What counts as an Emergency Fund?

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TheTimeLord
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What counts as an Emergency Fund?

Post by TheTimeLord »

I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
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jebmke
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Re: What counts as an Emergency Fund?

Post by jebmke »

Everything I have is my emergency fund. Given my investment plan, I would start liquidating bond holdings first, then move to equity (very unlikely).

This year it appears we have a confluence of one-time items that will require cash above our normal expense rate. If necessary I'll liquidate some short-term Treasury funds.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Lastrun
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Re: What counts as an Emergency Fund?

Post by Lastrun »

jebmke wrote: Mon Mar 20, 2023 10:04 am Everything I have is my emergency fund. ….
Correct, if the you know what hits the fan, everything is an emergency fund. I am retired at this point and look at this more from a liquidity standpoint.

When you no longer are worried about being out of work, the 3, 6, 12 month approach does not mean as much. The only issue now is how much to keep in savings, money market, etc. for immediate and near term needs.

One of the things I have learned in this recent rate increase period, is I would not use something like BND or BSV under this liquidity approach.
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Re: What counts as an Emergency Fund?

Post by runner3081 »

Every single dollar in every single account is an emergency fund - including home equity.

As far as tiering, i.e., sequence of pulling out:
-Credit Cards
-Checking
-Savings
-iBonds
-HSA
-Home Equity
-Post-Tax
-ROTH
-Pre-Tax Accounts
-529 Plan
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Re: What counts as an Emergency Fund?

Post by jebmke »

Lastrun wrote: Mon Mar 20, 2023 10:12 am
jebmke wrote: Mon Mar 20, 2023 10:04 am Everything I have is my emergency fund. ….
Correct, if the you know what hits the fan, everything is an emergency fund. I am retired at this point and look at this more from a liquidity standpoint.

When you no longer are worried about being out of work, the 3, 6, 12 month approach does not mean as much. The only issue now is how much to keep in savings, money market, etc. for immediate and near term needs.

One of the things I have learned in this recent rate increase period, is I would not use something like BND or BSV under this liquidity approach.
BND is liquid, it just isn't stable. We ditched a dedicated EF in our early 40s. Our bond holdings have always been fairly low duration (< = 5 years) so volatility hasn't been an issue.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: What counts as an Emergency Fund?

Post by dvvader »

I can picture in my mind where this thread is going... its going to turn into a debate over semantics just like all emergency fund threads do.

At the end of the day, all the matters is the answer to this question, "Do you have enough money, or a means to acquire enough money, to cover your short- and long-term obligations?"

That being said, to me what strictly constitutes an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc. How this is managed (part of portfolio? rebalanced? how much?) are questions I'll let others debate over.
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TheTimeLord
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Re: What counts as an Emergency Fund?

Post by TheTimeLord »

runner3081 wrote: Mon Mar 20, 2023 10:16 am Every single dollar in every single account is an emergency fund - including home equity.

As far as tiering, i.e., sequence of pulling out:
-Credit Cards
-Checking
-Savings
-iBonds
-HSA
-Home Equity
-Post-Tax
-ROTH
-Pre-Tax Accounts
-529 Plan
While I know what you are saying, I am going to push back on this concept because a lot of those investments don't fit the profile I would consider appropriate for an emergency fund especially for individuals under 59.5.
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Re: What counts as an Emergency Fund?

Post by rockstar »

The use case changes when retired. It’s no longer about job loss. It’s more about unexpected expenses outside of your expectations. I’d swap job loss for medical and housing related repairs.

And it’s still short term liquid funds. I’d say you want to be able to access them in a week or less.
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Re: What counts as an Emergency Fund?

Post by Grt2bOutdoors »

In a typical start of one’s career, the first order of business is to establish a savings account and possibly a checking account to pay bills. Somewhere along the line, this new phrase of an emergency account was phased in. The purpose of the E-fund? To pay bills outside of the normal day to day expenses that arise in situations like job loss, or an unforeseen expense that is atypical.

As one gets older and after the E-fund has been fully stocked with sn appropriate amount for your own personal needs, then the opening of other accounts usually comes next. Accounts like your retirement account, taxable account like a brokerage, other savings vehicles like Series I and/or EE savings bonds, etc.

If the proverbial blank hit the fan, then all assets are fair game and becomes the umbrella e-fund.

