Smarter approach to "emergency funds"?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
mikeyzito22
Posts: 870
Joined: Sat Dec 02, 2017 4:42 pm

Re: Smarter approach to "emergency funds"?

Post by mikeyzito22 »

willthrill81 wrote: Wed Mar 25, 2020 3:13 pm
watchnerd wrote: Wed Mar 25, 2020 3:00 pm
Triple digit golfer wrote: Wed Mar 25, 2020 2:53 pm

I don't really understand the concept of "just have a slightly large emergency fund than needed and put some of it in equities." What does that mean? For a desired 6 month emergency fund, forego a month of expenses worth of investing and put it in the 20/80 emergency fund so that it's now 7 months? Why not just invest that month into your regular AA and leave the 6 months at 100% cash/bonds? In the event of an emergency lasting longer than six months, you tap into the portfolio anyway. Six of one, half dozen of another.
I struggled with the same concept.

I realized it only made sense to me if one considers the emergency money to be completely firewalled from the rest of the portfolio.

Whereas, like you, I just think of emergency monies as part of the asset continuum in aggregate.
emphasis added

Precisely. For young accumulators with small portfolios, this should likely be true. But for older accumulators with significant portfolios, it likely isn't true.
Great. So what dollar figure are we looking at for "significant portfolios" and "accumulators with small portfolios?"
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Smarter approach to "emergency funds"?

Post by willthrill81 »

mikeyzito22 wrote: Sat Nov 28, 2020 3:42 pm
willthrill81 wrote: Wed Mar 25, 2020 3:13 pm
watchnerd wrote: Wed Mar 25, 2020 3:00 pm
Triple digit golfer wrote: Wed Mar 25, 2020 2:53 pm

I don't really understand the concept of "just have a slightly large emergency fund than needed and put some of it in equities." What does that mean? For a desired 6 month emergency fund, forego a month of expenses worth of investing and put it in the 20/80 emergency fund so that it's now 7 months? Why not just invest that month into your regular AA and leave the 6 months at 100% cash/bonds? In the event of an emergency lasting longer than six months, you tap into the portfolio anyway. Six of one, half dozen of another.
I struggled with the same concept.

I realized it only made sense to me if one considers the emergency money to be completely firewalled from the rest of the portfolio.

Whereas, like you, I just think of emergency monies as part of the asset continuum in aggregate.
emphasis added

Precisely. For young accumulators with small portfolios, this should likely be true. But for older accumulators with significant portfolios, it likely isn't true.
Great. So what dollar figure are we looking at for "significant portfolios" and "accumulators with small portfolios?"
When you have enough funds to handily cover any plausible spending needs. For us, we believed that was when we hit about 4x.
The Sensible Steward
mikeyzito22
Posts: 870
Joined: Sat Dec 02, 2017 4:42 pm

Re: Smarter approach to "emergency funds"?

Post by mikeyzito22 »

willthrill81 wrote: Sat Nov 28, 2020 7:41 pm
mikeyzito22 wrote: Sat Nov 28, 2020 3:42 pm
willthrill81 wrote: Wed Mar 25, 2020 3:13 pm
watchnerd wrote: Wed Mar 25, 2020 3:00 pm
Triple digit golfer wrote: Wed Mar 25, 2020 2:53 pm

I don't really understand the concept of "just have a slightly large emergency fund than needed and put some of it in equities." What does that mean? For a desired 6 month emergency fund, forego a month of expenses worth of investing and put it in the 20/80 emergency fund so that it's now 7 months? Why not just invest that month into your regular AA and leave the 6 months at 100% cash/bonds? In the event of an emergency lasting longer than six months, you tap into the portfolio anyway. Six of one, half dozen of another.
I struggled with the same concept.

I realized it only made sense to me if one considers the emergency money to be completely firewalled from the rest of the portfolio.

Whereas, like you, I just think of emergency monies as part of the asset continuum in aggregate.
emphasis added

Precisely. For young accumulators with small portfolios, this should likely be true. But for older accumulators with significant portfolios, it likely isn't true.
Great. So what dollar figure are we looking at for "significant portfolios" and "accumulators with small portfolios?"
When you have enough funds to handily cover any plausible spending needs. For us, we believed that was when we hit about 4x.
4x yearly expenses or 4x salary?
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Smarter approach to "emergency funds"?

Post by willthrill81 »

mikeyzito22 wrote: Sat Nov 28, 2020 7:52 pm
willthrill81 wrote: Sat Nov 28, 2020 7:41 pm
mikeyzito22 wrote: Sat Nov 28, 2020 3:42 pm
willthrill81 wrote: Wed Mar 25, 2020 3:13 pm
watchnerd wrote: Wed Mar 25, 2020 3:00 pm

I struggled with the same concept.

I realized it only made sense to me if one considers the emergency money to be completely firewalled from the rest of the portfolio.

Whereas, like you, I just think of emergency monies as part of the asset continuum in aggregate.
emphasis added

Precisely. For young accumulators with small portfolios, this should likely be true. But for older accumulators with significant portfolios, it likely isn't true.
Great. So what dollar figure are we looking at for "significant portfolios" and "accumulators with small portfolios?"
When you have enough funds to handily cover any plausible spending needs. For us, we believed that was when we hit about 4x.
4x yearly expenses or 4x salary?
The former.

If our auto is wrecked due to our fault, we're out $500. If our house burns down, we're out $1,000. Our HSA alone would cover our annual out-of-pocket max for 2+ years. Regular state unemployment benefits would cover all of our essential spending for six months. And all of that is aside from our portfolio. No need for an EF anymore.
The Sensible Steward
User avatar
NerveDoc
Posts: 36
Joined: Sat Sep 21, 2019 8:58 am

Re: Smarter approach to "emergency funds"?

Post by NerveDoc »

Wouldn't an issue with this plan be keeping tax-inefficient bonds in a taxable account?
User avatar
Topic Author
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Smarter approach to "emergency funds"?

Post by vineviz »

NerveDoc wrote: Sun Dec 06, 2020 6:51 am Wouldn't an issue with this plan be keeping tax-inefficient bonds in a taxable account?
Most people keep their emergency funds in taxable accounts, so the approach discussed here is not les tax-efficient than other approaches. Neither stocks nor bonds are less tax-efficient than cash.

But an investor with a large enough Roth IRA could treat the contributions in that account as their emergency fund with no taxation on gains. On the other hand, if that Roth amount is large enough there’s likely little need to imagine part of it as being a dedicated emergency fund to begin with.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Smarter approach to "emergency funds"?

Post by willthrill81 »

vineviz wrote: Sun Dec 06, 2020 8:14 am But an investor with a large enough Roth IRA could treat the contributions in that account as their emergency fund with no taxation on gains. On the other hand, if that Roth amount is large enough there’s likely little need to imagine part of it as being a dedicated emergency fund to begin with.
When we still kept an EF, we kept 2/3 of it invested conservatively in a Roth IRA and the remaining third in cash.
The Sensible Steward
User avatar
spdoublebass
Posts: 889
Joined: Thu Apr 27, 2017 10:04 pm
Location: NY

Re: Smarter approach to "emergency funds"?

