having debt to service on cars and student loans.
It's an aggressive plan they've set forth, but one along the lines of taking out additional cash from mortgage to invest in the market vs. paying down the mortgage. The former carries more risk, but also has a higher chance of bigger returns, and particularly because of their young age, can afford to take more risk and if things don't pan out, they have more time to recover. They've already started this path, and things should be getting easier than when they started and as they progress.

The limit I would be looking at would be the 22% tax bracket, and so long as deferring income isn't going below that mark, I'd consider that desirable. IRA space more limited and tax diversification gives one lots more flexibility down the road, so that's also worth it to me. I completely agree with commandeering niece/nephew fund and using the taxable accounts to pay off bad debts, but AFAIK, OP doesn't have bad debts. A 7% or 10% RV debt is a bad debt (so if you must, keep it as short as you can). A subsidized 0 or 1% car loan is a good debt as is a subsidized or forgiven student loan. No point in paying more into that PSLF than the minimum. Keeping a 3-5% loan for liquidity and investing in equities is worth the risk IMO, though I can understand paying off too. That might apply to the car loans and wife's loan. If we're talking about $100k 2% difference over 5 years, that's about 10k -- either way depending on the market ups and downs, and in many cases will average out to less than that. This added variance is worth the liquidity to me, and my exceptions is skewed to the equities upside. YMMV.

https://www.marketwatch.com/story/whats ... 2018-09-24

The bottom line for me is Net Worth (assets - liabilities), and from what I've seen, they're making good progress. If they keep up their tax advantaged investments for retirement, that taxable fund is not going to be needed and becomes spending money. I think it's already the de facto emergency fund, which hopefully won't be needed. It's difficult beginning a career with negative net worth from student loans, but I'm pretty sure they're in the positive now and experiencing accelerating growth with income and returns both producing noticeable increases. A doubling of investing accounts by 2025 is realistic with about half coming from returns and half from contributions.
Meanwhile, they're not even really sure of their monthly budget and talking about purchasing another depreciating asset before they have even paid off the two they already own. You even suggested they could take a loan out to pay for it!
:oops:
Yup, if they can afford it, why not? A good time would be when the PSLF goes through, and Net Worth takes a bit step up (and by then, aside from mortgage, all the loans should have been paid off). And if you've got equities, you don't have to take out a 10% RV loan, if you can take out a lower cost margin loan and stay invested: https://www1.interactivebrokers.com/en/ ... hp?f=46376 .
Yes, I said margin loan. viewtopic.php?t=310387 viewtopic.php?f=10&t=165555&start=100
My suggestion to you: I would not advocate encouraging that kind of financial behavior. :shock:

At age 36 with a nest egg of $330K which is exactly 2X their salary has them right on track for the Fidelity suggested "journey" for their $165K salary and age.
It's shocking that with all the extreme measures OP has taken, he's only "right on track". I'd say the vast majority of 36 year olds are far from this milestone and here's some 401k data by age. I wouldn't take that rule of thumb too seriously and consider a broader context. If all goes well, in 5 or 10 years, you might be asking about a boat or vacation home, and that's alright too.

"15% savings rate, a 1.5% constant real wage growth"
https://www.fidelity.com/viewpoints/ret ... -to-retire

https://www.personalcapital.com/blog/re ... lance-age/
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AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

inbox788 wrote: Fri Sep 11, 2020 2:48 am
CyclingDuo wrote: Thu Sep 10, 2020 8:53 pmI think the exception here being we are not talking about just maxing out both spouse's 401k and Roth IRA's. They are maxing out an additional plan by doing two 401k's and one 457b (for a total of 3 pre-tax retirement plans), plus the two Roth IRA's, and contributing into an account for the niece/nephew fund, and their additional taxable account investing. 42% of gross income going to the three pre-tax funds and the Roth IRA's alone before we even get to the niece/nephew and taxable account investing while having debt to service on cars and student loans.
It's an aggressive plan they've set forth, but one along the lines of taking out additional cash from mortgage to invest in the market vs. paying down the mortgage. The former carries more risk, but also has a higher chance of bigger returns, and particularly because of their young age, can afford to take more risk and if things don't pan out, they have more time to recover. They've already started this path, and things should be getting easier than when they started and as they progress.

The limit I would be looking at would be the 22% tax bracket, and so long as deferring income isn't going below that mark, I'd consider that desirable. IRA space more limited and tax diversification gives one lots more flexibility down the road, so that's also worth it to me. I completely agree with commandeering niece/nephew fund and using the taxable accounts to pay off bad debts, but AFAIK, OP doesn't have bad debts. A 7% or 10% RV debt is a bad debt (so if you must, keep it as short as you can). A subsidized 0 or 1% car loan is a good debt as is a subsidized or forgiven student loan. No point in paying more into that PSLF than the minimum. Keeping a 3-5% loan for liquidity and investing in equities is worth the risk IMO, though I can understand paying off too. That might apply to the car loans and wife's loan. If we're talking about $100k 2% difference over 5 years, that's about 10k -- either way depending on the market ups and downs, and in many cases will average out to less than that. This added variance is worth the liquidity to me, and my exceptions is skewed to the equities upside. YMMV.

https://www.marketwatch.com/story/whats ... 2018-09-24

The bottom line for me is Net Worth (assets - liabilities), and from what I've seen, they're making good progress. If they keep up their tax advantaged investments for retirement, that taxable fund is not going to be needed and becomes spending money. I think it's already the de facto emergency fund, which hopefully won't be needed. It's difficult beginning a career with negative net worth from student loans, but I'm pretty sure they're in the positive now and experiencing accelerating growth with income and returns both producing noticeable increases. A doubling of investing accounts by 2025 is realistic with about half coming from returns and half from contributions.
Meanwhile, they're not even really sure of their monthly budget and talking about purchasing another depreciating asset before they have even paid off the two they already own. You even suggested they could take a loan out to pay for it!
:oops:
Yup, if they can afford it, why not? A good time would be when the PSLF goes through, and Net Worth takes a bit step up (and by then, aside from mortgage, all the loans should have been paid off). And if you've got equities, you don't have to take out a 10% RV loan, if you can take out a lower cost margin loan and stay invested: https://www1.interactivebrokers.com/en/ ... hp?f=46376 .
Yes, I said margin loan. viewtopic.php?t=310387 viewtopic.php?f=10&t=165555&start=100
My suggestion to you: I would not advocate encouraging that kind of financial behavior. :shock:

At age 36 with a nest egg of $330K which is exactly 2X their salary has them right on track for the Fidelity suggested "journey" for their $165K salary and age.
It's shocking that with all the extreme measures OP has taken, he's only "right on track". I'd say the vast majority of 36 year olds are far from this milestone and here's some 401k data by age. I wouldn't take that rule of thumb too seriously and consider a broader context. If all goes well, in 5 or 10 years, you might be asking about a boat or vacation home, and that's alright too.

"15% savings rate, a 1.5% constant real wage growth"
https://www.fidelity.com/viewpoints/ret ... -to-retire

https://www.personalcapital.com/blog/re ... lance-age/

Thanks for your and everyone's thoughtful comments. Re: Where the $800 came from - I was consistently getting tons of overtime for the past two years, to the point that my income jumped to $187k for the last two years. That would probably be helpful to know how this all happened. That hasn't been the case since COVID hit and overtime went away. As it turned out, overtime stopped at the same time the CARES Act passed and the $800 monthly student loan payments went away. But I was bringing in more than $800 with the overtime so it wasn't a big deal then. Now it's consistent, and with the same maxed out contributions to all the accounts saving is impossible. Amazingly, as of yesterday I was told I'm again eligible for overtime (we're unbelievably understaffed and have to function for the courts to work) so within a month my income will be a fair bit to much higher than it otherwise would be. Obviously that makes generating more cash easy, especially if I stop maxing out one of the retirement accounts.

CyclingDuo - Can you help me better understand your thoughts about which accounts to stop contributing to in the interim? There's $58,500 possible to max out the two 401k's and the 457, and $12,000 between our Roth IRA's. My 401k match is maxed when I put in 5%. The State automatically adds 4% no matter what, which means if I put in 5%, I get 9% matched (crazy right?). I know I can't miss out out on that. If I understand right, the 457 is accessible when you leave the job and isn't age dependent. If that's true - and please correct me if it isn't - maybe it would be good to split the total amount I decide to invest between those two to get the match and have earlier access to more in the 457. Another consideration is the back door Roth IRA contributions. Is it better to max the Roth IRA's and miss the full tax deduction of using some of that money toward the two 401k's and 457? I'm not sure there's one right answer, but I have no idea how to think about that. You suggested paying off debts with the taxable account, I'd love to hear more about your thoughts on this. Our car loans are 2 and 3% and total $9,200. That plus my wife's remaining student loans equals $15,100. Is it worth selling taxable stock (VTSAX and VTIAX) for this rather than let the gains accumulate over time and pay on the debt for now? I have no "bad" or other lingering debt.

