Question About Emergency Fund

[Fern]

In the past i've tried to follow the conventional widsom of keeping more or less 6 months worth of living expenses in a high yield, online money market account for 'emergency' purposes.

Less than a year ago i opened an acct. with Western Financial with money that would otherwise be sitting in my non -interest bearing checking account. I was happy with the 4.5% interest i was getting, but now Wachovia has bought out Western Financial and they don't offer near as good a return, so now i'm stuck with the hassle of having to close out the account. But now i'm wondering if it's even necessary to transfer the $$ to yet another online MM account.

You see, I have ample taxable savings in a variety of stock and bond mutual funds, about $100,000. And i keep about $6K in my checking account for day to day bills. In the somewhat unlikely event of a job loss, i could simply sell 1 or more of these mutual funds if i needed the cash. Yes, I know such a sale would have to be reported to the IRS and since i couldn't control the timing of such a sale, i might incur a loss, but i don't see this as a real biggie.

I'm thinking i could just earn more in any of my mutual funds as compared to the money market, so am thinking of just foregoing the MM acct emerg stash since i have ample other savings.

Your thoughts?

[kv968]

I would first have to ask, do you a fully funded IRA and a 401k that you're contributing to?

Beyond that, I would still say keep your EF in a MMA. If you do put it into mutual funds and the market tanks, your EF would then be in the same boat as the rest of the money you would "tap" (ie. sell off a fund here or there). Granted it would have to be a really bad market to lose a major part of 100K, but it can happen and it can happen when you need the money the most.

[sweeps]

I can see a strong argument for reducing to maybe 6 weeks of readily available cash if you have a large amount of money in (diversified) taxable funds, but I wouldn't go much lower than that. I think more of a concern than investment risk is liquidity risk. If you had a serious problem, it could take a while for you to get cash out of your funds, after factoring in sale and settlement time, transfer delays, weekends, holidays, market shutdowns, technical glitches, human error, etc.

[disneysteve]

Fern, I think you make a good point that often gets overlooked. An EF is not something that you would need to access all at once, but rather provide a source of funds over time. If I lost my job tomorrow, I wouldn't instantly need 6 months worth of living expenses. I would need that money gradually over the next 6 months. Of course, I would need some of it pretty quickly which is where the checking account and MMA come into play. My total non-retirement account investment portfolio is nearly $200,000 (including cash accounts). So if my unemployment continued, I could gradually liquidate some of my holdings to cover living expenses if necessary.

[Aleta]

I've laddered our emergency funds. If you have 6 mos of emergency money you can put 3 months in a CD and also in a 6 month. You can break it up anyway you want and always keeping a certain amount in a money market so you can access it quickly. Anyway, hopefully you won't need as much money to cover your day to day expenses.

[kv968]

I also agree that a total EF doesn't have to be held in a MMA, however I feel you also shouldn't put just whatever isn't IMMEDIATELY needed into mutual funds either. If it would take you say 2 weeks to access the money in those funds, that doesn't mean you should have only 2 weeks or a month's worth of an EF in a MMA. I'm don't you guys and gals are promoting that either, I'm just saying that I just don't think having the very minimum in a liquid, secure account is a good idea.

The OP has a situation in which that the 100K currently in the funds could be used as a EF if needed. If you only had bascially whatever was in your EF to your name, I would say you shouldn't hold any of it in mutual funds.

[Ima saver]

I keep quite a bit in my money market account earning a sure 5.25% I just opened a jumbo CD that is paying 5.75% I hate putting everything I have in mutual funds because they do tend to go up and down. But I have to have a lot of cash on hand for building houses.

[LuxLiving]

Short of any other brilliant idea showing up I would ladder it into about six CDs to the tune of how much monthly expenses I would need each month in an emergency situation.

Normal Salary $2500
Monthly Emergency MUST HAVE Expenses $1800
Six $1800 CDs that you just keep rolling over as they mature.

Then I'd toss whatever was left after that into those MFs.

I'm interested in other's responses.

[Broken Arrow]

Well... I used to think that laddering CDs is the way to go as well.

However, even now, online MMA rates still aren't too shabby, so I don't see too much benefit in going elsewhere with your emergency fund money. Sure, you may not need all of it to be liquid, but there still doesn't seem to be enough incentive for me to invest it elsewhere.

Then again, I'm only talking about 10k. If your emergency fund is bigger than that, then I can see why it would be worth it to do something else.

[bjl584]

All interesting ideas. I am still in the process of buiding up my EF, so right now it is all cash in a high yield mm account. I have thought about what to do once I reach my 6 month living expense target. As I do not want to keep any more than 6 months expenses in my EF account, I will need to figure out what to do with the interest that the account will be earning. Right now I am targeting $16000, at 5.05% interest that would be about $808 in interest earned annually less taxes. I would end up with a little over $600 annually to do something with. That would be a nice little contribution to one of my MF's or for a stock purchase that I may have my eye on at the time. I do like the staggered CD approach to continuously roll over my money. This will be something that I will have to consider before too long.