Post by spdoublebass »

So since this thread started I tweaked my EF a bit.

I keep 3 months living expenses in savings accounts. (.5% at Ally, .9% at a differenct credit union)

Then I have been putting the rest in VTINX target date income fund. I did this because it only had a $1000 buy in. I may switch this to the Life Strategy or Wellesley fund at a later date. I am aware of the stock differences in all three funds.

I like knowing I can access the money in either case very quickly. I also like that I can easily reduce stock exposer by adding another month of expenses to the savings account.

I used to buy I Bonds monthly as a way to build an EF. I'm finding that since I only have a few thousand in I Bonds, even if inflation hit, it won't really matter in the big picture for MY situation.

For simplicity, I was thinking about closing out my Treasury Direct account and no longer buy any more I Bonds. While I like them, I just don't see the point. I also do not like that they are locked up for a year.

(Long term, when I have more in my EF, I will merge it into my overall AA and not do this mental accounting. However, I do like having a separate EF at this point)
I'm trying to think, but nothing happens
User avatar
travelogue
Posts: 259
Joined: Sat Aug 12, 2017 4:29 pm

Re: Smarter approach to "emergency funds"?

Post by travelogue »

Anyone know an issuer I could parter with to launch EFND, the all-in-one emergency fund ETF? Seems like there's a market, especially with yields on savings accounts, money market funds, and treasuries so low.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Smarter approach to "emergency funds"?

Post by willthrill81 »

travelogue wrote: Tue Jan 05, 2021 10:28 am Anyone know an issuer I could parter with to launch EFND, the all-in-one emergency fund ETF? Seems like there's a market, especially with yields on savings accounts, money market funds, and treasuries so low.
Such a fund already exists and has been around for 50 years.
The Sensible Steward
User avatar
travelogue
Posts: 259
Joined: Sat Aug 12, 2017 4:29 pm

Re: Smarter approach to "emergency funds"?

Post by travelogue »

willthrill81 wrote: Tue Jan 05, 2021 10:30 am
travelogue wrote: Tue Jan 05, 2021 10:28 am Anyone know an issuer I could parter with to launch EFND, the all-in-one emergency fund ETF? Seems like there's a market, especially with yields on savings accounts, money market funds, and treasuries so low.
Such a fund already exists and has been around for 50 years.
Will they make an ETF class?
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Smarter approach to "emergency funds"?

Post by willthrill81 »

travelogue wrote: Tue Jan 05, 2021 10:32 am
willthrill81 wrote: Tue Jan 05, 2021 10:30 am
travelogue wrote: Tue Jan 05, 2021 10:28 am Anyone know an issuer I could parter with to launch EFND, the all-in-one emergency fund ETF? Seems like there's a market, especially with yields on savings accounts, money market funds, and treasuries so low.
Such a fund already exists and has been around for 50 years.
Will they make an ETF class?
Good question. I don't know.
The Sensible Steward
User avatar
Raraculus
Posts: 339
Joined: Sat Jul 20, 2019 10:43 am

Re: Smarter approach to "emergency funds"?

Post by Raraculus »

I'll admit that I've started late in life when it came to actively investing. No one to blame but myself. :)

I'm still in accumulating mode now, trying to get more and more shares of equities. I'm trying to catch up. Cash drag is why I don't have an EF anymore.

If an emergency happens, that's what CC's are for. If I don't have enough credit or need to use cash, then I'll just use my margin account at my brokerage. Eventually, I repay these funds over time from my regular employment.

And if for some reason, I need CASH as in actual Benjamins, I do have a regular checking account in the low four figures. I can always replenish that fairly quickly.

I think I'm good. :shock:
User avatar
inittowinit
Posts: 215
Joined: Thu Jul 05, 2012 6:37 pm

Re: Smarter approach to "emergency funds"?

Post by inittowinit »

As someone with a fairly large emergency fund for my age and lifestyle, but zero taxable investments (everything's in retirement accounts) -- I think this is a compelling idea. Especially compared to keeping everything in Ally savings account or chasing bank account bonuses (too lazy).
User avatar
jason2459
Posts: 1208
Joined: Wed May 06, 2020 7:59 pm

Re: Smarter approach to "emergency funds"?

Post by jason2459 »

000 wrote: Tue Jul 28, 2020 12:47 am
JBTX wrote: Tue Jul 28, 2020 12:33 am We have an ample fund of cash. Call it mental accounting, bucket ING or whatever you like. Having close to a year in liquidity is comforting. I don't have to worry about it going up or down with market fluctuations.
There is no replacement for cash, as March 2020 showed us all.

I have a tiered EF. Small amount in Cash/HYSA and no penalty CDs. Next tier in JMST JPMC ultra short muni fund that did really well through the crash a year ago. Barely a blip down. Then the rest in ex-US ETF. Now that I'm getting older... I'm shifting from CDs and the JMST to I-Bonds. As a long term strategy for my bond allocation and part of my tiered EF.

So I guess I'm saying cash may be King but there's not much weight anymore behind what the King or Queen has to say anymore.
Last edited by jason2459 on Thu Feb 25, 2021 9:50 pm, edited 1 time in total.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
averagedude
Posts: 1772
Joined: Sun May 13, 2018 3:41 pm

Re: Smarter approach to "emergency funds"?

Post by averagedude »

This approach seems reasonable to me. I was hook, line, and sinker on the emergency fund concept. Never had to use it and it has been a drag on my investment returns. Could possibly be my biggest investment mistake. An emergency fund may not be wise for big savers that start investing in their early 20s. Probably works best for people who save little and live paycheck to paycheck.
renzop
Posts: 2
Joined: Sun Jan 31, 2021 12:07 pm
Location: NYC

Re: Smarter approach to "emergency funds"?

Post by renzop »

I've been reading this thread with great interest, and am wondering how the current market conditions have adjusted people's thinkings (or not) on this strategy.

My personal "emergency fund" is $200K — this represents ~1.5-2 years of expenses at current semi frugal lifestyle (VHCOL area). I recognize this is a significantly higher timespan than most would recommend, but I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs. As I increase in age (currently mid 40s) I fear this will become more volatile rather than more stable. So the larger cushion helps me sleep better at night.

I hold my EF in Citi (along with a small checking account for typical expenses), previously I had this in a 6/12/18/24mo. CD ladder at 50K each. With the interest rates being what they are as of late, after my CDs were all called a few months ago, my client rep at Citi recently convinced me to move them to EALDX ultra-short bonds for the time being to hold while waiting to see if the interest rates improved. I’ve since then done my own research and realized he probably took me for a bit of a ride to get a commission when I see the very high (0.85%) ER on EALDX.