Given the continuing lack of financial literacy in this country, most peoples E-fund remains the trusty savings account. And there is absolutely nothing wrong with having just one account to meet those needs should they arise.
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Re: What counts as an Emergency Fund?

Post by jebmke »

rockstar wrote: Mon Mar 20, 2023 10:25 am The use case changes when retired. It’s no longer about job loss. It’s more about unexpected expenses outside of your expectations. I’d swap job loss for medical and housing related repairs.

And it’s still short term liquid funds. I’d say you want to be able to access them in a week or less.
which is everything I have.
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Re: What counts as an Emergency Fund?

Post by H-Town »

TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
When an emergency occurs, everything is fair game. Everything. Nothing is untouchable. So it's everything I own, everything I can borrow, everything I can acquire.
Time is the ultimate currency.
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Re: What counts as an Emergency Fund?

Post by howard71 »

My grown adult kids (all approaching 50), have been learning of late what they can NOT count on as an emergency fund. That would be their Dad's money.
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Re: What counts as an Emergency Fund?

Post by Lee_WSP »

Previous threads have bandied about the term liquidity, but I don't that's the only requirement. Our entire taxable accounts and retirement accounts past age xx are highly liquid. Real estate and business interests wouldn't be.

Seems like a true emergency fund needs to have value stability of some sort to ensure the ability to pay short term expenses. However, once retired, it seems like the purpose is to pay for unexpected expenses or provide an alternative funding source in case of volatility or drawdowns.
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Re: What counts as an Emergency Fund?

Post by jebmke »

dvvader wrote: Mon Mar 20, 2023 10:22 am I can picture in my mind where this thread is going... its going to turn into a debate over semantics just like all emergency fund threads do.
We need a final, definitive thread on emergency funds. At some point we may need a separate forum for final, definitive and mega-threads.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: What counts as an Emergency Fund?

Post by KlangFool »

TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
As a courtesy, why don't you start by telling us what is your definition of the emergency fund?

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Re: What counts as an Emergency Fund?

Post by TheTimeLord »

H-Town wrote: Mon Mar 20, 2023 10:36 am
TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
When an emergency occurs, everything is fair game. Everything. Nothing is untouchable. So it's everything I own, everything I can borrow, everything I can acquire.
This thread has been very informative. I definitely have a much different perspective, probably because I consider disasters and emergencies to be different animals. Just as I would consider visiting an ER different from being admitted to a hospital. From my perspective an emergency is a short term transient event that can be handled with funds outside of those dedicated to providing one's retirement income, a disaster would require dipping into those funds possibly indiscriminately as some have described. That said I think what I am reading is most people are saying rather than dedicating funds for that purpose they will just handle the situation best they can if the need arises. I must say this is a very different direction that I expected when I started the thread.
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Re: What counts as an Emergency Fund?

Post by KlangFool »

OP,

1) It does lose it's nominal value. Aka, you know exactly the dollar value.

2) Accessibility, you can get at it when you want it. It is not subject to someone's else decision. Aka, HELOC does not qualify since it can be cancelled.

3) It does not cost you to use the money. For example, you have to pay interest in order to use it.

4) Cash or cash equivalent.

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Re: What counts as an Emergency Fund?

Post by cbox »

dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
Last edited by cbox on Mon Mar 20, 2023 11:00 am, edited 1 time in total.
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Re: What counts as an Emergency Fund?

Post by TheTimeLord »

KlangFool wrote: Mon Mar 20, 2023 10:55 am
TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
As a courtesy, why don't you start by telling us what is your definition of the emergency fund?

KlangFool
The interesting part was my intention in starting the thread was to discuss the labeling of certain types of easily assessable, liquid assets not the definition of an Emergency. Or in other words are we holding Emergency Funds even though we don't label them as such. This thread has gone in an entirely different direction.
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Re: What counts as an Emergency Fund?