[humandraydel]

Fern, I'm fine with your plan. Really it is a personal situation - how comfortable are you with the risk? Personally, I don't have a problem with the risk so I've got 2 months expenses in a MM and the rest in tax efficient funds.

[trainedmonkey]

I've been struggling with this same question.

I hold about 3months of EF in a local MMA (not paying nearly what it should)
I hold the balance of my liquid assets in a laddered Fidelity Brokerage Account. The ladder consists of a percentage of the following holdings:

Money Market Mutual Fund
Right now short term bond funds
Moderate Allocation Fund
Equity Funds (mainly Large Caps right now)

I figure if I find myself in a true emergency I can tap Credit Cards and then liquidate whatever money I want depending on need.

Right now I hold more cash than anything since the market has been doing so well and I'm still trying to get my percentage worked out.

As said here, it kind of a personal decision based on your circumstances and whatever you do, it may never seem enough or the right choice at different times through life.

[LuxLiving]

Broken Arrow - you're right about current interest rates between MMAs & CDs being somewhat equal - for the present. However, at any given moment in time we are gambling so to speak on where those interest rates are headed. You can lock in some rate that today seems great Marvelous FANTASTIC only to have it be yesterday's news and looking mighty weak next week. Inversely you could assume that these rates are low and hoping for higher decide to hold cash instead only to see those NOW great looking rates evaporate overnight and you'll wish you'd stuck some portion of your holdings into them.

At each moment in time we have to decide whether to hold our cards or play them.

BA - I know you KNOW this - just discussing it for others who might forget the 'timing risks' involved in money management. I forget it at times myself! Ha!!

[Aleta]

Lux Living: You are so right. Although the rates are great now, we don't know what they will be in the future. It is good to ladder so that way you can take advantage of the rates. I have a friend that likes to lock up money in 1 yr CD's. Let's say the minimum is $1000.00 and she wants to invest $5,000; she will be 5 CD's at $1,000. each. She says that if she needs the money, she can break one or two. She looks at what rate she needs to get on deciding which ones to get.

I remember some years back when I got a 9 month CD for 6.85% and I had a gut feeling to buy another one and I didn't. The banker said , "oh don't worry the economy looks good".
WRONG! So, it is good if you can ladder them, say a 3 month, 6 month, 9 month, and 1 year. That way one is coming due every 3 months. Usually the 9 month is the same as the 6 month rate.

[MonkeyMama]

I have to agree with CD ladder - I intend to do a CD ladder for our cash as it builds back up.

bankrate.com actually has an interesting cd ladder feature. A little calculator that considers your needs and how to ladder the money. You can buy for example a 1-year c.d. every 3 months or so (so one matures every 3 months), or more common I believe is buying many at once at different lengths.

Since I tend to be a cash hoarder overall I intend to have a large cash fund and want to do what I Can to max my returns - so c.d. ladder it is.

That being said, if I had $100k in mutual funds, I am not sure if I would be worried about keeping such a large cash EF. IT all is depends on a lot of factors.

[MonkeyMama]

Oh just had to add I think in general is a good idea to have at least 6 weeks, as mentioned, of expenses in liquid savings.

[anonymous_saver]

I would honestly keep the 6 months of an emergency fund in a normal high interest online savings account. My reasoning is that an emergency fund is not only if you happened to lose your job, or became disabled, or something like that, it can also be in the chance that you have a major thing go wrong with your house or car (for example, what happens if it's winter and your furnace broke down, you would immediately need that money to fix the furnace or buy a new one). If you had 6 months of expenses, you would likely be able to cover this within a day or two. If you had your money elsewhere, it would likely take you longer. Plus, is your money in your mutual funds and stocks set aside for retirement? If they are, this is a bad idea to take money out from there for reasons such as losing your job, that is kind of the point of an emergency fund in the first place.

You said that you would like to put that $600 or so of interest every year to "do something with" such as putting it into stocks, or a mutual fund. I disagree with this strategy slightly. Let's say inflation goes up every year by 4%, then the emergency fund that you had 2007 would not be worth as much as it would be worth in 2008 if you took out the interest every year. You could maybe take out a $100 or so, but then it probably wouldn't be worth it.

Just my two cents. I do however, congratulate you on what seems to be good financial planning! =)

[sweeps]

The other factor here is the availability of credit cards. I assume Fern has a credit card with a decent limit that she can tap into temporarily in the case of an emergency. She has funds available to pay it off when the bill comes, but this would give her immediate spending power to cover an emergency situation.

[zetta]

If you have $100k in non-retirement mutual funds, I'd be comfortable with 3 months expenses in a MMA and the other 3 months in a fund you mentally designate as the first one to tap in a period of extended unemployment,