Subsequently, I have been learning a lot from this forum and other research into managing things myself. After reading this thread, I am fairly convinced about this strategy, and am thinking it would be a good move for me especially given I already have a propensity for a somewhat “overfunded” EF. Single-fund balanced holdings definitely make sense for me as I'm not likely to actively monitor or rebalance this EF.

Since Citi Brokerage can’t hold VASIX, I’ve been looking into replicate this strategy with iShares AOK. Coincidentally, the 30/70 composition of AOK is similar to the recently adjusted Safety Net allocation on Betterment (https://www.betterment.com/resources/al ... ce-update/).

Any gotchas I should be aware of where people would recommend against swapping this 200K of EALDX for AOK outright? Has the recent bond market conditions caused people to reconsider this allocation as beneficial? Alternatively, given the longer timeframe of this EF, might AOM or another ETF make more sense than AOK?
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Smarter approach to "emergency funds"?

Post by KlangFool »

renzop wrote: Sun Mar 07, 2021 11:13 am I've been reading this thread with great interest, and am wondering how the current market conditions have adjusted people's thinkings (or not) on this strategy.

My personal "emergency fund" is $200K — this represents ~1.5-2 years of expenses at current semi frugal lifestyle (VHCOL area). I recognize this is a significantly higher timespan than most would recommend, but I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs. As I increase in age (currently mid 40s) I fear this will become more volatile rather than more stable. So the larger cushion helps me sleep better at night.
renzop,

Why are you doing this?

A) What is your possible gain?

B) What are your possible loss?

C) Is your GAIN significantly much bigger than you LOSS?

<<I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs.>>

I don't see it. Based on your description, 1.5 to 2 years of expense in CASH is reasonable in your circumstances. I had increased my emergency fund to 3 years. I consider current situation is more uncertain that all other precious recession/crisis that I had faced. I am buying some physical Gold/Silver too.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
wordsmith11
Posts: 97
Joined: Mon Mar 27, 2017 10:18 pm

Re: Smarter approach to "emergency funds"?

Post by wordsmith11 »

Raraculus wrote: Sun Feb 21, 2021 10:57 pm I'll admit that I've started late in life when it came to actively investing. No one to blame but myself. :)

I'm still in accumulating mode now, trying to get more and more shares of equities. I'm trying to catch up. Cash drag is why I don't have an EF anymore.

If an emergency happens, that's what CC's are for. If I don't have enough credit or need to use cash, then I'll just use my margin account at my brokerage. Eventually, I repay these funds over time from my regular employment.

And if for some reason, I need CASH as in actual Benjamins, I do have a regular checking account in the low four figures. I can always replenish that fairly quickly.

I think I'm good. :shock:
Credit cards and margin will only last so long. If the emergency is job loss or voluntary "can't take it anymore" job resignation, then what?
If you pay for a cheap tattoo, you're gonna get a cheap tattoo.
drummerboy
Posts: 217
Joined: Wed Apr 20, 2016 1:08 pm

Re: Smarter approach to "emergency funds"?

Post by drummerboy »

renzop wrote: Sun Mar 07, 2021 11:13 am Any gotchas I should be aware of where people would recommend against swapping this 200K of EALDX for AOK outright? Has the recent bond market conditions caused people to reconsider this allocation as beneficial? Alternatively, given the longer timeframe of this EF, might AOM or another ETF make more sense than AOK?
It's an interesting debate to consider AOK for the Emergency Fund. Yielding about 2%. Of course, chasing yield always leads to scary outcomes. AOM might be too aggressive.

It all comes down to math, AOK is a 31% Equity fund. If stocks decline by 50% what does that do to your emergency fund?

Full disclosure, I own some AOK and yet never considered it as an emergency fund. Might have to do some research on this....

Of course, why not just adjust your overall asset allocation to match adding some AOK to the portfolio?. It's cheaper to implement and then you allow the portfolio to operate as a single unit.
User avatar
Raraculus
Posts: 339
Joined: Sat Jul 20, 2019 10:43 am

Re: Smarter approach to "emergency funds"?

Post by Raraculus »

wordsmith11 wrote: Mon Mar 08, 2021 6:43 pmCredit cards and margin will only last so long. If the emergency is job loss or voluntary "can't take it anymore" job resignation, then what?
I'll just have to muddle through. Obviously I'd hate for that to happen, and would actively seek new employment as soon as possible. Hopefully that scenario, however stressful, may be short-lived. I do have my IRA's, but I'd rather not touch them until I'm retired.

If it lasts longer...then I guess I may be in deep trouble. An emergency fund is not gonna save me. I have only myself to blame.

So, in short, I'll find a way to regain my footing and get on with my life.
drummerboy
Posts: 217
Joined: Wed Apr 20, 2016 1:08 pm

Re: Smarter approach to "emergency funds"?

Post by drummerboy »

jason2459 wrote: Thu Feb 25, 2021 7:20 pm I have a tiered EF. Small amount in Cash/HYSA and no penalty CDs. Next tier in JMST JPMC ultra short muni fund that did really well through the crash a year ago. Barely a blip down. Then the rest in ex-US ETF. Now that I'm getting older... I'm shifting from CDs and the JMST to I-Bonds. As a long term strategy for my bond allocation and part of my tiered EF.

So I guess I'm saying cash may be King but there's not much weight anymore behind what the King or Queen has to say anymore.
Another consideration is Vanguard LifeStrategy Income Fund (VASIX). It's 20% stocks (US and ex-US). Current SEC Yield is 1.75%. Perhaps an interesting option for an EF addition (on top of the allocation to I-Bonds).
CorradoJr
Posts: 302
Joined: Thu Apr 26, 2012 10:03 am

Re: Smarter approach to "emergency funds"?

Post by CorradoJr »

This thread is opening up my mind and I am sure learning a lot by reading through. At present, I'm in the situation of beginning to start my first taxable investments (outside of a very small EF.) All other assets are in 401k/Roths at 90/10 asset allocation split between S&P500/Total Stock and Total Bond type investments.

Due to receiving a bonus and slight salary increase this year, I am finally able to put aside 3x monthly expenses and then have some left over for future taxable investing. I'd like to stick to a 90/10 AA.

I'm looking for advice on how to best approach building my EF and then my taxable portion:

1. Hold 1x monthly expenses in a high-yield savings account (very liquid)
2. Hold the remainder of (2-4 additional months) "overfund" in something like VASIX (Lifestrategy Income) or Wellesley -or- long-term treasuries?

I think I agree with the "firewall" approach in keeping the EF and taxable separate since I have no taxable investments from which to pull at this time...then

3. Build my taxable account with VTSAX (Total Stock Market)

I've also been reading up on how the first 20% of bond holdings can be in long-term treasuries something like Vanguard Long-Term Treasury Index (VLGSX) and I am curious as to how/if I would need to fit that into my overall EF or taxable portfolio, especially since it would not be optimal from a tax perspective to hold bonds in taxable.

Can anyone offer some advice?
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Smarter approach to "emergency funds"?

