Yet another EF question

[Goldy]

I'm having a hard time justifying keeping my EF in a savings account these days mostly due to the fact that I can't think of a single scenario in which I would need immediate access to the money and could not wait a week for a check to clear. At the same time I am having a hard time identifying mid term investment options (3-5yr term) that pays a decent interest rate. CD's are pretty boring right now and I'm a little nervous of just dropping 20k into the market. Maybe LendingClub? Maybe I should prepay the Roth for 2015 instead of DCA'ing throughout the year. If I needed the money I could always withdraw the contributions.

Any other thoughts on other places to put the money or good vanguard funds?

45k cash @ 1%
7k student loan at 1.4%
199k mortgage @ 2.5%
No other debt

15k EE bonds (4%)
Maxing 401k for both of us
Maxing Roth for both

[autoxer]

Why not think longer term than 3-5 years? I know it is an emergency fund and it needs to be there when you have an emergency, but why not keep a portion in cash (3 - 6 months worth of expenses) and then invest the excess for the long term? What are the chances that you won't need this money in the next 5 years?

[sblatner]

How much do you need for a 6-8 month emergency fund?

I'd say prepay your Roth for the year.

[AnotherReader]

Looks like the Fed is going to raise interest rates soon. Why not put some cash aside for I-bond purchases when rates climb and start a CD ladder now? You could ladder $10-$15,000 in CD's now, the same amount when rates rise, and then buy some I-bonds when the interest rate changes (every 6 months). Laddering CD's means they mature periodically and you can reinvest or keep cash out if you expect a large expense. Careful research will show the lowest penalty if you have to liquidate early to meet a major emergency. I use depositaccounts.com to review CD rates and penalties. It's an unbiased source of information about savings and checking accounts.

[Goldy]

Thanks for all the replies.

The only reason I'm not thinking longer than 3-5 years is that I can't think of any needs that we would have in a longer time frame. We are happy in our house and retirement savings is probably covered so the only thing that I would really need this money for would be if we lost our jobs or if our cars needed to be replaced on short notice.

Our base expenses is around 4k a month but we could trim that down if we needed to. Anyway, lets say 4k, that means a solid 6mo EF would be 25k. I am going to lump in my bonds into my EF since those can be cashed any day so all I truly need is 10k in cash. I'll probably keep it at 20 just to be safe.

[disneysteve]

One thing to consider is longer term CDs. In some cases, you can get a nicer interest rate and even if you had to cash out early and pay the penalty, your net return would still be a lot higher than what money market accounts and short term CDs are paying.

Your Roth idea is a good one too. The one possible drawback there is if you have that money invested in the market and there is a significant correction, you could be forced to liquidate holdings at a bad time.

[autoxer]

... and retirement savings is probably covered

I've never thought that it was covered, I just figure the more I save, the earlier I can retire.

[sblatner]

I'd say prefund your Roth for the year, pay off the student loan.

Keep $10k for an EF (along with the bonds) which leaves you with about $18k. Maybe start an investment at Vanguard or add to one you already have.

I personally would hate to lock in too long with a CD.

I think it is important to have a four legged stool for retirement. SS, Roth, 401k/IRA and regular savings.

SS - might be taxable
Roth - tax free
401k - taxable
regular savings - only taxes on earnings

Will help with taxes once retired.

[disneysteve]

I personally would hate to lock in too long with a CD.

There are CDs that can be redeemed early with a relatively minor penalty so you aren't really locked in. If you end up cashing out early, even after the penalty, you can end up with a much better return than a shorter term investment.

[feh]

I Bonds are a good option. At least you're keeping up w/ inflation that way.

I'm not a fan of CDs right now. Short term CDs (less than 3 years) are earning barely more than savings accounts.

Don't spend too much time thinking about this - the amount of money we're talking about is small. Let's say your options are savings account (.95%) and short term bond fund (1.6%) and your EF is $20K.

The difference in return in one year is $130.

[Goldy]

Well I think I will fund the Roths and then maybe spread the rest over a CD ladder and a few k in to the lending club account. Ally has a raise your rate CD which is nice incase interest rates increase in the future.

Feh has a really good point. I'm sure I spend more than that in wasted electricity a year.

[JoeP]

An EF doesn't need to be as liquid as some say. If you lose your job, you can access smaller amounts as needed, not necessarily the whole thing at once. We use the credit card for most emergencies, and then pay that amount from the EF, which is at our CU. For lower cost unexpected expenses, I'll just take out the cash.

Ours is technically 2-tiered: first is cash in a savings account, and the second is a bond fund that can get to us in about 4 days.

[snafu]

If your employment is stable, I see it like Joe. We keep about 2 months basic expenses liquid in savings for unanticipated expenses. Both TFSA [ROTH like] accounts fully funded to maximum allowed and the remainder in a Dividend ETF [Exchange Traded Fund] which can be sold with cash back in our account in two business days. I've always used CCs as initial outlay to reap their rewards since the balances are always paid 2 business days before their due date. I'll likely be flamed but I've also always 'timed' CCs, using one of several cards, based on it's closing date.

The info automatically pops up on my cell's calendar and only takes a few computer click to get done. With Janet Yellen looking to increase interest rates and broadly hinting, I wouldn't be a Bond Fund buyer at this time. If you take into account income tax paid on savings and inflation, the numbers say you are losing buyer power with 1% interest.

[Goldy]

Our income is stable I guess. We both work for the same company, so there is that, but its been 8 years for each of us so I think its OK. We have survived a few layoffs including one where we lost 50% of our staff.

I agree with you about the CC's. We use ours for everything and if something did come up I wouldn't hesitate to put it on the card since I know I can pay it off.

The Dividend ETF is a good idea, I'll look into that. Part of me wants to keep some powder dry incase there is a great buying opportunity up ahead.

[dczech09]

Emergency fund is not for investing or making money. It is, in a sense, an insurance policy and should cost you money (in terms of opportunity cost that is). The lost value of the money is basically your premium.

An emergency fund is one of those things that you do not want to have to use. However, if you need it, you are happy it is there. Keep it liquid and easy to get to. You may never need it, and if you don't, that is great!

I recommend keeping 3 to 6 months of expenses in a simple bank savings account, or a money market mutual fund. Nothing crazy. No mutual funds, even through a Roth IRA as there is a potential cost that you could incur if/when you "disrupt" your investment. I would also avoid CD's as they do not make much more than simple savings accounts, yet they charge ridiculous fees if you pull money out.

Keep it simple! You're welcome to do as you wish, however that is my recommendation.

I would not keep student loans around while having so much in cash! If I were you, I would pay off the student loans and keep the rest in savings. Save up any extra that you would need to hit the 6 month mark (if any).

Otherwise, you are doing awesome!