Investing EF

[doxie]

So I have about $25,000 in an EF. This represents about 5 months worth of expenses. I am comfortable with this amount, despite Suze Orman's insistence on 8 months. I also have another, more liquid, savings account which I keep for vacations and large expenditures. It also serves as my first line EF, where as I would consider the other one my "oh s*&t" EF. I try to keep at least $5000 in that one.

I think I've grown tired of earning nothing on this money. I'm thinking about investing some of it in some very conservative Vanguard income funds, specifically:

Short-Term Investment Grade (VFSTX)
Total Bond Market Index (VBMFX)
Wellesley Income (VWINX)

I'm thinking I would keep $5000 or so in the credit union money market where it is now, and put $20,000 split evenly among these funds. Looking at their history of fluctuation, I feel comfortable with the risk.

That said, I've always heard you should always keep your EF in more liquid savings accounts. On the other hand, people who are in retirment live off the money in these type accounts, so I don't see why I can't use them for this purpose.

Thoughts?

[littleroc02us]

As long as your comfortable with the possibility that you could lose money???

[bjl584]

If you did put it into funds, would there be commission charges to sell shares should you need the money? Avoid that. That being said, an EF really shouldn't be thought of as an investment, or as a lost opportunity to invest. It's a safety net and peace of mind.

[disneysteve]

The purpose of an EF is to have money safe and accessible. The purpose is not to maximize your returns. That's what the rest of your portfolio is for.

[Snodog]

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. In fact a money market would have lost money (in real terms) 6 out of the last 25 years. In contrast both Short-Term Investment Grade and Total Bond Market Index would have faired slightly better each losing money (in real terms) only 5 out of the last 25 years.

I have no problem with your plan. In fact my New Years resolution is to try something similar if I am not too lazy.

[jIM_Ohio]

I would keep 3 months in savings... then put rest in something conservative and not volatile. I use Permanent Portfolio PRPFX

[snafu]

I too keep all but $2K EF in a basic low cost MF knowing I can cash out in segments or all within two business days. I can't imagine a situation of needing a huge sum instantly, nor do I know of anyone having that experience. In fact, when we were abruptly evacuated due to an environmental emergency, the biggest frustration was that bank machines were all totally out of cash. We now keep a minimum of $100. in the house and always fill the gas tank on our way home so that we can depart on little notice.

Do folks who were evacuated due to hurricanes or fires etc... withdraw huge sums of cash? Wouldn't that make you a target? The ATMs have limits and bank branches throw on capes of bureaucracy, conservatism, and 'attitude' if you walk in and ask for $ 25K. The 1st thing they'll tell you is that they can't release that large a sum to one individual, yadda yadda. Why not avoid losing 2% buying power?

if you like, at the end of each year, re-balance your EF and move the earnings to another investment.

[jIM_Ohio]

I too keep all but $2K EF in a basic low cost MF knowing I can cash out in segments or all within two business days. I can't imagine a situation of needing a huge sum instantly, nor do I know of anyone having that experience. In fact, when we were abruptly evacuated due to an environmental emergency, the biggest frustration was that bank machines were all totally out of cash. We now keep a minimum of $100. in the house and always fill the gas tank on our way home so that we can depart on little notice.

Do folks who were evacuated due to hurricanes or fires etc... withdraw huge sums of cash? Wouldn't that make you a target? The ATMs have limits and bank branches throw on capes of bureaucracy, conservatism, and 'attitude' if you walk in and ask for $ 25K. The 1st thing they'll tell you is that they can't release that large a sum to one individual, yadda yadda. Why not avoid losing 2% buying power?

if you like, at the end of each year, re-balance your EF and move the earnings to another investment.

I have read on other financial forums that people in Florida and similar hurricane paths suggest an EF is 3 months cash, and some of that cash is in CASH and not in a bank for the reason you mentioned. They mention things like needing cash to buy wood to protect windows and get gas instantly (sometimes 1 day to get money is too long to wait). Technically a mutual fund has 7 days to get you your money when liquidated (I have never had a problem with more than 1-2 day wait, but 7 days is the law).

[littleroc02us]

That should be an oxymoron, when you say you want to invest your EF...

[Snodog]

I can't imagine a situation of needing a huge sum instantly, nor do I know of anyone having that experience.

Maybe bailing a relative out of jail or if someone kidnaps your wife and you need to pay them ranson or if....

[jpg7n16]

So I have about $25,000 in an EF. This represents about 5 months worth of expenses. I am comfortable with this amount, despite Suze Orman's insistence on 8 months.

Good for her, but 8 months is unnecessary for like 97% of the general population. Here's what the CFP board educational info has to say about the subject:

From: http://www.cfp.net/clinic/includes/D...,29,Slide%2029 (online powerpoint presentation)

Individuals should have an adequate fund that can be drawn upon quickly if needed to cover major unexpected adverse events

• Major medical expenses
• Laid off from work
• Disability following a car accident

Typically 3 to 6 months of expenses

• 3 months if stable income stream
• 6 months (or more) if self employed

In your case, I would reduce the amount in cash to $15,000 (3 months) and keep the other $10,000 in one of your options listed above. Most likely the short term bond fund as it is closer aligned with the potential timeframe that you might need the money.

Then you will still meet the CFP board's recommendations of a 3-6 month EF, and also earn a slightly better rate on a portion of that money; while keeping more money available to you in an emergency (ie. not locked up in a retirement account)

And that 3 months should be held in cash or cash equivalents like:

From: September 2007 eNewsletter

Here is a list of savings and investment options that many advisors recommend for emergency funds:

Savings Accounts: Savings accounts normally earn higher interest rates than checking accounts, but the rates are still pretty low. Online savings accounts often offer more attractive rates.
Money Market Accounts: These savings accounts earn higher interest rates than traditional savings and often allow transactions like check-writing, though some limits apply.
Money Market Funds: A money market fund is not a money market savings account but a type of conservative investment. They tend to offer higher rates of return than savings accounts but, as with any investment, you can also lose money in a money market fund, although the risk is considered very low.
Certificates of Deposit (CDs): In a CD, you deposit a specific amount of money in a bank for a fixed period, usually between three months and five years. Your money earns a fixed rate of interest over that term; the longer you leave the money in, the higher the return. There are usually penalties if you withdraw funds early.

[cypher1]

Maybe bailing a relative out of jail or if someone kidnaps your wife and you need to pay them ranson or if....

I'd respond with:

"I don't know who you are. I don't know what you want. If you are looking for ransom, I can tell you I don't have money. But what I do have are a very particular set of skills; skills I have acquired over a very long career. Skills that make me a nightmare for people like you. If you let my *insert VIP* go now, that'll be the end of it. I will not look for you, I will not pursue you. But if you don't, I will look for you, I will find you, and I will kill you."

Sorry, couldn't resist...

[jpg7n16]

Geez cypher, I really hope someone doesn't get Taken from you

[disneysteve]

Individuals should have an adequate fund that can be drawn upon quickly if needed to cover major unexpected adverse events

* Major medical expenses
* Laid off from work
* Disability following a car accident

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.

[bjl584]

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.

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.