Post by JBTX »

renzop wrote: Sun Mar 07, 2021 11:13 am I've been reading this thread with great interest, and am wondering how the current market conditions have adjusted people's thinkings (or not) on this strategy.

My personal "emergency fund" is $200K — this represents ~1.5-2 years of expenses at current semi frugal lifestyle (VHCOL area). I recognize this is a significantly higher timespan than most would recommend, but I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs. As I increase in age (currently mid 40s) I fear this will become more volatile rather than more stable. So the larger cushion helps me sleep better at night.

I hold my EF in Citi (along with a small checking account for typical expenses), previously I had this in a 6/12/18/24mo. CD ladder at 50K each. With the interest rates being what they are as of late, after my CDs were all called a few months ago, my client rep at Citi recently convinced me to move them to EALDX ultra-short bonds for the time being to hold while waiting to see if the interest rates improved. I’ve since then done my own research and realized he probably took me for a bit of a ride to get a commission when I see the very high (0.85%) ER on EALDX.

Subsequently, I have been learning a lot from this forum and other research into managing things myself. After reading this thread, I am fairly convinced about this strategy, and am thinking it would be a good move for me especially given I already have a propensity for a somewhat “overfunded” EF. Single-fund balanced holdings definitely make sense for me as I'm not likely to actively monitor or rebalance this EF.

Since Citi Brokerage can’t hold VASIX, I’ve been looking into replicate this strategy with iShares AOK. Coincidentally, the 30/70 composition of AOK is similar to the recently adjusted Safety Net allocation on Betterment (https://www.betterment.com/resources/al ... ce-update/).

Any gotchas I should be aware of where people would recommend against swapping this 200K of EALDX for AOK outright? Has the recent bond market conditions caused people to reconsider this allocation as beneficial? Alternatively, given the longer timeframe of this EF, might AOM or another ETF make more sense than AOK?

Have you considered ibonds? You can only fund $10k per year, $20k for MFJ,plus another $5k as a tax refund. It takes a few years but over time it adds up.

Also, a different strategy, not for everybody, is also do EE bonds. EEBONDS only return about 0.2%, but if you hold them 20 years they double in value, which is over 3.5%. In an emergency you could always cash them in after one year, although after 5 years or so you really wouldn't want to.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Smarter approach to "emergency funds"?

Post by KlangFool »

Raraculus wrote: Mon Mar 08, 2021 7:36 pm
wordsmith11 wrote: Mon Mar 08, 2021 6:43 pmCredit cards and margin will only last so long. If the emergency is job loss or voluntary "can't take it anymore" job resignation, then what?
I'll just have to muddle through. Obviously I'd hate for that to happen, and would actively seek new employment as soon as possible. Hopefully that scenario, however stressful, may be short-lived. I do have my IRA's, but I'd rather not touch them until I'm retired.

If it lasts longer...then I guess I may be in deep trouble. An emergency fund is not gonna save me. I have only myself to blame.

So, in short, I'll find a way to regain my footing and get on with my life.
Why do you think in a binary fashion? Typically, the recession lasting about 2 years. A 2 years EF will let you outlast most recession.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Dottie57
Posts: 12379
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Smarter approach to "emergency funds"?

Post by Dottie57 »

I think the safety and the walled off from a portfolio really depends on wealth. There is no way I could have conceived of investing my emergency fund most of my life. Now I can see it in bonds at least. High rollers have a lot more options.
garlandwhizzer
Posts: 3565
Joined: Fri Aug 06, 2010 3:42 pm

Re: Smarter approach to "emergency funds"?

Post by garlandwhizzer »

To know how much emergency fund you should have from say zero to 3 years living expenses what you really need is not a formula from someone else but sound judgement based on your own circumstances. Things like whether you are retired or in the accumulation phase, other reliable income streams in a pinch, your portfolio allocation (how many safe, non-volatile assets do you hold apart from the emergency fund), the amount of your necessary annual expenses including all living expenses, your specific risk tolerance and risk capacity--all of these things plus others have to taken into account and rational judgements made on the basis of them. There is no single right answer for everyone. Some don't need an emergency fund at all, others need a very substantial one in order to weather unexpected problems and still sleep at night. Instead of following someone else's advice about emergency funds it may be wise to take a very thorough look at yourself and your own specific financial circumstances, your portfolio allocations, your risk tolerance and risk capacity then simply apply a bit of simple common sense judgement to arrive at the answer.

Garland Whizzer
User avatar
jason2459
Posts: 1208
Joined: Wed May 06, 2020 7:59 pm

Re: Smarter approach to "emergency funds"?

Post by jason2459 »

JBTX wrote: Tue Mar 09, 2021 11:46 pm
renzop wrote: Sun Mar 07, 2021 11:13 am I've been reading this thread with great interest, and am wondering how the current market conditions have adjusted people's thinkings (or not) on this strategy.

My personal "emergency fund" is $200K — this represents ~1.5-2 years of expenses at current semi frugal lifestyle (VHCOL area). I recognize this is a significantly higher timespan than most would recommend, but I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs. As I increase in age (currently mid 40s) I fear this will become more volatile rather than more stable. So the larger cushion helps me sleep better at night.

I hold my EF in Citi (along with a small checking account for typical expenses), previously I had this in a 6/12/18/24mo. CD ladder at 50K each. With the interest rates being what they are as of late, after my CDs were all called a few months ago, my client rep at Citi recently convinced me to move them to EALDX ultra-short bonds for the time being to hold while waiting to see if the interest rates improved. I’ve since then done my own research and realized he probably took me for a bit of a ride to get a commission when I see the very high (0.85%) ER on EALDX.

Subsequently, I have been learning a lot from this forum and other research into managing things myself. After reading this thread, I am fairly convinced about this strategy, and am thinking it would be a good move for me especially given I already have a propensity for a somewhat “overfunded” EF. Single-fund balanced holdings definitely make sense for me as I'm not likely to actively monitor or rebalance this EF.

Since Citi Brokerage can’t hold VASIX, I’ve been looking into replicate this strategy with iShares AOK. Coincidentally, the 30/70 composition of AOK is similar to the recently adjusted Safety Net allocation on Betterment (https://www.betterment.com/resources/al ... ce-update/).

Any gotchas I should be aware of where people would recommend against swapping this 200K of EALDX for AOK outright? Has the recent bond market conditions caused people to reconsider this allocation as beneficial? Alternatively, given the longer timeframe of this EF, might AOM or another ETF make more sense than AOK?

Have you considered ibonds? You can only fund $10k per year, $20k for MFJ,plus another $5k as a tax refund. It takes a few years but over time it adds up.

Also, a different strategy, not for everybody, is also do EE bonds. EEBONDS only return about 0.2%, but if you hold them 20 years they double in value, which is over 3.5%. In an emergency you could always cash them in after one year, although after 5 years or so you really wouldn't want to.
Plus another $10k if one setups up a trust.

MFJ could get $35k in I-bonds and another $35k in EE bonds.
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Smarter approach to "emergency funds"?

