Recommendations for a 2nd tier emergency fund

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Toons
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Re: Recommendations for a 2nd tier emergency fund

Post by Toons »

First choice
Intermediate term tax exempt
Second choice
Conservative Growth

For Me
😉
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Toons
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Re: Recommendations for a 2nd tier emergency fund

Post by Toons »

First choice
Intermediate term tax exempt
Second choice
Conservative Growth

For Me
😉
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

sycamore wrote: Tue Jul 20, 2021 2:16 pm Finally pick the specific funds to reach your 30/20/50 stocks/bonds/cash allocation:
- 50% in ally

- 1. Buy an all-in-one fund like VSCGX with a 60/40 allocation, which at 50% of total is the 30% in stocks and 20% bonds per above
OR
- 2. Buy separate funds VTSAX at 30% and VBTLX at 20%. No international stocks or bonds, but you need to rebalance it
What are the advantages of #2? I don't know anything about rebalancing or tax loss harvesting. Remember, I have all my retirement space filled with TR funds! Thanks.
pasadena
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Re: Recommendations for a 2nd tier emergency fund

Post by pasadena »

OK, I understand buckets and mental accounting (that's me!). I think you're overthinking it. Decide on how much money you want to keep in 100% cash for emergencies. Then decide how much of the rest you're willing to lose for an unknown duration. That will help you determine which AA you're comfortable with for that particular bucket. Then choose whatever all-in-one fund matches that.

You can buy I-Bonds for inflation protection. 3.54% right now, rate resets every 6 months depending on the inflation numbers. Must keep at least 1 year, lose 3 months of interest if sod between 1 year and 5 year, guaranteed to double after 20 years (or is it 30?).

And/Or (maybe a 3rd tier?):

(1) One of the Life Strategy funds, VASIX being the most conservative at 20/80, if you're ok with International Stocks and International Bonds

(2) You can make your own by buying individual index funds (VTSAX / <Bond Fund>). In taxable <Bond Fund> depends on your tax bracket (Fed and State). My taxable bond allocation uses VWITX (Intermediate-Term Tax-Exempt Fund) which is tax exempt at the Fed level. You may want to choose something with a shorter duration, or a fund that is also state tax exempt for your State. See the list of them here.

Advantages of (2) is the flexibility in choosing your indexes and your allocation. Some people don't want international stocks and/or bonds. Also you can make it a lot more tax efficient, and maybe cheaper.
Disadvantage of (2) is the necessary rebalancing from time to time.

You can make it as simple or as complicated as you want.
Last edited by pasadena on Tue Jul 20, 2021 4:35 pm, edited 1 time in total.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

pasadena wrote: Tue Jul 20, 2021 4:20 pm (2) You can make your own by buying individual index funds (VTSAX /

Advantages of (2) is the flexibility in choosing your indexes and your allocation. Some people don't want international stocks and/or bonds. Also you can make it a lot more tax efficient, and maybe cheaper.
Disadvantage of (2) is the necessary rebalancing from time to time.

You can make it as simple or as complicated as you want.
Is (2) significantly more tax efficient? I'm in 12% bracket. Rebalancing seems a bit daunting and leaves me open to behavioral errors. I'm just skittish about making an error on the fund AA never being able to change it. Taxable is new to me. Probably way over thinking it.

Thanks...learning a lot here.
KlangFool
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

OP,

Why do you need to rebalance?

Assuming that you have 100K in your taxable.

A) You absolutely need 75K at any time.

B) Keep 50K in CASH -> you always get 50K

C) Keep 50K in VTSAX -> You may lose 50% -> 25K.

Then, you are done. Do not rebalance. Reinvest everything into VTSAX.

In term of taxes

A) CASH ~ 0% income = ~ 0% taxes

B) VTSAX -> 2% dividend/distribution -> $1,000 -> 0% Long-term capital gain tax rate 0% taxes.

Easy and ZERO maintenance.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
pasadena
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Re: Recommendations for a 2nd tier emergency fund

Post by pasadena »

jb3 wrote: Tue Jul 20, 2021 4:30 pm
pasadena wrote: Tue Jul 20, 2021 4:20 pm (2) You can make your own by buying individual index funds (VTSAX /

Advantages of (2) is the flexibility in choosing your indexes and your allocation. Some people don't want international stocks and/or bonds. Also you can make it a lot more tax efficient, and maybe cheaper.
Disadvantage of (2) is the necessary rebalancing from time to time.

You can make it as simple or as complicated as you want.
Is (2) significantly more tax efficient? I'm in 12% bracket. Rebalancing seems a bit daunting and leaves me open to behavioral errors. I'm just skittish about making an error on the fund AA never being able to change it. Taxable is new to me. Probably way over thinking it.