Post by jebmke »

TheTimeLord wrote: Mon Mar 20, 2023 10:55 am
H-Town wrote: Mon Mar 20, 2023 10:36 am
TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
When an emergency occurs, everything is fair game. Everything. Nothing is untouchable. So it's everything I own, everything I can borrow, everything I can acquire.
This thread has been very informative. I definitely have a much different perspective, probably because I consider disasters and emergencies to be different animals. Just as I would consider visiting an ER different from being admitted to a hospital. From my perspective an emergency is a short term transient event that can be handled with funds outside of those dedicated to providing one's retirement income, a disaster would require dipping into those funds possibly indiscriminately as some have described. That said I think what I am reading is most people are saying rather than dedicating funds for that purpose they will just handle the situation best they can if the need arises. I must say this is a very different direction that I expected when I started the thread.
My retirement income is pretty stable. Pension, SS ( and, if looking at it from a cash flow basis, dividends). Expenses on the other hand are not. After 15 years of retirement, probably the biggest surprise to me is how wide the range of expenses (even excluding income taxes) is from year to year. I would have predicted something like +/-20% around the mean but the range is much larger.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: What counts as an Emergency Fund?

Post by H-Town »

TheTimeLord wrote: Mon Mar 20, 2023 10:55 am
H-Town wrote: Mon Mar 20, 2023 10:36 am
TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
When an emergency occurs, everything is fair game. Everything. Nothing is untouchable. So it's everything I own, everything I can borrow, everything I can acquire.
This thread has been very informative. I definitely have a much different perspective, probably because I consider disasters and emergencies to be different animals. Just as I would consider visiting an ER different from being admitted to a hospital. From my perspective an emergency is a short term transient event that can be handled with funds outside of those dedicated to providing one's retirement income, a disaster would require dipping into those funds possibly indiscriminately as some have described. That said I think what I am reading is most people are saying rather than dedicating funds for that purpose they will just handle the situation best they can if the need arises. I must say this is a very different direction that I expected when I started the thread.
I see. I think you refer to an emergency response plan. I'm sure people would be happy to share them.
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Re: What counts as an Emergency Fund?

Post by TheTimeLord »

KlangFool wrote: Mon Mar 20, 2023 10:57 am OP,

1) It does lose it's nominal value. Aka, you know exactly the dollar value.

2) Accessibility, you can get at it when you want it. It is not subject to someone's else decision. Aka, HELOC does not qualify since it can be cancelled.

3) It does not cost you to use the money. For example, you have to pay interest in order to use it.

4) Cash or cash equivalent.

KlangFool
I am going to be honest, I couldn't to save my life come up with a consistent BH definition for cash. People use the term all the time and I get the gist but to me it is a term without definition in the BH universe.
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Re: What counts as an Emergency Fund?

Post by rockstar »

Lee_WSP wrote: Mon Mar 20, 2023 10:48 am Previous threads have bandied about the term liquidity, but I don't that's the only requirement. Our entire taxable accounts and retirement accounts past age xx are highly liquid. Real estate and business interests wouldn't be.

Seems like a true emergency fund needs to have value stability of some sort to ensure the ability to pay short term expenses. However, once retired, it seems like the purpose is to pay for unexpected expenses or provide an alternative funding source in case of volatility or drawdowns.
I’d say checking, t bills, I bonds (over a year old), and savings. I’d add TIPS within a month of maturity based on how much I’ve seen their value move.

If I want to put equities here, I’d say that you must have held them for at least 10 years, which is the sweet spot where you’re likely to be positive.
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Re: What counts as an Emergency Fund?

Post by robphoto »

TheTimeLord wrote: Mon Mar 20, 2023 10:24 am
runner3081 wrote: Mon Mar 20, 2023 10:16 am Every single dollar in every single account is an emergency fund - including home equity.

As far as tiering, i.e., sequence of pulling out:
-Credit Cards
-Checking
-Savings
-iBonds
-HSA
-Home Equity
-Post-Tax
-ROTH
-Pre-Tax Accounts
-529 Plan
While I know what you are saying, I am going to push back on this concept because a lot of those investments don't fit the profile I would consider appropriate for an emergency fund especially for individuals under 59.5.
I think this is just meant to illustrate the sequence in which you liquidate, at increasing levels of desperation, not that they are all optimal for quick cash.

I think for most, they consider an emergency fund as money you can access quickly, that has stable principle, to carry you through loss of income or unexpected expenses.
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Re: What counts as an Emergency Fund?

Post by runner3081 »

TheTimeLord wrote: Mon Mar 20, 2023 10:24 am
runner3081 wrote: Mon Mar 20, 2023 10:16 am Every single dollar in every single account is an emergency fund - including home equity.