Post by JBTX »

jason2459 wrote: Wed Mar 10, 2021 11:08 am
JBTX wrote: Tue Mar 09, 2021 11:46 pm
renzop wrote: Sun Mar 07, 2021 11:13 am I've been reading this thread with great interest, and am wondering how the current market conditions have adjusted people's thinkings (or not) on this strategy.

My personal "emergency fund" is $200K — this represents ~1.5-2 years of expenses at current semi frugal lifestyle (VHCOL area). I recognize this is a significantly higher timespan than most would recommend, but I work in a high volatility industry, and have unexpectedly lost employment 3 times in the past decade, each time with ~6-12mo. between jobs. As I increase in age (currently mid 40s) I fear this will become more volatile rather than more stable. So the larger cushion helps me sleep better at night.

I hold my EF in Citi (along with a small checking account for typical expenses), previously I had this in a 6/12/18/24mo. CD ladder at 50K each. With the interest rates being what they are as of late, after my CDs were all called a few months ago, my client rep at Citi recently convinced me to move them to EALDX ultra-short bonds for the time being to hold while waiting to see if the interest rates improved. I’ve since then done my own research and realized he probably took me for a bit of a ride to get a commission when I see the very high (0.85%) ER on EALDX.

Subsequently, I have been learning a lot from this forum and other research into managing things myself. After reading this thread, I am fairly convinced about this strategy, and am thinking it would be a good move for me especially given I already have a propensity for a somewhat “overfunded” EF. Single-fund balanced holdings definitely make sense for me as I'm not likely to actively monitor or rebalance this EF.

Since Citi Brokerage can’t hold VASIX, I’ve been looking into replicate this strategy with iShares AOK. Coincidentally, the 30/70 composition of AOK is similar to the recently adjusted Safety Net allocation on Betterment (https://www.betterment.com/resources/al ... ce-update/).

Any gotchas I should be aware of where people would recommend against swapping this 200K of EALDX for AOK outright? Has the recent bond market conditions caused people to reconsider this allocation as beneficial? Alternatively, given the longer timeframe of this EF, might AOM or another ETF make more sense than AOK?

Have you considered ibonds? You can only fund $10k per year, $20k for MFJ,plus another $5k as a tax refund. It takes a few years but over time it adds up.

Also, a different strategy, not for everybody, is also do EE bonds. EEBONDS only return about 0.2%, but if you hold them 20 years they double in value, which is over 3.5%. In an emergency you could always cash them in after one year, although after 5 years or so you really wouldn't want to.
Plus another $10k if one setups up a trust.

MFJ could get $35k in I-bonds and another $35k in EE bonds.
I have a RL trust but decided not to contribute there because we are going to redo the trust and I could never figure out definitively what happens when /if you dissolve the trust.
Tipro
Posts: 41
Joined: Sun Jul 14, 2013 8:22 pm

Re: Smarter approach to "emergency funds"?

Post by Tipro »

CorradoJr wrote: Tue Mar 09, 2021 11:10 pm This thread is opening up my mind and I am sure learning a lot by reading through. At present, I'm in the situation of beginning to start my first taxable investments (outside of a very small EF.) All other assets are in 401k/Roths at 90/10 asset allocation split between S&P500/Total Stock and Total Bond type investments.

Due to receiving a bonus and slight salary increase this year, I am finally able to put aside 3x monthly expenses and then have some left over for future taxable investing. I'd like to stick to a 90/10 AA.

I'm looking for advice on how to best approach building my EF and then my taxable portion:

1. Hold 1x monthly expenses in a high-yield savings account (very liquid)
2. Hold the remainder of (2-4 additional months) "overfund" in something like VASIX (Lifestrategy Income) or Wellesley -or- long-term treasuries?

I think I agree with the "firewall" approach in keeping the EF and taxable separate since I have no taxable investments from which to pull at this time...then

3. Build my taxable account with VTSAX (Total Stock Market)

I've also been reading up on how the first 20% of bond holdings can be in long-term treasuries something like Vanguard Long-Term Treasury Index (VLGSX) and I am curious as to how/if I would need to fit that into my overall EF or taxable portfolio, especially since it would not be optimal from a tax perspective to hold bonds in taxable.

Can anyone offer some advice?
try and think medium to long term about the asset allocation you're comfortable with in taxable. That may be different than what you are okay with in a tax advantaged account. Then think about how many months of spend you could never stomach to go below.

Once you have those answers, start investing all new funds into your long-term asset allocation. Eventually you can move everything into your taxable asset allocation in the investment account of your choice and be pretty confident that it will never drop below the whatever months of savings you can't stand to lose. A life strategy fund or 100% equity is probably your best bet there. For example, if you are okay with 100% equities and you say 50% drawdown is the max historical drop, and you want to always have 6 months of savings, by the time you have 12 months of savings you could be totally invested in the market.

I wouldn't over complicate it. For now just leave your money in the safe savings, start investing new money in the market, and reevaluate in 3 to 6 months to see where things stand.
User avatar
Raraculus
Posts: 339
Joined: Sat Jul 20, 2019 10:43 am

Re: Smarter approach to "emergency funds"?

Post by Raraculus »

KlangFool wrote: Wed Mar 10, 2021 7:43 amWhy do you think in a binary fashion? Typically, the recession lasting about 2 years. A 2 years EF will let you outlast most recession.
The cash drag of a 2 year EF will set back my retirement date by two years. :D

All kidding aside, I recognize the fragility of my approach in using CC's and margin loans. In my personal situation, I can see them lasting around one year should a job loss occur. I can see my retirement funds lasting another year should the recession continue and I am not able to secure another employment.

But, what can I do? The same amount of cash, if liquidated from my investments, will just last me as long. I think it's better to build up my investment portfolio to where it's 'hardened', and then I can start thinking about building a modest EF.

Personal finance is truly personal. I know the construction of my finances and I know I am taking on more risk that is not commensurate with my age. I put myself in this situation because I did not invest in my younger years. I choose to continue on this financial path. Consider me informed. :beer
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Smarter approach to "emergency funds"?

Post by KlangFool »

Raraculus wrote: Wed Mar 10, 2021 1:52 pm
KlangFool wrote: Wed Mar 10, 2021 7:43 amWhy do you think in a binary fashion? Typically, the recession lasting about 2 years. A 2 years EF will let you outlast most recession.
The cash drag of a 2 year EF will set back my retirement date by two years. :D

All kidding aside, I recognize the fragility of my approach in using CC's and margin loans. In my personal situation, I can see them lasting around one year should a job loss occur. I can see my retirement funds lasting another year should the recession continue and I am not able to secure another employment.

But, what can I do? The same amount of cash, if liquidated from my investments, will just last me as long. I think it's better to build up my investment portfolio to where it's 'hardened', and then I can start thinking about building a modest EF.