Re: Net worth - I currently have $504,000 in debts (mostly student loans and mortgage) and $578k in assets (according to Personal Capital which has all my info). For our student loans, I have $350k (with the $800 payment as 15% of my salary) on track for PSLF in 2025. We're definitely taking a celebratory travel hiatus at that point! My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025. Our current mortgage is $135k (from $161k originally in late 2016), and the value now is somewhere around $210k.

I'm in utter disbelief how fast our net worth skyrocketed in the past year, from -$91,000 in March 2020 to $94,000 on Sept 2. Currently hovering at $73k because everything's in stocks and shifting so much lately.
lakpr
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Re: Best way to build an emergency fund?

Post by lakpr »

AC1984 wrote: Fri Sep 11, 2020 9:19 pm My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025.
You really want to wait 5 years for paying off this small $5900 amount? Why not pay it off now?
Topic Author
AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

lakpr wrote: Fri Sep 11, 2020 10:27 pm
AC1984 wrote: Fri Sep 11, 2020 9:19 pm My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025.
You really want to wait 5 years for paying off this small $5900 amount? Why not pay it off now?
Because at least the way I see it, I don't have cash to justify paying it off right now. Sure I could do it with taxable investments, but is that worth the capital gains tax and much higher rate of return compared to a 3% interest loan that will be gone in a four years? If anything, maybe the cars would make more sense because they're shorter term loans but they're also under 3% interest. Could you help me understand your reasoning?

That said, it would be great to not have the monthly payments.
Last edited by AC1984 on Sat Sep 12, 2020 8:28 am, edited 1 time in total.
lakpr
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Re: Best way to build an emergency fund?

Post by lakpr »

AC1984 wrote: Sat Sep 12, 2020 8:20 am
lakpr wrote: Fri Sep 11, 2020 10:27 pm
AC1984 wrote: Fri Sep 11, 2020 9:19 pm My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025.
You really want to wait 5 years for paying off this small $5900 amount? Why not pay it off now?
Because at least the way I see it, I don't have cash to justify paying it off right now. Sure I could do it with taxable investments, but is that worth the capital gains tax and much higher rate of return compared to a 3% interest loan that will be gone in a couple years? What are your thoughts?
I would definitely sell the taxable investments and pay off the loan. Of course, I would turn on the Specific-Id tracking on the taxable investments and pick those lots to sell, that have the least gains or perhaps even losses to cover the amount. The "higher rates of return" in the market are not guaranteed, and even otherwise the advantage of doing a rate-arbitrage on a $5,900 amount would be negligible. Given that you are maxing out three retirement vehicles, the daily fluctuations on that total balance alone would be more than the $5,900. Also seems to me it's a pain to carry on for 5 years, that could be made to go away almost instantly.
Last edited by lakpr on Sat Sep 12, 2020 8:33 am, edited 1 time in total.
Topic Author
AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

lakpr wrote: Sat Sep 12, 2020 8:28 am
AC1984 wrote: Sat Sep 12, 2020 8:20 am
lakpr wrote: Fri Sep 11, 2020 10:27 pm
AC1984 wrote: Fri Sep 11, 2020 9:19 pm My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025.
You really want to wait 5 years for paying off this small $5900 amount? Why not pay it off now?
Because at least the way I see it, I don't have cash to justify paying it off right now. Sure I could do it with taxable investments, but is that worth the capital gains tax and much higher rate of return compared to a 3% interest loan that will be gone in a couple years? What are your thoughts?
I would definitely sell the taxable investments and pay off the loan. Of course, I would turn on the Specific-Id tracking on the taxable investments and pick those lots to sell that have the least gains or perhaps even losses to cover the amount. The "higher rates of return" are not guaranteed, and even otherwise doing a rate-arbitrage on a $5,900 amount would be negligible. Given that you are maxing out three retirement vehicles, the daily fluctuations on that total balance alone would be more than the $5,900. Also seems to me it's a pain to carry on for 5 years, that could be made to go away almost instantly.
I've never sold anything so forgive myth ignorance. Is the Specific-Id tracking an easy filter to use? All my taxable accounts are at Vanguard.
lakpr
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Re: Best way to build an emergency fund?

Post by lakpr »

AC1984 wrote: Sat Sep 12, 2020 8:33 am I've never sold anything so forgive my ignorance. Is the Specific-Id tracking an easy filter to use? All my taxable accounts are at Vanguard.
At this link: https://investor.vanguard.com/taxes/cost-basis/, there is a "Select a Cost Basis Method" link that requires you to login. I don't remember the next steps exactly, but after logging in it allowed me to choose the "Specific ID" basis.

My experience is that it takes 1 business day to process
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CyclingDuo
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Re: Best way to build an emergency fund?

Post by CyclingDuo »

AC1984 wrote: Fri Sep 11, 2020 9:19 pmCyclingDuo - Can you help me better understand your thoughts about which accounts to stop contributing to in the interim? There's $58,500 possible to max out the two 401k's and the 457, and $12,000 between our Roth IRA's. My 401k match is maxed when I put in 5%. The State automatically adds 4% no matter what, which means if I put in 5%, I get 9% matched (crazy right?). I know I can't miss out out on that. If I understand right, the 457 is accessible when you leave the job and isn't age dependent. If that's true - and please correct me if it isn't - maybe it would be good to split the total amount I decide to invest between those two to get the match and have earlier access to more in the 457. Another consideration is the back door Roth IRA contributions. Is it better to max the Roth IRA's and miss the full tax deduction of using some of that money toward the two 401k's and 457? I'm not sure there's one right answer, but I have no idea how to think about that. You suggested paying off debts with the taxable account, I'd love to hear more about your thoughts on this. Our car loans are 2 and 3% and total $9,200. That plus my wife's remaining student loans equals $15,100. Is it worth selling taxable stock (VTSAX and VTIAX) for this rather than let the gains accumulate over time and pay on the debt for now? I have no "bad" or other lingering debt.
Certainly keep contributing to the 401k to get the match, but I would use your current taxable account to get rid of the car loans and your wife's student loans in one fell swoop. Write the checks and be done with those loans. The monthly money that was going to service those loans can go right into building up your emergency fund. Your upcoming overtime pay can be used to build up the taxable account again.

How quickly do you want do build all of that up? You have the option of suspending or cutting back on the 457b contributions for October/November/December - and maybe even a few months in the early part of next year to get the EF fund built up. Stuff always happens in terms of repairs and maintenance with autos and home ownership. Most of us who have lived a few more decades can attest to Murphy showing up with multiple things all at once.

Part of your budgeting really should include a monthly amount that is being set aside each month for repairs and maintenance - because those events are coming, trust me. Suggested example is always save at least 1% for your home's value each year for repairs and maintenance, and the suggested example is to set aside $100-$150 per car every month (depending on model, age, etc...) for upcoming larger repairs. The smaller maintenance and repair stuff you just cash flow, but it's the larger repairs on homes and autos that you need to include in your monthly budget.
AC1984 wrote: Fri Sep 11, 2020 9:19 pmRe: Net worth - I currently have $504,000 in debts (mostly student loans and mortgage) and $578k in assets (according to Personal Capital which has all my info). For our student loans, I have $350k (with the $800 payment as 15% of my salary) on track for PSLF in 2025. We're definitely taking a celebratory travel hiatus at that point! My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025. Our current mortgage is $135k (from $161k originally in late 2016), and the value now is somewhere around $210k.
What are your plans in case PSLF does not happen for you in 2025? Only 1% who have applied for it have gotten it to date. President Trump once again has it in his proposed 2021 budget to get rid of the PSLF program. If it were me, I would start making realistic plans - based on only 1% of applicants actually receiving the loan forgiveness - how I was going to pay off that $350K myself. In other words, maxing out three pre-tax plans (401k's and 457b) + Roth IRA's + Niece/Nephew Fund + Taxable Account investing may not be the equation you will need to follow to service the loan, plus cover household expenses. If it were me, I wouldn't wait until 2025 to find out. I would be attacking it now as those are better odds that are in your favor. :beer