As far as tiering, i.e., sequence of pulling out:
-Credit Cards
-Checking
-Savings
-iBonds
-HSA
-Home Equity
-Post-Tax
-ROTH
-Pre-Tax Accounts
-529 Plan
While I know what you are saying, I am going to push back on this concept because a lot of those investments don't fit the profile I would consider appropriate for an emergency fund especially for individuals under 59.5.
It is going to take one heck of an emergency to even get past the HSA, let alone home equity.

I disagree with your push back. If there is a life and death emergency that depletes all other funds, we will take whatever funds needed, including penalties to cover it.
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Re: What counts as an Emergency Fund?

Post by UpperNwGuy »

cbox wrote: Mon Mar 20, 2023 10:58 am
dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
Why do you think it is worse to sell stocks at a loss for emergency expenses than to sell stocks at a loss for retirement distributions? I don't see any difference.
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Re: What counts as an Emergency Fund?

Post by nisiprius »

I can't prove it, but I have a hunch that the standard "emergency fund" advice is decades old and intended to keep brokers out of trouble. Imagine a young worker who has saved up $10,000 and goes to a broker and wants to invest all of it in Xerox stock (1970s equivalent of a meme stock). The broker could get in trouble for recommending an unsuitable investment unless they say "go away, kid, and don't come back until you've got 6 months' expenses in savings."

I feel that emergency funds are appropriate, and that they are a "just eat your broccoli" thing and that people who are aggressively trying to optimize their finances just hate them and look for excuses not to have one.

I haven't seen any really good analyses of actual financial emergencies and what resources really work to meet them. I think we're all on our own. We have to have a plan, and the plan has to cover whatever we think we can previsualize about emergencies.

For financial emergencies that can be bridged with a credit card and for which it's OK if it takes a week or ten days or so to get the money into an account as "available funds" from which the card can be paid off, hey, your whole portfolio is available. The only question is how badly you feel about selling assets that might be down. If the "emergency" needs $50,000 and the only thing you have to liquidate is stocks, and it's March of 2009, then meeting the $50,000 emergency is liquidating stocks that cost you $100,000 to buy. Pretty painful. On the other hand, if it's bonds and they're down 10%, it doesn't seem like a big deal.

So, for low-speed financial emergencies, as a rough idea it seems to me that a core bond fund or anything less volatile than that can be mentally part of the emergency resources.

Sometimes you need liquidity, and a several-day-delay for something to get to a place where someone can cut a teller's check won't be good enough. Sometimes you need robustness, as in a form of payment that's acceptable when the power is out.

If your roof has been damaged by a tree falling on it--which literally happened to a neighbor of ours a few years ago--it's a question of who you can call to get a tarp over it, and what to do if they say "cash, check, or Venmo." I don't actually know what my neighbor did.

In a sky-is-falling disaster where everyone wants plywood on their windows at the same time and the power is out and ATM machines and Venmo aren't available, you need something different.

One of the weird things to me is that the most commonly mentioned emergency is job loss. That's a very special case, and very different from other emergencies because of the likelihood of unemployment benefits. I know what everyone should do, and I have no idea how to do it. What everyone should do is find out if they would be eligible for unemployments benefits, how much they would be, and how long they would continue. That's surprisingly hard to do, and I've never felt that it was appropriate to discuss with HR. The answer will be different in every state.
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Re: What counts as an Emergency Fund?

Post by KlangFool »

TheTimeLord wrote: Mon Mar 20, 2023 11:03 am
KlangFool wrote: Mon Mar 20, 2023 10:57 am OP,

1) It does lose it's nominal value. Aka, you know exactly the dollar value.

2) Accessibility, you can get at it when you want it. It is not subject to someone's else decision. Aka, HELOC does not qualify since it can be cancelled.

3) It does not cost you to use the money. For example, you have to pay interest in order to use it.

4) Cash or cash equivalent.

KlangFool
I am going to be honest, I couldn't to save my life come up with a consistent BH definition for cash. People use the term all the time and I get the gist but to me it is a term without definition in the BH universe.
If the nominal value can change, it is not cash. Physical cash, checking and saving account, MMF. It is not that hard.

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Re: What counts as an Emergency Fund?