Thanks...learning a lot here.
Honestly, maybe if you choose a tax-exempt bonds fund (which State do you live in?), but otherwise the difference for a flat (i.e. you won't add to it) $50k at the 12% bracket probably won't change your life either way. And maybe behavioral errors may end up being worse.

That said, rebalancing isn't hard and it usually doesn't happen often.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

Live in NJ.
sycamore
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Re: Recommendations for a 2nd tier emergency fund

Post by sycamore »

jb3 wrote: Tue Jul 20, 2021 3:54 pm
sycamore wrote: Tue Jul 20, 2021 2:16 pm Finally pick the specific funds to reach your 30/20/50 stocks/bonds/cash allocation:
- 50% in ally

- 1. Buy an all-in-one fund like VSCGX with a 60/40 allocation, which at 50% of total is the 30% in stocks and 20% bonds per above
OR
- 2. Buy separate funds VTSAX at 30% and VBTLX at 20%. No international stocks or bonds, but you need to rebalance it
What are the advantages of #2? I don't know anything about rebalancing or tax loss harvesting. Remember, I have all my retirement space filled with TR funds! Thanks.
Advantages of #2 are:
- Flexibility. You get to pick which funds to use. E.g., if you don't like the ratio of US/International that Vanguard (or Fidelity or whoever) picked, then you get to pick your own combination, including no international exposure at all

- Lower expenses. The low-cost all-in-one funds are around 0.12% or so. Using separate funds you could get for around 0.04%, or even 0.00% if you use Fidelity's Zero funds.

- If you change your mind about how much bonds you want, you could just sell some of the bond fund (likely with low capital gains, as bond fund prices don't change as much as stock fund prices) and exchange into a stock fund. But with an all-in-one, you can't just sell the bond part, you'd have to sell shares of the whole fund which effectively sells stocks and bonds both (proportionally) so there's likely to be more capital gains.

- I like the automatic daily rebalancing of all-in-one funds, but not everyone does. Some people prefer to selectively rebalance on their own schedule (or, even try to market time things) so I suppose that's an advantage.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

Thanks for that explanation.

Would there be a benefit to having VASIX and a small amount in VTSMX in taxable? So the combined stock ratio could be adjusted up/down.
babystep
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Re: Recommendations for a 2nd tier emergency fund

Post by babystep »

Say you need 100k EF. 50k is 1st tier in HYSA. Put 100k in VTSAX/VTI for EF in taxable. Put 50k in 401k in bonds/fixed income.

If you really have emergency for second tier then you swap bonds/fixed income in 401k with VTSAX. Sell VTSAX in taxable and use the cash for emergency.

Pros: that 50k you have in 401k for emergency indirectly is not taxed at high tax rate
Cons: Needs extra work.
Jonbuck
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Re: Recommendations for a 2nd tier emergency fund

Post by Jonbuck »

My wife and I have worked hard to build an emergency fund throughout the years and are blessed to be at the point now where we have at least 1 years expenses in cash mixed between checking account (about 3 months expenses) and High Yield Savings (about 9 months expenses).

Now that we have reached this milestone of a year expenses we have started to build our 457 account. When the 457 account reaches 6 months expenses I will most likely reduce my high yield savings account down to about 3 months and out the rest into my taxable account which is a mix of VTI, VXUS, BND and VNQ.

I know the progression is different than what BH traditionally recommends, but my wife and I work in careers that are generally low paying with little room for advancement in salary beyond just small annual cost of living adjustments and we both work in the Non Profit sector where our jobs, depending on funding, could disappear rather quickly requiring us to shift. We like having a large cash buffer as it has given us an incredible peace of mind knowing that if we went through a season of needing to find different employment we would be Ok.

I guess what everyone says is true, personal finance is PERSONAL. I view BH philosophy as descriptive of a path and methodology that works if you work it, but not necessarily prescriptive to where if you adjust and tweak the plan to fit your specific situation it shouldn’t matter. Your life is your life and your situation is your situation. While there are some things that may theoretically optimize your finances, it doesn’t necessarily mean you should do it as optimization doesn’t always take into account unique situations.
EnjoyIt
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Re: Recommendations for a 2nd tier emergency fund

Post by EnjoyIt »

Also, why do a life strategy fund when all you need is one fund such as VTSAX (Vanguard total stock admiral shares index fund)

You were thinking of doing a life strategy fund that is 40/60. In todays market that 60% can easily be replaced with CDs, high yield savings account, short term treasuries or total bond market index funds. Therefor if you want 40% equities, then just buy VTSAX with 40% of the cash.