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AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

CyclingDuo wrote: Sat Sep 12, 2020 9:21 am
AC1984 wrote: Fri Sep 11, 2020 9:19 pmCyclingDuo - Can you help me better understand your thoughts about which accounts to stop contributing to in the interim? There's $58,500 possible to max out the two 401k's and the 457, and $12,000 between our Roth IRA's. My 401k match is maxed when I put in 5%. The State automatically adds 4% no matter what, which means if I put in 5%, I get 9% matched (crazy right?). I know I can't miss out out on that. If I understand right, the 457 is accessible when you leave the job and isn't age dependent. If that's true - and please correct me if it isn't - maybe it would be good to split the total amount I decide to invest between those two to get the match and have earlier access to more in the 457. Another consideration is the back door Roth IRA contributions. Is it better to max the Roth IRA's and miss the full tax deduction of using some of that money toward the two 401k's and 457? I'm not sure there's one right answer, but I have no idea how to think about that. You suggested paying off debts with the taxable account, I'd love to hear more about your thoughts on this. Our car loans are 2 and 3% and total $9,200. That plus my wife's remaining student loans equals $15,100. Is it worth selling taxable stock (VTSAX and VTIAX) for this rather than let the gains accumulate over time and pay on the debt for now? I have no "bad" or other lingering debt.
Certainly keep contributing to the 401k to get the match, but I would use your current taxable account to get rid of the car loans and your wife's student loans in one fell swoop. Write the checks and be done with those loans. The monthly money that was going to service those loans can go right into building up your emergency fund. Your upcoming overtime pay can be used to build up the taxable account again.

How quickly do you want do build all of that up? You have the option of suspending or cutting back on the 457b contributions for October/November/December - and maybe even a few months in the early part of next year to get the EF fund built up. Stuff always happens in terms of repairs and maintenance with autos and home ownership. Most of us who have lived a few more decades can attest to Murphy showing up with multiple things all at once.

Part of your budgeting really should include a monthly amount that is being set aside each month for repairs and maintenance - because those events are coming, trust me. Suggested example is always save at least 1% for your home's value each year for repairs and maintenance, and the suggested example is to set aside $100-$150 per car every month (depending on model, age, etc...) for upcoming larger repairs. The smaller maintenance and repair stuff you just cash flow, but it's the larger repairs on homes and autos that you need to include in your monthly budget.
AC1984 wrote: Fri Sep 11, 2020 9:19 pmRe: Net worth - I currently have $504,000 in debts (mostly student loans and mortgage) and $578k in assets (according to Personal Capital which has all my info). For our student loans, I have $350k (with the $800 payment as 15% of my salary) on track for PSLF in 2025. We're definitely taking a celebratory travel hiatus at that point! My wife's loans total $5,900 and we're paying $220/month (variable interest rate, currently less than 3%), and they're also on track to be paid off in 2025. Our current mortgage is $135k (from $161k originally in late 2016), and the value now is somewhere around $210k.
What are your plans in case PSLF does not happen for you in 2025? Only 1% who have applied for it have gotten it to date. President Trump once again has it in his proposed 2021 budget to get rid of the PSLF program. If it were me, I would start making realistic plans - based on only 1% of applicants actually receiving the loan forgiveness - how I was going to pay off that $350K myself. In other words, maxing out three pre-tax plans (401k's and 457b) + Roth IRA's + Niece/Nephew Fund + Taxable Account investing may not be the equation you will need to follow to service the loan, plus cover household expenses. If it were me, I wouldn't wait until 2025 to find out. I would be attacking it now as those are better odds that are in your favor. :beer

CyclingDuo
Regarding PSLF, I'm 99.9% positive it will go through. I've done copious amounts of research myself on this topic and subscribe to a newsletter from Student Loan Planner, who has the most accurate and up to date info on the subject. To answer your questions and for anyone else who wants to know, the 1% who were granted the forgiveness were from the very earliest borrowers because they were the only ones potentially eligible who would have met the 120 payments criteria when that info was gathered. Consequently, there was an extremely small percentage of people who applied for forgiveness compared to the amount of people planning to do so now. The program requirements have been notoriously confusing, worsened by false or misleading information from loan servicers over the years. All of the people who didn't get forgiveness had some aspect of their payments incorrect. Many didn't get yearly certification that each payment was qualifying (i.e. non-profit/government job, full time status, and perhaps the most confusing part of being in the correct type of loan and payment plan: a Direct consolidated loan with an Income Driven Repayment plan - either ICR, IBR, PAYE, or REPAYE). I know for a fact I've met all these requirements and have gotten written confirmation that all my payments to date are certified as qualified by FedLoan, the primary servicer designated by the Dept. of Education to handle PSLF tracking. I personally know folks in my same job who have been granted PSLF.

**Edit to the original comment** In addition to the info above, many of the PSLF applications that didn't originally go through were because of having the wrong type of federal loan. Legislation has been passed rectifying this to include other loan types, so many these individuals likely have been granted forgiveness at this time. There's no data on whether this has actually happened so I'm speculating here.

**One more edit** Throwing any extra money toward loans that will be forgiven via PSLF is throwing money away. It won't add anything of value because of it isn't considered for purposes of PSLF.

Also, the proposed elimination of PSLF isn't going to happen any time soon, if at all. It requires congressional authorization, and that isn't going to happen with the current composition of people in congress. And the budget you're referencing was released pre-COVID, so there's no way at all that is even being considered at this point in time. In fact the opposite is happening, whereby the CARES Act and Trump's most recent executive order - which isn't being challenged - specifically states that all suspended payments that would otherwise qualify do in fact count as qualifying payments for purposes of any loan forgiveness program.

Finally, if there were ever new laws passed regarding a reduction or elimination of PSLF, it would only affect NEW borrowers specified in the law by a future date of loan origination. This has been true for every previous change in loan forgiveness requirements. Not to mention the PSLF guidelines are specifically written into the loan's Master Promissory Note. If there were an executive order or law that tried to pull a stunt otherwise, there would be a class action lawsuit with tens of thousands of people and it would prevail.
Last edited by AC1984 on Sat Sep 12, 2020 10:05 am, edited 1 time in total.
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Re: Best way to build an emergency fund?

Post by CyclingDuo »

AC1984 wrote: Sat Sep 12, 2020 9:52 amRegarding PSLF, I'm 99.9% positive it will go through.
All the best. There is a lot of financial water to flow under the bridge between now and 2025 due to the Covid crisis and the strain on the country's finances. At the very least, saving at your high rate will have built up your portfolio over the years in case the plan doesn't work out with your current thinking and you need to service the loan.

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Re: Best way to build an emergency fund?

Post by AC1984 »

CyclingDuo wrote: Sat Sep 12, 2020 10:05 am
AC1984 wrote: Sat Sep 12, 2020 9:52 amRegarding PSLF, I'm 99.9% positive it will go through.
All the best. There is a lot of financial water to flow under the bridge between now and 2025 due to the Covid crisis and the strain on the country's finances. At the very least, saving at your high rate will have built up your portfolio over the years in case the plan doesn't work out with your current thinking and you need to service the loan.

CyclingDuo
Thanks :happy Given my current savings rate, if for any unlikely reason I did have to pay it back, I could which is nice to know. That would royally suck though.
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AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

Wow, so I tallied the current balance for both car loans and my wife's student loans and pausing the taxable contributions. Each loan has it's own payoff date and the numbers are rounded for simplicity.

My car: $161 biweekly ($350/month divided by 12)..................Total balance = $3,200
Wife's car: $294/month.............................................................Total balance = $6,045
Wife's student loans: $220.......................................................Total balance = $5,915
Total debt paid:.................................................................................................$15,165

Extra monthly cash flow/savings:
Cars/student loans paid off.................................................................................$742/month
Pause taxable investing:......................................................................................$1000/month

Total extra monthly cash flow:.......................................................................... $1,742
Extra yearly cash flow: ...............................................................................................................$20,904

Looking at it from this perspective makes it seem like a no brainer to pay all this off, even with the potential loss of future gains of the $15k withdrawn from the taxable account). Plus this is without stopping any contributions toward all five retirement accounts. Fast way to increase EF...Best compromise of both worlds?
Last edited by AC1984 on Sat Sep 12, 2020 1:52 pm, edited 1 time in total.
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

lakpr wrote: Sat Sep 12, 2020 8:28 amI would definitely sell the taxable investments and pay off the loan. Of course, I would turn on the Specific-Id tracking on the taxable investments and pick those lots to sell, that have the least gains or perhaps even losses to cover the amount. The "higher rates of return" in the market are not guaranteed, and even otherwise the advantage of doing a rate-arbitrage on a $5,900 amount would be negligible. Given that you are maxing out three retirement vehicles, the daily fluctuations on that total balance alone would be more than the $5,900. Also seems to me it's a pain to carry on for 5 years, that could be made to go away almost instantly.
I wouldn't. The way I see it is that there's gains in taxable, so you're paying taxes in taxable to invest in tax deferred/advantaged accounts. It's a form of rebalancing, and even if there was reason to rebalance, the objective may be better reached via cash flows.