Personal finance is truly personal. I know the construction of my finances and I know I am taking on more risk that is not commensurate with my age. I put myself in this situation because I did not invest in my younger years. I choose to continue on this financial path. Consider me informed. :beer
<<The cash drag of a 2 year EF will set back my retirement date by two years. :D>>

1) This is obviously false.

2) Consider the damage done to your portfolio in the coming recession if you need the 2 years of EF, it is small price to pay.

<<The same amount of cash, if liquidated from my investments, will just last me as long.>>

3) At a 50% of greater loss. It will set your retirement date much more than 2 years.

<<Consider me informed.>>

4) You are informed if

A) You have the actual calculation and number on how far will the 2 years of EF set your back in the retirement if nothing bad happened.

B) How much the 2 years of EF saves your in the worst case with 2 years of unemployment in the recession?

If you have the numbers for (A) and (B), you are informed.

<< I put myself in this situation because I did not invest in my younger years. I choose to continue on this financial path. >>

I disagreed on this statement too. In almost every cases when we actually go through the numbers, taking extra RISK is insignificant in achieving the number. Increasing the saving rate is what counts.

"Trust buy verify". Do your own calculation and let the numbers show you the answers.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
RickyAZ
Posts: 152
Joined: Sun Dec 08, 2019 5:27 pm

Re: Smarter approach to "emergency funds"?

Post by RickyAZ »

    CorradoJr wrote: Tue Mar 09, 2021 11:10 pm This thread is opening up my mind and I am sure learning a lot by reading through. At present, I'm in the situation of beginning to start my first taxable investments (outside of a very small EF.) All other assets are in 401k/Roths at 90/10 asset allocation split between S&P500/Total Stock and Total Bond type investments.

    Due to receiving a bonus and slight salary increase this year, I am finally able to put aside 3x monthly expenses and then have some left over for future taxable investing. I'd like to stick to a 90/10 AA.

    I'm looking for advice on how to best approach building my EF and then my taxable portion:

    1. Hold 1x monthly expenses in a high-yield savings account (very liquid)
    2. Hold the remainder of (2-4 additional months) "overfund" in something like VASIX (Lifestrategy Income) or Wellesley -or- long-term treasuries?

    I think I agree with the "firewall" approach in keeping the EF and taxable separate since I have no taxable investments from which to pull at this time...then

    3. Build my taxable account with VTSAX (Total Stock Market)

    I've also been reading up on how the first 20% of bond holdings can be in long-term treasuries something like Vanguard Long-Term Treasury Index (VLGSX) and I am curious as to how/if I would need to fit that into my overall EF or taxable portfolio, especially since it would not be optimal from a tax perspective to hold bonds in taxable.

    Can anyone offer some advice?
    If you’re going to be 90/10 then just hold your EF as short term bonds in the taxable. It’s not going to kick out enough ordinary dividends to really upend things tax wise ( assuming you don’t plan on holding $millions in ST bonds) and is liquid enough that you’ll have the cash within 2 days. Rebalance as necessary
    statefan03
    Posts: 66
    Joined: Wed Mar 25, 2020 12:31 pm
    Location: NC

    Re: Smarter approach to "emergency funds"?

    Post by statefan03 »

    I've found the following provides almost identical returns to the original post, but with even less drawdown, variability, and lower fees.

    20% Total Stock Market
    20% Total Bond Market
    60% Short Term Treasuries

    https://www.portfoliovisualizer.com/bac ... tion7_2=60
    Williams57
    Posts: 230
    Joined: Tue Jan 21, 2020 10:16 pm

    Re: Smarter approach to "emergency funds"?

    Post by Williams57 »

    Can margin loans count as "emergency fund"? IBKR's current rates are in 0.6-1.5% I believe. May make sense if you have high capital gains, or for whatever other reason. Of course this assumes you have more than enough in your brokerage account, double triple of you basic emergency fund.
    bjcleaver
    Posts: 16
    Joined: Thu Feb 25, 2021 3:58 pm

    Re: Smarter approach to "emergency funds"?

    Post by bjcleaver »

    I've been thinking about this whole concept a lot lately. For me it's less an emergency fund but more of a "working capital" fund (although I may just be splitting hairs.) I work in real estate and my income can be unpredictable/inconsistent as to when it occurs and the dollar amount. As such I tend to keep a large balance in my business checking account just in case I need to tap into it (I haven't had to tap into it.) So it's just "sitting there". I suppose it gives me peace of mind, but I also feel like there has been a large opportunity cost over the last few years of not doing something with it.

    I do tend to bucket things, it's just how my mind works, so it's hard for me to look at this across my AA. I'm 51 but run a fairly aggressive portfolio for my investments, the majority of which are in tax-advantaged. I could probably rationalize many of the various suggestions made in this thread - VASIX; some amount of VWINX/cash; Short Term Treasuries; 20% TSM/20% TBM/60% STT; NTSX/bonds; SWAN, 100% VTI. There are lots of ideas! And I'm having a surprisingly hard time figuring out what I want for this, which is probably why I just keep pushing off the decision. Moderate returns with minimal downside? I think? Sigh.
    mwesty
    Posts: 33
    Joined: Fri Nov 06, 2020 7:38 am

    Re: Smarter approach to "emergency funds"?

    Post by mwesty »

    What would be the tax implications for VASIX? I thought it was recommended to keep bonds in non-taxable?
    Zillions
    Posts: 391
    Joined: Sun May 24, 2020 12:58 am

    Re: Smarter approach to "emergency funds"?

    Post by Zillions »

    Question about where to keep a home down-payment fund:

    I have a 3-5 year timeline to buy a house. The down payment we've saved so far is in a combination of VTI & VNQ (Vanguard Real Estate). Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)? Ideally, I'd like to keep this pot as a 4-fund portfolio - VTI, VNQ, VWINX and VASIX but want to run this here to get feedback / advice.

    Thanks.
    gtwhitegold
    Posts: 673
    Joined: Fri Sep 21, 2012 1:55 pm

    Re: Smarter approach to "emergency funds"?

    Post by gtwhitegold »

    I'm using this strategy for a portion of my emergency fund now. I have $5000 in a money market account, $6000 in preferable rate CDs, and the rest is using this strategy. I'll have about $40,000 in this strategy before I retire from the Military. I'm using 7% TMF, 8% SAA, and 85% BSV. I was initially going to use VTIP for the short term bond fund, but BSV looked to be a little higher yielding and stable during liquidity events like last March. Also, I shouldn't need the inflation protection just yet.
    sycamore
    Posts: 6360
    Joined: Tue May 08, 2018 12:06 pm

    Re: Smarter approach to "emergency funds"?

    Post by sycamore »

    Zillions wrote: Wed Mar 31, 2021 2:39 am Question about where to keep a home down-payment fund:

    I have a 3-5 year timeline to buy a house. The down payment we've saved so far is in a combination of VTI & VNQ (Vanguard Real Estate). Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)? Ideally, I'd like to keep this pot as a 4-fund portfolio - VTI, VNQ, VWINX and VASIX but want to run this here to get feedback / advice.