Lets say you have $100k and you want to do $50k in a high yield savings account and $50k in a 40/60 Life strategy fund.
Essentially that becomes ($50k * 40% = $20k) in equities. Why not just buy $20k in VTSAX and put the rest in the high yield savings account. You are essentially achieving the same thing but with even less complexity.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
H-Town
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Re: Recommendations for a 2nd tier emergency fund

Post by H-Town »

jb3 wrote: Tue Jul 20, 2021 12:29 pm I'm not understanding all of the negative responses.

MY EF is a 100k in cash in an Ally savings account. It's probably more than I need. My wife has a very secure job.

MY EF also acts as a misc. fund for large purchases, eg a car or appliance, which I replenish from cash flow.

I'm making almost nothing from the 100k. Given that it's probably slightly over funded and it is extremely unlikely I would ever need all 100k at one time and urgently, it seems to make sense to put some of that 100k into something conservative but that can possibly return more than .05% at Ally.

I am in my late 40s in 12% tax bracket. I'm thinking of putting, say, 25k of that 100k cash into VASIX. While not totally tax optimized it feels reasonable to me.

I have nothing in taxable now except my Ally savings. All of my retirement accounts have Target Date funds and I would prefer to keep my portfolio simple.

The EF fund would be walled off from the rest of my portfolio and would rebalance itself. Over time if I spend some of my Ally cash for a car, etc., I could replenish those funds from cash flow. Leaving the 25k portion to grow on its own in VASIX.
Seems to me that I'd put 50k to VTI (total U.S. stock) and move on. 50k cash / 50k equity.
sycamore
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Re: Recommendations for a 2nd tier emergency fund

Post by sycamore »

jb3 wrote: Tue Jul 20, 2021 10:00 pm Thanks for that explanation.

Would there be a benefit to having VASIX and a small amount in VTSMX in taxable? So the combined stock ratio could be adjusted up/down.
Agree that it would be a benefit to be able to adjust AA by using two funds, if that's something important to you.
etfan
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Re: Recommendations for a 2nd tier emergency fund

Post by etfan »

A Life Strategy fund has the extra feature of some extra growth on the side through automatic rebalancing. When equities go down, it buys a little more stock. When they go up, it buys more bonds. And since it's presumably a conservative fund (80/20), the safe (bond) side should still contain almost all of my EF in case I need the money.
as9
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Re: Recommendations for a 2nd tier emergency fund

Post by as9 »

As someone without a significant taxable account yet, I use NTSX for exactly what you're describing. It's up 21% since starting this last year, which is some nice padding to absorb a drop and still be even/ahead.
mikejuss
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Re: Recommendations for a 2nd tier emergency fund

Post by mikejuss »

There is no such thing as a second-tier emergency fund: either invest your money or keep it in a savings account. :mrgreen:
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Re: Recommendations for a 2nd tier emergency fund

Post by anon_investor »

Our curret EF tiers
Tier 1: 4 months in "cash" (physical cash / bank accounts / NPCDs)
Tier 2: 6 months in I Bonds
Tier 3: >2 years in index funds in taxable account

We plan to shift the expiring NPCDs to I Bonds. We also plan to buy at least some I Bonds annually even after our NPCDs expire, which will increase Tier 2. Tier 3 also continues to grow as we add to it each pay check (all tax advantaged accounts are already being maxed out).
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

I'm leaning towards the simplicity of putting 25% of my EF cash in VASIX. Any thoughts on how that fund will do if interest rates rise?

https://investor.vanguard.com/mutual-fu ... file/VASIX
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Re: Recommendations for a 2nd tier emergency fund

Post by radiowave »

jb3 wrote: Wed Jul 21, 2021 9:40 pm I'm leaning towards the simplicity of putting 25% of my EF cash in VASIX. Any thoughts on how that fund will do if interest rates rise?

https://investor.vanguard.com/mutual-fu ... file/VASIX
I recommend iBonds over a balanced fund in taxable. The VASIX will have monthly dividends that counts towards income - would that get you to the next tax bracket threshold? Agree with KlangFool, cash/NWP CDs at Ally or equivalent online savings (note 0.50% not 0.05% as you noted above) $ amount up to what helps you sleep at night then VTSAX in taxable account if you haven't maxed out your tax deferred account. Not mentioned above, but you can also buy other treasuries at Treasury Direct or at Vanguard and other brokerages.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

Hmmm, Yes I see the simplicity of just placing ~20k VTSAX in taxable and leaving 80k in Ally HYSA.

That would mean less risk than having the bonds that VASIX does and less taxes.

