Wisdom of Keeping Emergency $ in Low Interest Bearing Account

[Fern]

The conventional wisdom out there is to stash at least 3 months' worth of money in an emergency fund money market or some sort of savings account that won't lose value.

However, if you have a sizeable sum of other taxable investments, not particularly earmarked for anything except retirement and to pay for the purchase of a new car when needed, then is it really necessary to keep the so-called emergency fund monies in a low-interest bearing money market?

Becus if i were laid off, i could still just cash out one of my taxable mutual funds as needed. So the special emergency fund would seem to be unnecessary in this kind of case, no?

[fiffer010]

But what about the emergencies that are less severe then loosing your job? Like household appliances or having to fix your car. Do you want to cash your mutual funds every time you need new tires?

[kristinecfp]

Another point to consider: what if you got laid off (or had some other emergency) right after a large drop in the market, like in 2001 or 2002? Would you want to sell your mutual funds right after such a large loss?

You could invest in a short term cd ladder or an ultra short term bond fund to get a little bit higher yield, but I agree that emergency funds should be kept in a safe place such as savings accounts, money markets or cds.

[Tree0164]

You risk losing money in mutual funds. I want my emergency fund to be secure.

[jmjj215]

I echo what Tree0164 said. Those other funds are earmarked for something else: car, retirement (more long-term stuff). I'd stick w/ an EF in a safe, high-yield savings account.

[Fern]

well, as far as smaller emergencies, i keep around $5K to $7K in my checking account, so if it were tires or car repairs, i'd just write a check.

if the market were tanking at a time when i needed to access that money, i could choose to cash out either bond funds or stock funds, whichever was doing better.

[Ima saver]

I have about half my money in mutual funds and stocks. the rest I keep in cash in a money market and a savings fund. Mine are paying 3.59 and 4.14, and sometimes that is a better rate than my mutual funds are paying.
I keep more than i should in those two funds because we are building a spec house with part of the money.

[baselle]

I've been debating about how much to actually keep in the emergency fund and how much to send into investments. When do you stop? I find I like the comfort of having a big emergency fund but really I have to decide when enough is enough and start to send the savings into long term, higher risk things.

[Bluezy]

For our emergency account, baby CJ and I have $10,000 in a paltry but secure MMA with our bank, tied in with our Interest bearing checking account. We are also funding our HSA to cover any medical expenses that would come up, protecting more of our emergency fund. Any other funds that are available will be transferred to our online savings accounts.

Our investments will be funded as time passes. I've only begun the transformation into the paralegal world, therefore, extra funding for investments will come later this year.

Good luck to you!

[Ima saver]

I have $100,000 in a savings earning 4.14% and $200,000 in a money market checking earning 3.57. That is earning me about $900 a month in interest. But we will need most of that $200,000 to build a spec house, so I am not going to transfer it to anything higher yielding at this point. I have not put anything in mutual funds in a long time. I need to get back in the habit of doing that.

[sweeps]

Another reason that keeping your emergency fund money in mutual funds is not ideal is the extra time it takes to get the money out as cash.

First, there's a delay whenever the stock market is closed (weekends, holidays, etc.) or trading is halted (e.g. 9/11). Second, once you cash out, you often have to wait for the transaction to be "settled" before you can withdraw. I just sold ETF shares at Sharebuilder, and I have to wait approximately 3 days before I can pull that cash out. Third, don't forget the brokerage-to-bank transfer delay (worse if you request a check).

[Ima saver]

I have had to close a few mutual funds to get money for a land closing. I always count on at least a week before I can get my check in the mail. Plus, then I have created a taxable event. (which I hate) With my emergency fund in the bank, I only pay tax on the interest it earns and nothing when I withdraw some funds.