Investing EF

[disneysteve]

I can see sitting on a few thousand in cash if you live in an area prone to disaster. Cash would be invaluable in the aftermath of an earthquake or a hurricane.

I totally agree. But that isn't 6-month's worth of expenses. You'd want to be able to buy food, supplies, a generator or gas to get out of town. How many people were essentially trapped in town post-Katrina because they couldn't afford to evacuate?

[doxie]

Don't be fooled into thinking you can never lose money in a money market. If inflation is 2% and your money market returned 1% you still lost money in real terms.

This is exactly why I've been thinking about making this change. At .3%, I feel like my money is going to waste away in that money market. And no, I can't think of any reason I would need access to the full amount in less than a week.

I'm going to do a little more thinking and talk to my partner about the amount to keep in cash, and go ahead and move the rest over to Vanguard.

One question, all these funds say they have no redemption fee. That means I can make withdrawals without having to pay anything right?

[jIM_Ohio]

This is exactly why I've been thinking about making this change. At .3%, I feel like my money is going to waste away in that money market. And no, I can't think of any reason I would need access to the full amount in less than a week.

I'm going to do a little more thinking and talk to my partner about the amount to keep in cash, and go ahead and move the rest over to Vanguard.

One question, all these funds say they have no redemption fee. That means I can make withdrawals without having to pay anything right?

Look for short term trading fees- if money is in fund for 1 year (or whatever minimum is) those fees get waived.

[jpg7n16]

The one aspect of the standard EF advice I've always had a bit of trouble processing is the part in bold. Why do I need to be able to get to the money quickly?

Let's say my monthly expenses are $4,000. If I lose my job tomorrow, I don't need instant access to $24,000 cash (6 month's worth of expenses). I do need immediate access to a couple thousand for day to day bills but I've got time to gather the rest. I could sell stock or mutual fund shares held in taxable accounts. I could charge things to my credit card and deal with the bill later. My still-working spouse could take a 401k loan. We could take withdrawals from our Roths. We could sell off some personal belongings to raise some money. Basically, there are lots of ways we could gradually get money during that period of time with no income.

Of course, that only works for someone who HAS lots of places to draw from. For someone just starting out who doesn't have all of that, the 6-month EF is a lot more important. For someone like me, though, who is well-established and has a mid-6-figure portfolio, sitting on tens of thousands in cash just seems to be overkill.

Then maybe you don't need as large of an EF as you previously thought you did

I've always thought the bigger concern was, you don't want it invested heavily in risky assets cause they may fall in value and wipe out some of your security. And I know if you make the withdrawal from the Roth, you can't replace it once you're re-employed. So it'd be better to have funds outside of the Roth.

So those are two things to consider.

I also know at times, that selling a security may take some time to credit your investment account, and then another while to transfer from that account to your bank account. But that shouldn't take more than a month.


But I think having it in cash is just protection against having to do all your alternatives. Why take a 401k loan out when your income has just been reduced, when you could have had a buffer in cash? Why withdraw $15k from a Roth, when you can only replce $5k a year and can't contribute more for this year's normal contribution? Keep a few months in cash, and avoid those things.

I don't know why anyone would recommend 8 months in cash to the general public. I personally keep 3 months, and no more.

[bjl584]

I totally agree. But that isn't 6-month's worth of expenses. You'd want to be able to buy food, supplies, a generator or gas to get out of town. How many people were essentially trapped in town post-Katrina because they couldn't afford to evacuate?

No. I wouldn't advocate keeping 6 months worth of expenses in cash in your house. That seems risky. But enough to be able to buy what you outlined above is a good idea.

[disneysteve]

Look for short term trading fees- if money is in fund for 1 year (or whatever minimum is) those fees get waived.

Another thing to think about...

Every time you sell shares from a bond fund, it is a taxable transaction. That is not true when you move money out of a money market account. So you would want to keep enough in other places to cover all but the biggest emergencies just for keeping things simple.

[snshijuptr]

It all depends on your level of risk. The EF is there to balance out the risks in your personal life: job loss, natural disaster, repairs to assets, etc. You balance these out with cash or investments until you feel comfortable.

I always like to think of the worst case scenario that I would find reasonable. How much money would I need and in what time frame?

For example: DH gets laid off every summer (thanks school district). If I was in an accident over summer and couldn't work for a few weeks, what would we need? We would need health and car insurance. Let's assume my job stops paying me. We would have DH's unemployment, but that is always delayed.

So immediately we would need to cover our regular expenses, buy prescription drugs, and buy crutches.
By the end of the month, we would have to pay all of the car repairs, the medical bills, and our regular bills.
By the end of 2 months, we would have to make up for DH's paycheck, pay for my extended care, and hopefully we will be reimbursed by the auto insurance.
By the end of 3 months, I would be largely back to normal, but DH may still be out of a job.

So we need enough money available in cash to pay for my misc medical expenses and our normal expenses. Within 1-2 weeks we will need enough for another months expenses plus medical bills and auto repair. After that we will need another month's expenses.

So in a worst reasonable case, how would you solve your cash flow problem? Personally, I have 6 months expenses in a savings account.