I think the downside is rebalancing would not be automatic.
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Re: Recommendations for a 2nd tier emergency fund

Post by ElJefeDelQueso »

jb3 wrote: Mon Jul 19, 2021 8:52 am What do the wise folks on Bogleheads suggest for a second tier ER fund in taxable? I hate the thought of falling behind inflation and can stomach some additional risk beyond just cash. I would still keep at least 50% of my ER in cash in Ally.

Some suggestions I've seen:
Vanguard LifeStrategy Income Fund (VASIX)
Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
Vanguard Wellesley Income Fund Investor Shares (VWINX)

See this thread where the concept of tiered ER fund is discussed:
viewtopic.php?f=10&t=309472

Please consider the potential of rising interest rates on these funds. Thanks!
From portfoliovizualizer, over the past 20 years it looks like you'd have gotten similar performance from a long term muni bond fund (vwlux at Vanguard or ftabx at Fidelity) than VASIX and not have the federal taxes.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

After all this great info, I've decided for my "ER/buffer" fund to go with 80k cash in Ally HYSA and 20% in stocks in taxable.

For the 20% stock portion should I use VTSAX (Total Stock Market) or VTWAX (Total World Stock Fund)?
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Kenkat
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Re: Recommendations for a 2nd tier emergency fund

Post by Kenkat »

The second tier of my emergency fund is part of my bond allocation. I use Vanguard Intermediate Term Tax Exempt.

Third tier of my emergency fund is taxable equities.

I don’t expect I would ever use Tier II or Tier III for an emergency so in some ways, this just equates to having some taxable investments available that could be used in an emergency. I don’t really think of it as part of my true emergency fund.
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Re: Recommendations for a 2nd tier emergency fund

Post by Living Free »

jb3 wrote: Fri Jul 23, 2021 10:16 am After all this great info, I've decided for my "ER/buffer" fund to go with 80k cash in Ally HYSA and 20% in stocks in taxable.

For the 20% stock portion should I use VTSAX (Total Stock Market) or VTWAX (Total World Stock Fund)?
VTWAX will have more dividends and probably more non qualified dividends compared to VTSAX and not give you the foreign tax credit (from what I'v heard). So I'd do VTSAX - presuming you've got enough international stock elsewhere in your portfolio.
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Re: Recommendations for a 2nd tier emergency fund

Post by mervinj7 »

jb3 wrote: Fri Jul 23, 2021 10:16 am After all this great info, I've decided for my "ER/buffer" fund to go with 80k cash in Ally HYSA and 20% in stocks in taxable.

For the 20% stock portion should I use VTSAX (Total Stock Market) or VTWAX (Total World Stock Fund)?
I use VTI (ETF version of VTSAX) for easy transferability.
What else do you have in your taxable?
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anon_investor
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Re: Recommendations for a 2nd tier emergency fund

Post by anon_investor »

jb3 wrote: Fri Jul 23, 2021 10:16 am After all this great info, I've decided for my "ER/buffer" fund to go with 80k cash in Ally HYSA and 20% in stocks in taxable.

For the 20% stock portion should I use VTSAX (Total Stock Market) or VTWAX (Total World Stock Fund)?
VTSAX and chill.
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

mervinj7 wrote: Fri Jul 23, 2021 11:31 am
I use VTI (ETF version of VTSAX) for easy transferability. What else do you have in your taxable?
Nothing. I'm creating an "ER/buffer" fund of 80k cash in Ally HYSA and 20% stocks in taxable.
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Re: Recommendations for a 2nd tier emergency fund

Post by mervinj7 »

KlangFool wrote: Mon Jul 19, 2021 11:35 am OP,

I have about 3 years of expense in CASH and about 400K to 500K of stock index funds in my taxable account. My overall portfolio's AA is 60/40.

I do not see why do you need anything besides CASH and Stock index funds in your taxable account.

KlangFool
When you calculate your overall AA, do you include your CASH as part of fixed income?
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jb3
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Re: Recommendations for a 2nd tier emergency fund

Post by jb3 »

KlangFool wrote: Mon Jul 19, 2021 11:35 am When you calculate your overall AA, do you include your CASH as part of fixed income?
No. I only have cash in my "EF/Buffer" fund which I don't count in my AA.
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Re: Recommendations for a 2nd tier emergency fund

Post by KlangFool »

mervinj7 wrote: Fri Jul 23, 2021 11:41 am
KlangFool wrote: Mon Jul 19, 2021 11:35 am OP,

I have about 3 years of expense in CASH and about 400K to 500K of stock index funds in my taxable account. My overall portfolio's AA is 60/40.

I do not see why do you need anything besides CASH and Stock index funds in your taxable account.

KlangFool
When you calculate your overall AA, do you include your CASH as part of fixed income?
No. I do not include CASH as part of my overall AA. I do not rebalance CASH.

KlangFool
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