The problem is liquidity and there's not enough cash in an emergency fund, so paying off a liquid, relatively low interest loan, isn't higher priority to me. Yeah, it's a hassle to deal with payments, but that's why they have automatic billpay.
CyclingDuo wrote: Sat Sep 12, 2020 9:21 amWhat are your plans in case PSLF does not happen for you in 2025? Only 1% who have applied for it have gotten it to date. President Trump once again has it in his proposed 2021 budget to get rid of the PSLF program. If it were me, I would start making realistic plans - based on only 1% of applicants actually receiving the loan forgiveness - how I was going to pay off that $350K myself.
There's a lot of misunderstand and misuse of statistics. I wouldn't panic, or even be that concerned. Look deeper at the number first. The program began in 2007 and 10 years of service is 2017. And the number of participants grew as people figured out how to use it, so those first few years are much smaller numbers.
The earliest time in which borrowers could receive forgiveness under the program was after October 1, 2017. The Department of Education reported that 2,215 borrowers had the remainder of their respective student loans forgiven under the program as of April 30, 2020.
...
Those interested in receiving PSLF should regularly submit the "Employment Certification Form" for PSLF.
https://en.wikipedia.org/wiki/Public_Se ... orgiveness


OP, you've got about 60 qualified/certified months? If so, that's great!

Here's a December 2018 article that might be one of the sources of that 1% misunderstanding.
Here are the facts about public service loan forgiveness

The Education Department just released data on how many borrowers’ loans it has forgiven under the program — just 206. More than 40,000 borrowers have applied for the forgiveness.
Some 32,000 borrowers were denied because they didn’t meet the program requirements and another nearly 12,000 applications were turned down for missing information.
https://www.cnbc.com/2018/12/21/1-perce ... eness.html

And some more information if you're interested.
Why the PSLF Success Rate Will Hit Over 50% by 2024
https://www.studentloanplanner.com/pslf ... ll-effect/
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Re: Best way to build an emergency fund?

Post by AC1984 »

inbox788 wrote: Sat Sep 12, 2020 1:26 pm
lakpr wrote: Sat Sep 12, 2020 8:28 amI would definitely sell the taxable investments and pay off the loan. Of course, I would turn on the Specific-Id tracking on the taxable investments and pick those lots to sell, that have the least gains or perhaps even losses to cover the amount. The "higher rates of return" in the market are not guaranteed, and even otherwise the advantage of doing a rate-arbitrage on a $5,900 amount would be negligible. Given that you are maxing out three retirement vehicles, the daily fluctuations on that total balance alone would be more than the $5,900. Also seems to me it's a pain to carry on for 5 years, that could be made to go away almost instantly.
I wouldn't. The way I see it is that there's gains in taxable, so you're paying taxes in taxable to invest in tax deferred/advantaged accounts. It's a form of rebalancing, and even if there was reason to rebalance, the objective may be better reached via cash flows.

The problem is liquidity and there's not enough cash in an emergency fund, so paying off a liquid, relatively low interest loan, isn't higher priority to me. Yeah, it's a hassle to deal with payments, but that's why they have automatic billpay.
Point taken, though it's more than just rebalancing because there's no more debt right? Plus I'd be able to get back to taxable account contributions at some point, which would be sizable once the EF and fun money is accrued. But if not selling the taxable funds, how would you recommend increasing cash flow and liquidity into an EF? Regarding PSLF, I wrote a detailed reply above that's consistent with your references. I'm at 72 qualified payments as of this month :sharebeer
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Re: Best way to build an emergency fund?

Post by mikeyzito22 »

dru808 wrote: Tue Sep 08, 2020 4:43 pm This is the easiest way to pad the fund. I only use $5 bills and larger when paying for anything, never use $1’s, never use change. $1.05 I use a $5 bill. I’ve built a substantial emergency emergency fund doing this the past 5 years.
If the OPs expenses are 12K a month, and most of it can be put on credit you could effectively get 2% cash back, so why use cash? Again, little bits and pieces don't add up but 100$ in cash back a month will. I still don't understand this logic.
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Re: Best way to build an emergency fund?

Post by inbox788 »

AC1984 wrote: Sat Sep 12, 2020 11:54 amPause taxable investing:......................................................................................$1000/month
...
Looking at it from this perspective makes it seem like a no brainer to pay all this off, even with the potential loss of future gains of the $15k withdrawn from the taxable account) Plus this is without stopping any contributions toward all five retirement accounts. Fast way to increase EF...Best compromise of both worlds?
No, not all. You've still got $1k going into taxable on top of everything else? Is this the last dollar cash flow decision? You shouldn't be investing this in taxable if you've got other priorities. But I wouldn't pay taxes to get the money out with a good plan. If you've been investing for 2+ years, the average gains is likely over 20%, but you should look at specific purchases and see if there are any losses or near zero gains. Those can be liquidated with little tax consequence. If you sell and have to pay tax, make sure it's going to be a beneficial use of that cash.

I'm obsessed with maxing out retirement plans, and that's top priority in my book. The 22% tax deferment is worth a whole lot to me, especially if I can ever get it out at 0%. Or with Roth, take the 22% hit now, but tax-free gains later. If I can maximize everything, I don't have to think about which is better under what assumptions. And I don't mind paying a little interest to achieve this.

Anyway, you can't sell equities to pay off a loan and use the same funds to keep an emergency fund. It's either or. And you can sell the equities anytime, now or in an emergency with some chance that it's only 70% or less of what you can raise now (or 120% or more). Why the urgency now (vs. last 2 years)?
AC1984 wrote: Sat Sep 12, 2020 1:49 pmPoint taken, though it's more than just rebalancing because there's no more debt right? Plus I'd be able to get back to taxable account contributions at some point, which would be sizable once the EF and fun money is accrued. But if not selling the taxable funds, how would you recommend increasing cash flow and liquidity into an EF?
I think it still is rebalancing. No more debt also means no more assets. Just consider these limited accounts (ignoring retirement accounts and minimum loan payments for now) and add them all up. Net worth = assets (taxable, EF) - liabilities (loans).

If you take out from taxable and pay off loans, your net worth hasn't changed. If you're moving assets from taxable to "emergency fund", all that does is reduce risk and variability, but in itself doesn't change anything. You can pay additional loans, but the money has to come from somewhere.

What is your current extra cash flow? $1000 to taxable? You could make $1000 extra loan payments with that instead? Or put them in the EF?

Address the goals and fears. What is the desired EF? How quickly do you want to reach it? Are you afraid of a market crash? If that's a big concern, then do sell equities in taxable to reduce risk. Don't see how paying off loans fit in the picture yet.

BTW, math doesn't add up for me. I think you're comparing different numbers leading to bigger difference. If done right, it's probably more like 6.1 of one vs half a dozen.
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Re: Best way to build an emergency fund?

Post by AC1984 »

inbox788 wrote: Sat Sep 12, 2020 2:19 pm
AC1984 wrote: Sat Sep 12, 2020 11:54 amPause taxable investing:......................................................................................$1000/month
...
Looking at it from this perspective makes it seem like a no brainer to pay all this off, even with the potential loss of future gains of the $15k withdrawn from the taxable account) Plus this is without stopping any contributions toward all five retirement accounts. Fast way to increase EF...Best compromise of both worlds?
I'm obsessed with maxing out retirement plans, and that's top priority in my book. The 22% tax deferment is worth a whole lot to me, especially if I can ever get it out at 0%. Or with Roth, take the 22% hit now, but tax-free gains later. If I can maximize everything, I don't have to think about which is better under what assumptions. And I don't mind paying a little interest to achieve this.