Post by alluringreality »

dvvader wrote: Mon Mar 20, 2023 10:22 am to me what strictly constitutes an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
I tend to define along similar lines. I think of an emergency fund as a type of liquidity planning. Generally the concept typically surrounds a possibility of needing near-term assets, so it becomes debatable if significant duration and marketable assets are necessarily consistent with such an objective. Topics like emergency funds may also relate with aspects of risk management, so I personally have some tendency to disagree that an entire portfolio serves the purpose. As an example, my tax advantaged accounts and taxable accounts do not share identical legal liabilities, so all assets may not necessarily serve the same role.
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Re: What counts as an Emergency Fund?

Post by H-Town »

cbox wrote: Mon Mar 20, 2023 10:58 am
dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
That's the pitfall with emergency fund.

If I need $50k of emergency expenses today, I can look at my taxable lots and sell the lots that I bought prior to March 2020 with > 45% unrealized gain. And that's with all the market downturn in 2022 and 2023. If I were to leave the same fund in HYSA since 2020, it would have earned less than 5%.

Note that interest income is taxed at top ordinary income rate. LTCG is taxed at preferred rate (10% or 15%). You can also carryforward TLH to offset capital gain, if that's applicable to you.

You need an emergency response plan. Emergency fund is only appropriate when you start out with debts and not much saved.
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Lee_WSP
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Re: What counts as an Emergency Fund?

Post by Lee_WSP »

The other issue not being touched on a lot is the distinction between phases of our investing lives.

When first starting out, an actual emergency fund to cushion against unemployment or unexpected expenses is fairly important. I think this rule is important because if one cannot manage to keep a floating cash reserve, it’s pretty hard to invest without worry.

Once you’ve got enough to be very on track towards financial independence, the need for a value protected account becomes less important, so the amount held in a savings or checking account can be reduced. We still need some liquidity, but not as much because the asset levels are such that greater risk can be taken with the savings account. I think this area is where there’s a lot of wiggle room for personal preference.

And then once in retirement or FI, all you really need is a liquid account for expected expenses and some unexpected ones too because you’re financially independent and an unexpected expense shouldn’t be derailing your retirement unless you’re on the edge. In which case, I’m not sure what can be done other than work longer.
Last edited by Lee_WSP on Mon Mar 20, 2023 11:59 am, edited 1 time in total.
dvvader
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Re: What counts as an Emergency Fund?

Post by dvvader »

UpperNwGuy wrote: Mon Mar 20, 2023 11:14 am
cbox wrote: Mon Mar 20, 2023 10:58 am
dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
Why do you think it is worse to sell stocks at a loss for emergency expenses than to sell stocks at a loss for retirement distributions? I don't see any difference.
I agree there is not really any difference if you are retired and are already drawing from your portfolio to meet expenses. However, for someone like me who is still in the early accumulation phase and not financially independent, there is a significant difference between selling/accessing stocks or drawing from a "pile of cash" specifically set aside to meet unplanned expenses.
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rkhusky
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Re: What counts as an Emergency Fund?

Post by rkhusky »

H-Town wrote: Mon Mar 20, 2023 11:52 am
cbox wrote: Mon Mar 20, 2023 10:58 am
dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
That's the pitfall with emergency fund.

If I need $50k of emergency expenses today, I can look at my taxable lots and sell the lots that I bought prior to March 2020 with > 45% unrealized gain. And that's with all the market downturn in 2022 and 2023. If I were to leave the same fund in HYSA since 2020, it would have earned less than 5%.

Note that interest income is taxed at top ordinary income rate. LTCG is taxed at preferred rate (10% or 15%). You can also carryforward TLH to offset capital gain, if that's applicable to you.

You need an emergency response plan. Emergency fund is only appropriate when you start out with debts and not much saved.
I was thinking of the opportunity cost too, but realized that only looks good in hindsight. If you put your $50K EF into stocks and then soon you have a $50K emergency and the market drops in half, you are stuck. If the emergency doesn’t happen for 20 years and your stock EF is now $200K, it appears you made a good choice.
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Re: What counts as an Emergency Fund?

Post by Tdubs »

TheTimeLord wrote: Mon Mar 20, 2023 10:24 am
runner3081 wrote: Mon Mar 20, 2023 10:16 am Every single dollar in every single account is an emergency fund - including home equity.