    Thanks.
    "Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)?"

    In general, yes.

    If your intent is to reduce the chance that your investments drop "too much" (and thereby prevent you from buying the house you want), then using bonds will help you do that.

    Bonds can also lose value but they are much less volatile than stocks and are thus preferred for known spending needs (like a house down payment). For money you want to spend in 3-5 years, I'd use short or intermediate term bonds.

    Wellesley holds mostly long-term bonds with an average duration of 7.9 years -- see https://investor.vanguard.com/mutual-fu ... olio/vwinx. And LifeStrategy uses Total Bond Market (6.6 years) and Total International Bond Index (8.3 years). So while the bond allocation of these funds does not "match" your spending horizon, you may want to take the chance aon them nyway because bonds in general are still safer than stocks for a 3-5 year horizon.

    Two more thoughts:
    1) if you wanted to simplify things, pick just a single fund for your down-payment fund. LifeStrategy Income (20/80) or Conservative (40/60) could be all you really need. Suggest you ask yourself why do you need active management (with Wellesley)? Why do you need REITs?

    2) What are the tax impacts for you?
    2a) REITs are usually best in a tax-advantaged account. I don't know what VNQ's distributions are like, nor if they're "qualified" dividends. You may be paying a high tax cost to hold REITs.
    2b) Bonds likewise are better in tax-advantaged accounts because their distributions are treated as taxable income. But in general bond distributions are pretty low these days so the tax on them may not be so bad.
    calwatch
    Posts: 1447
    Joined: Wed Oct 02, 2013 1:48 am

    Re: Smarter approach to "emergency funds"?

    Post by calwatch »

    Williams57 wrote: Thu Mar 11, 2021 10:52 am Can margin loans count as "emergency fund"? IBKR's current rates are in 0.6-1.5% I believe. May make sense if you have high capital gains, or for whatever other reason. Of course this assumes you have more than enough in your brokerage account, double triple of you basic emergency fund.
    Someone on this thread identified the credit card balance transfer checks we all get as part of an emergency fund - 3-4% fee for 0% money for 12-18 months. I don't see that as any different. As for me personally, I've purchased about a decade now of I Bonds which I could liquidate at any time. It would really suck if I had to do so, since those I Bond allocations can never be repurchased, but I could if I had to.
    Zillions
    Posts: 391
    Joined: Sun May 24, 2020 12:58 am

    Re: Smarter approach to "emergency funds"?

    Post by Zillions »

    sycamore wrote: Wed Mar 31, 2021 7:44 pm
    Zillions wrote: Wed Mar 31, 2021 2:39 am Question about where to keep a home down-payment fund:

    I have a 3-5 year timeline to buy a house. The down payment we've saved so far is in a combination of VTI & VNQ (Vanguard Real Estate). Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)? Ideally, I'd like to keep this pot as a 4-fund portfolio - VTI, VNQ, VWINX and VASIX but want to run this here to get feedback / advice.

    Thanks.
    "Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)?"

    In general, yes.

    If your intent is to reduce the chance that your investments drop "too much" (and thereby prevent you from buying the house you want), then using bonds will help you do that.

    Bonds can also lose value but they are much less volatile than stocks and are thus preferred for known spending needs (like a house down payment). For money you want to spend in 3-5 years, I'd use short or intermediate term bonds.

    Wellesley holds mostly long-term bonds with an average duration of 7.9 years -- see https://investor.vanguard.com/mutual-fu ... olio/vwinx. And LifeStrategy uses Total Bond Market (6.6 years) and Total International Bond Index (8.3 years). So while the bond allocation of these funds does not "match" your spending horizon, you may want to take the chance aon them nyway because bonds in general are still safer than stocks for a 3-5 year horizon.

    Two more thoughts:
    1) if you wanted to simplify things, pick just a single fund for your down-payment fund. LifeStrategy Income (20/80) or Conservative (40/60) could be all you really need. Suggest you ask yourself why do you need active management (with Wellesley)? Why do you need REITs?

    2) What are the tax impacts for you?
    2a) REITs are usually best in a tax-advantaged account. I don't know what VNQ's distributions are like, nor if they're "qualified" dividends. You may be paying a high tax cost to hold REITs.
    2b) Bonds likewise are better in tax-advantaged accounts because their distributions are treated as taxable income. But in general bond distributions are pretty low these days so the tax on them may not be so bad.
    Thank you!
    User avatar
    Topic Author
    vineviz
    Posts: 14921
    Joined: Tue May 15, 2018 1:55 pm
    Location: Baltimore, MD

    Re: Smarter approach to "emergency funds"?

    Post by vineviz »

    Zillions wrote: Wed Mar 31, 2021 2:39 am Question about where to keep a home down-payment fund:

    I have a 3-5 year timeline to buy a house. The down payment we've saved so far is in a combination of VTI & VNQ (Vanguard Real Estate). Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)? Ideally, I'd like to keep this pot as a 4-fund portfolio - VTI, VNQ, VWINX and VASIX but want to run this here to get feedback / advice.

    Thanks.

    LifeStrategy funds are already a “four fund portfolio” and are better diversified without the VTI/VNQ/VWINX concoction.

    VASIX by itself would be the most market risk I’d be comfortable with for a 3-5 year horizon.

    If you don’t mind seeing 1/3 of your down payment evaporate in a market crash then Vanguard LifeStrategy Cnsrv Gr Inv (VSCGX) would be a more aggressive choice.
    "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
    Zillions
    Posts: 391
    Joined: Sun May 24, 2020 12:58 am

    Re: Smarter approach to "emergency funds"?

    Post by Zillions »

    vineviz wrote: Wed Mar 31, 2021 8:47 pm
    Zillions wrote: Wed Mar 31, 2021 2:39 am Question about where to keep a home down-payment fund:

    I have a 3-5 year timeline to buy a house. The down payment we've saved so far is in a combination of VTI & VNQ (Vanguard Real Estate). Does it reduce risk a little more if we directed some portion of our ongoing / future down-payment investments into a combination of VWINX (Vanguard Wellesley Income) & VASIX (Vanguard LifeStrategy Income)? Ideally, I'd like to keep this pot as a 4-fund portfolio - VTI, VNQ, VWINX and VASIX but want to run this here to get feedback / advice.

    Thanks.

    LifeStrategy funds are already a “four fund portfolio” and are better diversified without the VTI/VNQ/VWINX concoction.

    VASIX by itself would be the most market risk I’d be comfortable with for a 3-5 year horizon.

    If you don’t mind seeing 1/3 of your down payment evaporate in a market crash then Vanguard LifeStrategy Cnsrv Gr Inv (VSCGX) would be a more aggressive choice.
    Like many other folks, I would be upset if I lost a 1/3rd of my assets but I do understand that it may not be unavoidable, esp. if I am seeking higher returns. I do have the option to postpone my home purchase, which is the other variable I can control in this equation. Thank you for the heads up on VSCGX. It's a single fund and less drama than a 4-fund portfolio!
    BackToSchoolDad
    Posts: 262
    Joined: Wed Mar 18, 2020 6:33 pm

    Re: Smarter approach to "emergency funds"?