Anyway, you can't sell equities to pay off a loan and use the same funds to keep an emergency fund. It's either or. And you can sell the equities anytime, now or in an emergency with some chance that it's only 70% or less of what you can raise now (or 120% or more). Why the urgency now (vs. last 2 years)?
AC1984 wrote: Sat Sep 12, 2020 1:49 pmPoint taken, though it's more than just rebalancing because there's no more debt right? Plus I'd be able to get back to taxable account contributions at some point, which would be sizable once the EF and fun money is accrued. But if not selling the taxable funds, how would you recommend increasing cash flow and liquidity into an EF?
I think it still is rebalancing. No more debt also means no more assets. Just consider these limited accounts (ignoring retirement accounts and minimum loan payments for now) and add them all up. Net worth = assets (taxable, EF) - liabilities (loans).
If you take out from taxable and pay off loans, your net worth hasn't changed. If you're moving assets from taxable to "emergency fund", all that does is reduce risk and variability, but in itself doesn't change anything. You can pay additional loans, but the money has to come from somewhere.

What is your current extra cash flow? $1000 to taxable? You could make $1000 extra loan payments with that instead? Or put them in the EF?

Address the goals and fears. What is the desired EF? How quickly do you want to reach it? Are you afraid of a market crash? If that's a big concern, then do sell equities in taxable to reduce risk. Don't see how paying off loans fit in the picture yet.

BTW, math doesn't add up for me. I think you're comparing different numbers leading to bigger difference. If done right, it's probably more like 6.1 of one vs half a dozen.


So much to consider, thank you for breaking everything down. I was putting $1,000 into taxable but went down to a few hundred (and nothing as of this month). I have everything automated through a "loan/investment" checking account fed by $1050 of my biweekly paycheck and weekly payments from our primary checking account. Withdrawals from the loan/investment checking are automated for mortgage (I was paying $100 extra but moved that to the emergency fund), car, Roth IRAs, and taxable (which is now straight into the emergency fund).
Anyway, you can't sell equities to pay off a loan and use the same funds to keep an emergency fund. It's either or. And you can sell the equities anytime, now or in an emergency with some chance that it's only 70% or less of what you can raise now (or 120% or more). Why the urgency now (vs. last 2 years)?
My thought would be sell equities to pay off the loans, and use the subsequent cash flow equivalent toward an emergency fund. I've felt more urgent recently because we'd love for my wife to be able to work less and do things she's been putting off (like thru-hiking) without stressing about cash flow, at least for a while. I'll still be working full time. Paying off the loans would make stress about cash flow go away, no? I'm not concerned about the market per se, I plan on keeping everything I can in index funds for the long haul. Desired EF is around $30,000, roughly 4 months' expenses. Plus if the loans were paid we wouldn't need as much in the emergency fund because monthly expenses would be that much less.
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Re: Best way to build an emergency fund?

Post by inbox788 »

AC1984 wrote: Sat Sep 12, 2020 3:21 pmMy thought would be sell equities to pay off the loans, and use the subsequent cash flow equivalent toward an emergency fund.
LOL. Rob Peter to pay Paul. What happened to those valuable equities you sold?

If you take the straight path..."My thought would be sell equities to pay off the loans, and use the subsequent cash flow equivalent toward an emergency fund."

Now that you've achieved your emergency fund goal, do you really want to use your emergency fund to pay off loans?

It's a lot of mental shuffling that doesn't achieve a whole lot net difference. Do whatever will make you and especially your wife feel better, but realize mathematically it's not much more than transferring $100/month or $1000/month from your savings account to your emergency fund.

On average, if you assume equities +6%, EF 0%, loans -3%, you'll do a little better doing nothing different.
I've felt more urgent recently because we'd love for my wife to be able to work less and do things she's been putting off (like thru-hiking) without stressing about cash flow, at least for a while. I'll still be working full time. Paying off the loans would make stress about cash flow go away, no? I'm not concerned about the market per se, I plan on keeping everything I can in index funds for the long haul. Desired EF is around $30,000, roughly 4 months' expenses. Plus if the loans were paid we wouldn't need as much in the emergency fund because monthly expenses would be that much less.
Less work means less income and less cash flow causing more stress. The answer is more work! But of course, work is stressful, so more work is more stress. Seriously, though, if there isn't much of a tax hit, selling some equities might be simplest thing to increase liquid cash you think you need.

In an emergency, I'd want equities over a paid off loan.
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AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

inbox788 wrote: Sat Sep 12, 2020 4:32 pm
AC1984 wrote: Sat Sep 12, 2020 3:21 pmMy thought would be sell equities to pay off the loans, and use the subsequent cash flow equivalent toward an emergency fund.
LOL. Rob Peter to pay Paul. What happened to those valuable equities you sold?

If you take the straight path..."My thought would be sell equities to pay off the loans, and use the subsequent cash flow equivalent toward an emergency fund."

Now that you've achieved your emergency fund goal, do you really want to use your emergency fund to pay off loans?

It's a lot of mental shuffling that doesn't achieve a whole lot net difference. Do whatever will make you and especially your wife feel better, but realize mathematically it's not much more than transferring $100/month or $1000/month from your savings account to your emergency fund.

On average, if you assume equities +6%, EF 0%, loans -3%, you'll do a little better doing nothing different.
I've felt more urgent recently because we'd love for my wife to be able to work less and do things she's been putting off (like thru-hiking) without stressing about cash flow, at least for a while. I'll still be working full time. Paying off the loans would make stress about cash flow go away, no? I'm not concerned about the market per se, I plan on keeping everything I can in index funds for the long haul. Desired EF is around $30,000, roughly 4 months' expenses. Plus if the loans were paid we wouldn't need as much in the emergency fund because monthly expenses would be that much less.
Less work means less income and less cash flow causing more stress. The answer is more work! But of course, work is stressful, so more work is more stress. Seriously, though, if there isn't much of a tax hit, selling some equities might be simplest thing to increase liquid cash you think you need.

In an emergency, I'd want equities over a paid off loan.
Thanks for all the detail, every time I think I have a handle on something there's so many more questions.
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CyclingDuo
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Re: Best way to build an emergency fund?

Post by CyclingDuo »

AC1984 wrote: Sat Sep 12, 2020 11:54 am Wow, so I tallied the current balance for both car loans and my wife's student loans and pausing the taxable contributions. Each loan has it's own payoff date and the numbers are rounded for simplicity.

My car: $161 biweekly ($350/month divided by 12)..................Total balance = $3,200
Wife's car: $294/month.............................................................Total balance = $6,045
Wife's student loans: $220.......................................................Total balance = $5,915
Total debt paid:.................................................................................................$15,165

Extra monthly cash flow/savings:
Cars/student loans paid off.................................................................................$742/month
Pause taxable investing:......................................................................................$1000/month

Total extra monthly cash flow:.......................................................................... $1,742
Extra yearly cash flow: ...............................................................................................................$20,904

Looking at it from this perspective makes it seem like a no brainer to pay all this off, even with the potential loss of future gains of the $15k withdrawn from the taxable account). Plus this is without stopping any contributions toward all five retirement accounts. Fast way to increase EF...Best compromise of both worlds?
It's a start. Standard Baby Step 2 stuff is what the Dave Ramsey crowd would call it.
AC1984 wrote: Sat Sep 12, 2020 11:54 amThanks :happy Given my current savings rate, if for any unlikely reason I did have to pay it back, I could which is nice to know. That would royally suck though.
Most of the rest of us managed to pay back our student loans. :mrgreen: Plus, I made sure my children graduated from college and graduate school debt free. All on a household income less than yours. :beer

What degree or degrees did you get to amass a whopping $350K student loan? Please tell me it was years in medical school...

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright
Topic Author
AC1984
Posts: 56
Joined: Fri Aug 24, 2018 7:53 am

Re: Best way to build an emergency fund?

Post by AC1984 »

CyclingDuo wrote: Sat Sep 12, 2020 5:58 pm Most of the rest of us managed to pay back our student loans. :mrgreen: Plus, I made sure my children graduated from college and graduate school debt free. All on a household income less than yours. :beer

What degree or degrees did you get to amass a whopping $350K student loan? Please tell me it was years in medical school...

CyclingDuo
That's wonderful you were able to pay back your school loans, but times have changed, and tuition exponentially along with it. It's not possible for many people to take out graduate degree loans and expect to fully pay them back. That's a big reason why PSLF was enacted, because as a society we need highly educated people working in skilled positions (I'm not implying anything about other kinds of work or education, just saying it's a need that has to be filled). Graduate school shouldn't only be accessible to those with wealth. I'm a psychologist, and that's the cost of a graduate program these days. My parents paid for a college education out of pocket with a regular job in school. That's been a pipe dream for a few decades now, more so every year. I pursued my interests with graduate school because I knew it would result in a fulfilling and stable career, though I didn't know exactly what or how at the time. I never intended to fully pay these loans back and my decision and confidence to enter grad school was in large part because of the promise of PSLF as an incentive to pursue a specialized degree without destroying my financial future. By the time the loan is forgiven, I'll still have paid north of $60,000. That seems like a reasonable tax.

I would guess the majority of people with federal loans today are on some kind of income based plan because they can't afford to pay it off. This discussion hints at larger systemic issues beyond the scope of this thread.
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

CyclingDuo wrote: Sat Sep 12, 2020 5:58 pm
AC1984 wrote: Sat Sep 12, 2020 11:54 am My car: $161 biweekly ($350/month divided by 12)..................Total balance = $3,200
Wife's car: $294/month.............................................................Total balance = $6,045
Wife's student loans: $220.......................................................Total balance = $5,915

Cars/student loans paid off.................................................................................$742/month
It's a start. Standard Baby Step 2 stuff is what the Dave Ramsey crowd would call it.

...
What degree or degrees did you get to amass a whopping $350K student loan? Please tell me it was years in medical school...
I'm not a big fan of Dave Ramsey, but his strategy is good for the right kind of debtor. I just don't think OP is it and can leap to Step 6 and 7 soon. https://www.daveramsey.com/dave-ramsey-7-baby-steps

I'm guessing it's not medical school. Doctor need better math skills and I can't for the life of me figure out how $350+$294+$220 = $742. I'd guess lawyer, since you don't need to know that much math. https://pbs.twimg.com/media/DYwrE4FXcAA ... me=360x360 https://i.pinimg.com/originals/d8/1e/b0 ... fde758.jpg

I'm understanding the situation better, and think the emergency fund is a red herring. OP was cruising along with a solid plan making progress on retirement and paying off debt and over $1000 extra cash a month and hit a speed bump, so no extra cash. He's now realizing, OMG, I don't have an EF. and OMG, I have too much debt. But with nearly 10k in cash accounts and $30k in equities at hand, and still some positive cash flow (keep growing slowly), I'd be comfortable enough to wait before taking any immediate actions. If there is a big loss of income, that's the time I'd take retirement savings to zero if necessary. Tax liability and tax benefit would drop too.

Now the rosy part of the picture. OP went from -90k to +90k NW in a year, terrific! How many 35 year olds any age have over $300k in retirement savings? It's not unrealistic to plan for $100k in growth in 5 years and with maxing out retirement accounts another $200k in contributions, so a doubling of retirement savings. And with current repayment, in about 2 years, all the above loans go away, so there additional positive cash flow. If nothing changes, these next 24 months will be a little tight, but after that it's blue skies ahead. In about 5 years time NW should be approaching $500k and when the loan forgiveness goes thru, it won't be much longer before $1M sometime between 40-45.

Oh, and in 5 years, the mortgage would have been paid every month and that much closer to finished. I don't recall seeing the rate, but should be close to the current 3%, and one can make a decision then whether to accelerate paying it off or invest any extra cash. I'd lean towards the latter and skip step 6.

https://www.synchronybank.com/blog/medi ... ngs-by-age
ImUrHuckleberry
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Re: Best way to build an emergency fund?

Post by ImUrHuckleberry »

MotoTrojan wrote: Tue Sep 08, 2020 4:58 pm Rather than halting Roth IRA contributions I would just use it as part of your emergency fund (leave it in money market). If an emergency comes up, you withdraw it penalty free and lose the Roth space, oh well. If no emergency comes up you can eventually move it to your asset allocation once you have a taxable emergency fund built up in the more distant future, yay!
This is exactly what we did for a few years until we had enough excess income to fund an EF directly, except we put it in a intermediate term treasury fund rather than MM.
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

ImUrHuckleberry wrote: Sat Sep 12, 2020 8:46 pm
MotoTrojan wrote: Tue Sep 08, 2020 4:58 pm Rather than halting Roth IRA contributions I would just use it as part of your emergency fund (leave it in money market). If an emergency comes up, you withdraw it penalty free and lose the Roth space, oh well. If no emergency comes up you can eventually move it to your asset allocation once you have a taxable emergency fund built up in the more distant future, yay!
This is exactly what we did for a few years until we had enough excess income to fund an EF directly, except we put it in a intermediate term treasury fund rather than MM.
Exactly! I don't know why I didn't think of this specific account earlier. Well, I sort of did, but didn't put it together with this part because I really don't see the need, but if you must, remember this:

Placing cash needs in a tax-advantaged account
https://www.bogleheads.org/wiki/Placing ... ed_account

If you've maxed out 2 Roth's for 2 years, you should have over 20k in Roth invested in equities. They can be sold and kept as money market funds (or short or mid term bonds depending on your risk tolerance) with no tax consequences. You can keep the equities in the taxable. And when you don't need the cash anymore, you can move it to adjust your asset allocation as above. But if you do need it in an emergency, you DON'T have to lose the Roth space. You sell equities in taxable and buy them back in Roth at the same time. This doesn't change your investment risk, just shifts them around (call it a 2 step transfer), but makes the cash accessible. This eliminates a taxable event if you don't have an emergency, which hopefully is the likely outcome. And you're equally prepared if there is a need.

Keep adding funds to protect and keep the Roth space. Come to think of it, you could use the tax-deferred accounts the same way, and have more cash that way by selling stocks there. A small wrinkle with either is the tax adjusted (after tax) investment amounts, which might be around 20-25% or you could just ignore it for simplicity. And since you're not really tied to Roth on the matter, then the availability of good low expense fee funds might be used to make the decision. Which account has better equity choices (keep) and bond choices (use).
Topic Author
AC1984
Posts: 56
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Re: Best way to build an emergency fund?

Post by AC1984 »

I'm understanding the situation better, and think the emergency fund is a red herring. OP was cruising along with a solid plan making progress on retirement and paying off debt and over $1000 extra cash a month and hit a speed bump, so no extra cash. He's now realizing, OMG, I don't have an EF. and OMG, I have too much debt. But with nearly 10k in cash accounts and $30k in equities at hand, and still some positive cash flow (keep growing slowly), I'd be comfortable enough to wait before taking any immediate actions. If there is a big loss of income, that's the time I'd take retirement savings to zero if necessary. Tax liability and tax benefit would drop too.
First thing's first: You're pretty much dead on, except I'm a psychologist and not a lawyer :beer Not sure how I added the simplest part wrong :!: but the logic is the same. If I'm totally honest about the reason I posted this question (which has been a valuable tutorial and thought exercise - thanks for everyone's contributions), my wife's work situation is somewhat untenable, though for now given the pandemic there's no immediate action being taken or considered. More like within the next year or so we've talked about a few possibilities. 1) Her working less at her current job, which wouldn't change too much given she would still have a 401k and a significant income...and we don't rely on her health insurance. 2) She stops working altogether for a while - not indefinitely - to pursue some dreams like extended travel or thru-hiking. The 'OMG' moment regarding liquid cash deficiency is both because we've had a ton of house expenses that were foreseen but not as far as the cost (i.e. had to replace the oven that turned into a $7k project because a new gas line was needed, an old one had to be replaced, new electrical line, and we had to get a very specific expensive oven because of the nature of the house). We also inherited a small pool with this house, and this year it rusted through and is being replaced...$3600, with the fence and deck surrounding it also deteriorated and had to be replaced in a similar time frame ($8k...etc.). I'm not kvetching here, just pointing out the obvious like Cycling Duo highlighted that as a homeowner a lot of big expenses have come up in short order and who knows what's next or when. The house is in really good shape structurally but a lot of things were ready to die when we moved in so hopefully we've replaced and fixed most of it for a while.

Re: monthly car/student loan debts: Honestly, until CyclingDuo mentioned it this wasn't a huge stressor other than it limits monthly liquidity and feels like a drag. I guess with money going in so many "untouchable" savings vehicles I haven't felt that it's even an option to dip into them, including the taxable account...obviously that's not true especially the taxable account.