    Post by BackToSchoolDad »

    Thanks to a growing list of things being added to the sinking fund budget, I've started to implement this approach for lumpy expenses with an indeterminate timeline. Currently wanting to start saving for things that'll come up in 5-10 years like a new roof/car.

    I'm doing it at M1, so adding funds doesn't add any complication.
    Currently the portfolio consists of:
    12% Vanguard Total Stock VTI
    8% Vanguard Total International VXUS
    40% Vanguard Short Term Treasury VGSH
    40% Vanguard Intermediate Treasury VGIT

    I considered using all Vanguard Short Term bond BSV or a mix of Total Bond and the new Vanguard Ultra Short bond ETF, but I assumed going all treasuries would be the most efficient implementation.

    Assuming you buy into the underlying premise and are comfortable with the equity risk, what's the optimal way to implement the bond portion such a portfolio?
    Greg in Idaho
    Posts: 226
    Joined: Tue Dec 27, 2016 11:59 am

    Re: Smarter approach to "emergency funds"?

    Post by Greg in Idaho »

    watchnerd wrote: Wed Mar 25, 2020 11:54 am
    rascott wrote: Wed Mar 25, 2020 11:38 am This seems like bucketing to me..... one bucket in a 20/80 AA.... and another bigger bucket in your "normal" AA. Why not just adjust the overall AA to match this?
    That's what I do.

    It's all one AA to me.

    My "EF" is just a subset of my fixed income.
    Me too
    User avatar
    Topic Author
    vineviz
    Posts: 14921
    Joined: Tue May 15, 2018 1:55 pm
    Location: Baltimore, MD

    Re: Smarter approach to "emergency funds"?

    Post by vineviz »

    BackToSchoolDad wrote: Sat May 08, 2021 1:20 pm Thanks to a growing list of things being added to the sinking fund budget, I've started to implement this approach for lumpy expenses with an indeterminate timeline. Currently wanting to start saving for things that'll come up in 5-10 years like a new roof/car.

    I'm doing it at M1, so adding funds doesn't add any complication.
    Currently the portfolio consists of:
    12% Vanguard Total Stock VTI
    8% Vanguard Total International VXUS
    40% Vanguard Short Term Treasury VGSH
    40% Vanguard Intermediate Treasury VGIT

    I considered using all Vanguard Short Term bond BSV or a mix of Total Bond and the new Vanguard Ultra Short bond ETF, but I assumed going all treasuries would be the most efficient implementation.

    Assuming you buy into the underlying premise and are comfortable with the equity risk, what's the optimal way to implement the bond portion such a portfolio?
    No one bond allocation is going to be vastly superior to another, so ultimately it boils down to what you feel comfortable with. I think what you've got is absolutely reasonable.

    Personally I think taking on a little credit risk with the short-term bonds might be worthwhile, since most of the actual diversification is coming from VGIT. I'm partial to iShares Core 1-5 Year USD Bond ETF (ISTB), so this would produce a pie something like this (I'd also just equalize the VTI and VXUS allocations, but again no big deal either way):

    10% Vanguard Total Stock (VTI)
    10% Vanguard Total International (VXUS)
    40% iShares Core 1-5 Year USD Bond ETF (ISTB)
    40% Vanguard Intermediate Treasury (VGIT)
    "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
    BackToSchoolDad
    Posts: 262
    Joined: Wed Mar 18, 2020 6:33 pm

    Re: Smarter approach to "emergency funds"?

    Post by BackToSchoolDad »

    vineviz wrote: Sun May 09, 2021 8:13 am Personally I think taking on a little credit risk with the short-term bonds might be worthwhile, since most of the actual diversification is coming from VGIT. I'm partial to iShares Core 1-5 Year USD Bond ETF (ISTB), so this would produce a pie something like this (I'd also just equalize the VTI and VXUS allocations, but again no big deal either way):

    10% Vanguard Total Stock (VTI)
    10% Vanguard Total International (VXUS)
    40% iShares Core 1-5 Year USD Bond ETF (ISTB)
    40% Vanguard Intermediate Treasury (VGIT)
    Interesting, thanks for the input. What about adding the credit risk short term do you find worthwhile? I feel like I usually see you recommend treasuries only.

    Is it the main benefit increased yield over treasuries without taking on too much risk? I think I read somewhere that the credit premium is more robust on the short end.
    User avatar
    Topic Author
    vineviz
    Posts: 14921
    Joined: Tue May 15, 2018 1:55 pm
    Location: Baltimore, MD

    Re: Smarter approach to "emergency funds"?

    Post by vineviz »

    BackToSchoolDad wrote: Sun May 09, 2021 12:31 pm
    vineviz wrote: Sun May 09, 2021 8:13 am Personally I think taking on a little credit risk with the short-term bonds might be worthwhile, since most of the actual diversification is coming from VGIT. I'm partial to iShares Core 1-5 Year USD Bond ETF (ISTB), so this would produce a pie something like this (I'd also just equalize the VTI and VXUS allocations, but again no big deal either way):

    10% Vanguard Total Stock (VTI)
    10% Vanguard Total International (VXUS)
    40% iShares Core 1-5 Year USD Bond ETF (ISTB)
    40% Vanguard Intermediate Treasury (VGIT)
    Interesting, thanks for the input. What about adding the credit risk short term do you find worthwhile? I feel like I usually see you recommend treasuries only.

    Is it the main benefit increased yield over treasuries without taking on too much risk? I think I read somewhere that the credit premium is more robust on the short end.


    It’s a little bit about yield, but mostly about diversification. When stocks are the majority of the portfolio, corporate bonds provide less diversification benefit since the credit risk is pretty highly correlated with equity market risk AND the volatility of the portfolio is dominated by the equity holdings.

    With stocks at just 20% of the portfolio, that is less true: you get a little gain from adding back in some market/credit risk to the term risk of Treasury bonds.

    I don’t want people to overdo it with an emergency fund, though, since in the REALLY bad months for stocks you can see short term corporate bonds go down to (though the magnitude isn’t expected to be severe). That’s why I think a fund like BSV or ISTB, both of which include a mix of Treasuries and corporate bonds, is a good complement to the pure intermediate term Treasury fund

    But I want to repeat, these differences are unlikely to make big differences in portfolio performance. Just pick a mix you think you’ll be comfortable with.
    "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
    DB2
    Posts: 1396
    Joined: Thu Jan 17, 2019 9:07 pm

    Re: Smarter approach to "emergency funds"?

    Post by DB2 »

    The more I think about this, I like this idea of using LifeStrategy Income as my ER fund (I love these funds in general). Maybe add a couple of extra/several months of expenses to it and it might just serve as my primary bond fund at the same time. I'll always keep at least a couple of months of expenses in my checking account.
    Post Reply