My primary growing mental stress is because in addition to wanting peace of mind of having a big pile of cash ready to go if needed, my wife's impending urgency to take a leap and try something else that at least for a while would mean no or drastically reduced income on her end. I want her to have that freedom because she supported us throughout my grad school and there's a lot of burnout and delayed life goals (personal relationship/lifestyle decisions). There's no real immediate need to sell taxable investments, and I could obviously reduce retirement contributions if I had to, but reducing tax-advantaged contributions isn't my first choice. Because we have so much money that isn't directly liquid it feels silly to be stressed with a pending lifestyle decision that hasn't even happened...though it is inevitable. I really just want to feel more secure when it does and know we have cash when other unexpected big expenses occur. I just have to be okay with the fact it will take some time to build up the cash savings account. And if we pull the lifestyle trigger and something urgent does arise, we have taxable funds to make most financial issues go away. The extra $1,000 that was going to taxable is now going to the cash EF so that's big, plus the extra $100 biweekly that was going toward the mortgage principle. My pending also overtime can't be overstated. I have no idea how much I'll get but it literally doubled my income the last two years...unlikely to have that again but significantly more than I would make without it. The extra income will go toward the EF until it doesn't have to.
Now the rosy part of the picture. OP went from -90k to +90k NW in a year, terrific! How many 35 year olds any age have over $300k in retirement savings? It's not unrealistic to plan for $100k in growth in 5 years and with maxing out retirement accounts another $200k in contributions, so a doubling of retirement savings. And with current repayment, in about 2 years, all the above loans go away, so there additional positive cash flow. If nothing changes, these next 24 months will be a little tight, but after that it's blue skies ahead. In about 5 years time NW should be approaching $500k and when the loan forgiveness goes thru, it won't be much longer before $1M sometime between 40-45.
I really have to keep this in mind.
MotoTrojan wrote: ↑Tue Sep 08, 2020 5:58 pm
Rather than halting Roth IRA contributions I would just use it as part of your emergency fund (leave it in money market). If an emergency comes up, you withdraw it penalty free and lose the Roth space, oh well. If no emergency comes up you can eventually move it to your asset allocation once you have a taxable emergency fund built up in the more distant future, yay!
I know this has been mentioned so I want to be clear on one part. Does the wash sale rule apply to selling in one account (taxable) and buying in another (Roth IRA)? If so that's easy to avoid I guess by waiting a month.
If you've maxed out 2 Roth's for 2 years, you should have over 20k in Roth invested in equities. They can be sold and kept as money market funds (or short or mid term bonds depending on your risk tolerance) with no tax consequences. You can keep the equities in the taxable. And when you don't need the cash anymore, you can move it to adjust your asset allocation as above. But if you do need it in an emergency, you DON'T have to lose the Roth space. You sell equities in taxable and buy them back in Roth at the same time. This doesn't change your investment risk, just shifts them around (call it a 2 step transfer), but makes the cash accessible. This eliminates a taxable event if you don't have an emergency, which hopefully is the likely outcome. And you're equally prepared if there is a need.
Is there a real reason to keep this "EF" part of Roth in a MMA other than it could lose value if I needed it at the time? Isn't there also an opportunity cost with the likelihood of the invested gains? Why not just keep it invested in VTSAX and use the taxable if needed?
MotoTrojan
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Re: Best way to build an emergency fund?

Post by MotoTrojan »

AC1984 wrote: Sun Sep 13, 2020 8:00 am
I know this has been mentioned so I want to be clear on one part. Does the wash sale rule apply to selling in one account (taxable) and buying in another (Roth IRA)? If so that's easy to avoid I guess by waiting a month.

If I had a taxable loss I’d sell and immediately buy a similar but not identical asset in the Roth; win-win, instead of deferring the tax I eliminate it forever. Sell total US, buy S&P500 or large-cap for example. Like a regular taxable tax-loss harvest but moving into IRA.

Having said that, I don’t think you’re in a position to have your entire EF invested in equities based on the OP.
ImUrHuckleberry
Posts: 488
Joined: Sat Apr 15, 2017 7:44 am

Re: Best way to build an emergency fund?

Post by ImUrHuckleberry »

AC1984 wrote: Sun Sep 13, 2020 8:00 am Is there a real reason to keep this "EF" part of Roth in a MMA other than it could lose value if I needed it at the time? Isn't there also an opportunity cost with the likelihood of the invested gains? Why not just keep it invested in VTSAX and use the taxable if needed?
I think the bolded is pretty much it.

We used an intermediate treasury fund and we counted it towards our fixed allocation. We then increased our equity holdings in other accounts like our 401k's to meet our desired AA across all accounts.
Topic Author
AC1984
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Re: Best way to build an emergency fund?

Post by AC1984 »

MotoTrojan wrote: Sun Sep 13, 2020 9:02 am
AC1984 wrote: Sun Sep 13, 2020 8:00 am
I know this has been mentioned so I want to be clear on one part. Does the wash sale rule apply to selling in one account (taxable) and buying in another (Roth IRA)? If so that's easy to avoid I guess by waiting a month.

If I had a taxable loss I’d sell and immediately buy a similar but not identical asset in the Roth; win-win, instead of deferring the tax I eliminate it forever. Sell total US, buy S&P500 or large-cap for example. Like a regular taxable tax-loss harvest but moving into IRA.

Having said that, I don’t think you’re in a position to have your entire EF invested in equities based on the OP.
Thanks, I'm going to use this strategy and leave future contributions in the Roth MMA until I have sufficient cash in my savings account that I no longer need it there. Could you please briefly explain how the immediate purchase after selling a taxable loss eliminates tax owed? I understand the asset allocation rebalancing but I'm less informed about tax issues.
toocold
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Re: Best way to build an emergency fund?

Post by toocold »

I would limit funding your 401k up to a match and use that to fund your EF for 6 months of expenses and then resume full match.

I think you guys are doing an awesome job of saving!
Topic Author
AC1984
Posts: 56
Joined: Fri Aug 24, 2018 7:53 am

Re: Best way to build an emergency fund?

Post by AC1984 »

toocold wrote: Tue Sep 15, 2020 6:05 am I would limit funding your 401k up to a match and use that to fund your EF for 6 months of expenses and then resume full match.

I think you guys are doing an awesome job of saving!
Thanks :) I tried to use all the overtime money I could toward retirement accounts the past few years. I know saving cash isn't complicated in theory, it's just hard to let go of adding money to investments. But a cash EF is really an insurance to not pull from investments, or stress about it. :sharebeer
DesertMan
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Re: Best way to build an emergency fund?

Post by DesertMan »

Vanguard Research- what to do with your next dollar
https://institutional.vanguard.com/VGAp ... NextDollar
MotoTrojan
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Re: Best way to build an emergency fund?

Post by MotoTrojan »

AC1984 wrote: Tue Sep 15, 2020 5:44 am
MotoTrojan wrote: Sun Sep 13, 2020 9:02 am
AC1984 wrote: Sun Sep 13, 2020 8:00 am
I know this has been mentioned so I want to be clear on one part. Does the wash sale rule apply to selling in one account (taxable) and buying in another (Roth IRA)? If so that's easy to avoid I guess by waiting a month.

If I had a taxable loss I’d sell and immediately buy a similar but not identical asset in the Roth; win-win, instead of deferring the tax I eliminate it forever. Sell total US, buy S&P500 or large-cap for example. Like a regular taxable tax-loss harvest but moving into IRA.

Having said that, I don’t think you’re in a position to have your entire EF invested in equities based on the OP.
Thanks, I'm going to use this strategy and leave future contributions in the Roth MMA until I have sufficient cash in my savings account that I no longer need it there. Could you please briefly explain how the immediate purchase after selling a taxable loss eliminates tax owed? I understand the asset allocation rebalancing but I'm less informed about tax issues.
Start by reading up on tax-loss harvesting (TLH). Then instead of selling the taxable asset and immediately buying (exchanging for) a similarl fund in the same taxable account, contribute those proceeds to your IRA (401k would work too, money is fungible) and buy the similar but not substantially identical asset in the tax-advantaged account. You'll get the same tax-loss as a regular TLH, but instead of deferring the tax into the future, you can actually eliminate it altogether by moving the same equity exposure into your Roth.

Here are some articles on TLH:

https://www.whitecoatinvestor.com/tax-loss-harvesting/

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

There are also countless (too many) threads on it on the forum if you search.
Ryzen
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Re: Best way to build an emergency fund?

Post by Ryzen »

AC1984 wrote: Sat Sep 12, 2020 6:58 pm
CyclingDuo wrote: Sat Sep 12, 2020 5:58 pm Most of the rest of us managed to pay back our student loans. :mrgreen: Plus, I made sure my children graduated from college and graduate school debt free. All on a household income less than yours. :beer

What degree or degrees did you get to amass a whopping $350K student loan? Please tell me it was years in medical school...

CyclingDuo
That's wonderful you were able to pay back your school loans, but times have changed, and tuition exponentially along with it. It's not possible for many people to take out graduate degree loans and expect to fully pay them back. That's a big reason why PSLF was enacted, because as a society we need highly educated people working in skilled positions (I'm not implying anything about other kinds of work or education, just saying it's a need that has to be filled). Graduate school shouldn't only be accessible to those with wealth. I'm a psychologist, and that's the cost of a graduate program these days. My parents paid for a college education out of pocket with a regular job in school. That's been a pipe dream for a few decades now, more so every year. I pursued my interests with graduate school because I knew it would result in a fulfilling and stable career, though I didn't know exactly what or how at the time. I never intended to fully pay these loans back and my decision and confidence to enter grad school was in large part because of the promise of PSLF as an incentive to pursue a specialized degree without destroying my financial future. By the time the loan is forgiven, I'll still have paid north of $60,000. That seems like a reasonable tax.

I would guess the majority of people with federal loans today are on some kind of income based plan because they can't afford to pay it off. This discussion hints at larger systemic issues beyond the scope of this thread.
Plenty of us with a fraction of the income make payments on the default payment plan with no expectation of forgiveness
[Edited rest of post: not worth the fight]

Enjoy your camper....
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

AC1984 wrote: Tue Sep 15, 2020 5:44 am
MotoTrojan wrote: Sun Sep 13, 2020 9:02 am If I had a taxable loss I’d sell and immediately buy a similar but not identical asset in the Roth; win-win, instead of deferring the tax I eliminate it forever. Sell total US, buy S&P500 or large-cap for example. Like a regular taxable tax-loss harvest but moving into IRA.

Having said that, I don’t think you’re in a position to have your entire EF invested in equities based on the OP.
Thanks, I'm going to use this strategy and leave future contributions in the Roth MMA until I have sufficient cash in my savings account that I no longer need it there. Could you please briefly explain how the immediate purchase after selling a taxable loss eliminates tax owed? I understand the asset allocation rebalancing but I'm less informed about tax issues.
I thought OP was already maxing out Roth and 100% equities. Did something change or is there something else I'm missing? Additional tax advantaged space that's not used?
AC1984 wrote: Tue Sep 08, 2020 1:35 pmFor the past two years we've been maxing out two 401k's, a 457 (I'm a state employee and have access to both) and two back door Roth IRAs. ... Overall our combined holdings are 100% stocks for now...
lakpr
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Re: Best way to build an emergency fund?

Post by lakpr »

inbox788 wrote: Tue Sep 15, 2020 12:47 pm I thought OP was already maxing out Roth and 100% equities. Did something change or is there something else I'm missing? Additional tax advantaged space that's not used?
AC1984 wrote: Tue Sep 08, 2020 1:35 pmFor the past two years we've been maxing out two 401k's, a 457 (I'm a state employee and have access to both) and two back door Roth IRAs. ... Overall our combined holdings are 100% stocks for now...
I believe the OP is now saying instead of directing Roth IRA to 100% equities, he will use money market funds.
inbox788
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Re: Best way to build an emergency fund?

Post by inbox788 »

lakpr wrote: Tue Sep 15, 2020 12:49 pmI believe the OP is now saying instead of directing Roth IRA to 100% equities, he will use money market funds.
Yes, he wants and "emergency fund", something in cash like form (some bonds may be acceptable), and the most expedient solution is to liquidate in tax advantaged space so there isn't a capital gains tax due immediately. If there are capital losses currently, it should obviously take precedent and liquidate first, but broad index equities should be up from 2 years ago. If after liquidating some assets in tax advantaged, the market goes down, then instead of TLH and buying back in taxable, doing a little dance with the tax advantaged accounts makes sense.

I'm always 100% equities in Roth, so it hasn't ever come up. (Unfortunately I chose international and it's lagging. Have considered swapping 50% or 100% with tax deferred holdings, but haven't gotten around to it. If done correctly, tax adjusted amounts, it probably wouldn't make any difference anyway.)

I'll have to think about whether it makes a difference in this situation and why (probably a lot of future tax rate predictions), but the simple switch is to park the "emergency fund" in tax deferred as a default instead of Roth.
Topic Author
AC1984
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Joined: Fri Aug 24, 2018 7:53 am

Re: Best way to build an emergency fund?

Post by AC1984 »

Ryzen wrote: Tue Sep 15, 2020 9:20 am
AC1984 wrote: Sat Sep 12, 2020 6:58 pm
CyclingDuo wrote: Sat Sep 12, 2020 5:58 pm Most of the rest of us managed to pay back our student loans. :mrgreen: Plus, I made sure my children graduated from college and graduate school debt free. All on a household income less than yours. :beer

What degree or degrees did you get to amass a whopping $350K student loan? Please tell me it was years in medical school...

CyclingDuo
That's wonderful you were able to pay back your school loans, but times have changed, and tuition exponentially along with it. It's not possible for many people to take out graduate degree loans and expect to fully pay them back. That's a big reason why PSLF was enacted, because as a society we need highly educated people working in skilled positions (I'm not implying anything about other kinds of work or education, just saying it's a need that has to be filled). Graduate school shouldn't only be accessible to those with wealth. I'm a psychologist, and that's the cost of a graduate program these days. My parents paid for a college education out of pocket with a regular job in school. That's been a pipe dream for a few decades now, more so every year. I pursued my interests with graduate school because I knew it would result in a fulfilling and stable career, though I didn't know exactly what or how at the time. I never intended to fully pay these loans back and my decision and confidence to enter grad school was in large part because of the promise of PSLF as an incentive to pursue a specialized degree without destroying my financial future. By the time the loan is forgiven, I'll still have paid north of $60,000. That seems like a reasonable tax.

I would guess the majority of people with federal loans today are on some kind of income based plan because they can't afford to pay it off. This discussion hints at larger systemic issues beyond the scope of this thread.
Plenty of us with a fraction of the income make payments on the default payment plan with no expectation of forgiveness
[Edited rest of post: not worth the fight]

Enjoy your camper....
1,000 paths up the mountain so they say, no hard feelings. We're all doing the best we know how with our specific circumstances. :happy
Topic Author
AC1984
Posts: 56
Joined: Fri Aug 24, 2018 7:53 am

Re: Best way to build an emergency fund?

Post by AC1984 »

lakpr wrote: Tue Sep 15, 2020 12:49 pm
inbox788 wrote: Tue Sep 15, 2020 12:47 pm I thought OP was already maxing out Roth and 100% equities. Did something change or is there something else I'm missing? Additional tax advantaged space that's not used?
AC1984 wrote: Tue Sep 08, 2020 1:35 pmFor the past two years we've been maxing out two 401k's, a 457 (I'm a state employee and have access to both) and two back door Roth IRAs. ... Overall our combined holdings are 100% stocks for now...
I believe the OP is now saying instead of directing Roth IRA to 100% equities, he will use money market funds.
I was referring to only new contributions directed to stay in the money market for now, wasn't planning to exchange for money market with existing funds.
Topic Author
AC1984
Posts: 56
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Re: Best way to build an emergency fund?

Post by AC1984 »

inbox788 wrote: Tue Sep 15, 2020 1:11 pm
lakpr wrote: Tue Sep 15, 2020 12:49 pmI believe the OP is now saying instead of directing Roth IRA to 100% equities, he will use money market funds.
Yes, he wants and "emergency fund", something in cash like form (some bonds may be acceptable), and the most expedient solution is to liquidate in tax advantaged space so there isn't a capital gains tax due immediately. If there are capital losses currently, it should obviously take precedent and liquidate first, but broad index equities should be up from 2 years ago. If after liquidating some assets in tax advantaged, the market goes down, then instead of TLH and buying back in taxable, doing a little dance with the tax advantaged accounts makes sense.

I'm always 100% equities in Roth, so it hasn't ever come up. (Unfortunately I chose international and it's lagging. Have considered swapping 50% or 100% with tax deferred holdings, but haven't gotten around to it. If done correctly, tax adjusted amounts, it probably wouldn't make any difference anyway.)

I'll have to think about whether it makes a difference in this situation and why (probably a lot of future tax rate predictions), but the simple switch is to park the "emergency fund" in tax deferred as a default instead of Roth.
Roth IRA or 401k is no difference on my end, I'd just be directing future contributions into a bond or money market fund.
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