As far as tiering, i.e., sequence of pulling out:
-Credit Cards
-Checking
-Savings
-iBonds
-HSA
-Home Equity
-Post-Tax
-ROTH
-Pre-Tax Accounts
-529 Plan
While I know what you are saying, I am going to push back on this concept because a lot of those investments don't fit the profile I would consider appropriate for an emergency fund especially for individuals under 59.5.
And this list isn't how the BH wiki describes an emergency fund: https://www.bogleheads.org/wiki/Emergency_fund
rich126
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Re: What counts as an Emergency Fund?

Post by rich126 »

Once you get to a certain amount of savings/investments I don't see any point of an emergency fund. As long as your money isn't tied up due to some kind of strange commitments I don't see any point of an emergency fund. You can easily sell stocks, bonds, treasuries, etc. and get cash quickly. Unless you have some money in CDs that can't be cashed early easily or have most of your assets in something like real estate, most everything can be sold and money accessed quickly. Keep some cash available for same day emergencies.

Although in my life I can't recall any same day/next day cash emergencies. I suppose if you needed bail but I avoid those troubles :)
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Re: What counts as an Emergency Fund?

Post by Lee_WSP »

Maybe the size of the stable value fund should be commensurate with ones SORR tolerance.
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Re: What counts as an Emergency Fund?

Post by firebirdparts »

TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
Well, I thought it was for people to get a transmission rebuilt. Then Dave Ramsey started talking about maybe the emergency should be you lost your job, which is probably 10X more money. Clearly, this is an especially good thing to talk about for people who don't have any money. When you don't have any money, an emergency is an emergency.

Once you get some money that's not your emergency fund, it becomes much less interesting to do such mental accounting in my opinion. For many years, all my money was in a 401k, but nevertheless, we didn't have a need for an emergency fund. Only losing my job would have seriously affected our finances. I made no preparations for that. Then the more extreme obvious case is you do not need an emergency fund to stop you from altering your taxable brokerage account in an emergency.
This time is the same
dvvader
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Re: What counts as an Emergency Fund?

Post by dvvader »

firebirdparts wrote: Mon Mar 20, 2023 2:35 pm
TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
Well, I thought it was for people to get a transmission rebuilt. Then Dave Ramsey started talking about maybe the emergency should be you lost your job, which is probably 10X more money. Clearly, this is an especially good thing to talk about for people who don't have any money. When you don't have any money, an emergency is an emergency.

Once you get some money that's not your emergency fund, it becomes much less interesting to do such mental accounting in my opinion. For many years, all my money was in a 401k, but nevertheless, we didn't have a need for an emergency fund. Only losing my job would have seriously affected our finances. I made no preparations for that. Then the more extreme obvious case is you do not need an emergency fund to stop you from altering your taxable brokerage account in an emergency.
See part I bolded above. It seems you made a risk assessment and determined job loss was not a risk for you, or at least not a risk you felt the need to insure against. I'm glad this worked out for you, but just because it worked for you doesn't mean it will for someone else.

In real life, luck counts, but good results do not imply a good process. Each individual or family must assess their own perceived risks, and take steps they deem acceptable or appropriate to mitigate or insure against those risks (an emergency fund could be viewed as a form of insurance). This is the "personal" part of personal finance. Failure to assess these risks would be a mistake (process), only time will tell if it's a costly one (result).
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Doc7
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Re: What counts as an Emergency Fund?

Post by Doc7 »

For us, with monthly “less discretionary” expenses approx $6300:

Primary checking account (inflow/outflow account for paychecks and credit card bills, check writing, a few direct bills) typically around $4-7K (in reality swings from $5K up to $10-12K depending on where we are in pay cycle)

One month, e.g. $6000 in Fidelty money market fund SPRXX. $3K in a taxable account on my Fidelity login and $3K in my wife’s login. Debit cards for each.

The above gives me access to the maximum daily ATM Limit x 3, which should be way more cash than I would ever need on a “right now” basis, but that was the primary reason between splitting it into 3 ATM accessible accounts.

$26K in I Bonds.




What “is” an E Fund anyway?

For me, it is the capability that I can replace my roof or my septic tank and drain field without taking out a loan. Yes, there are 0% credit cards and home equity lines of credit etc available for this.

I place significant value in having $32K of “cash” available for this sort of thing.

I would also use it for up to $5-10K cash purchase, suppose if I needed to replace a generator or purchase a car with significant down payment. It’s more “Comfort Fund” than “Emergency Fund” for me.

With bonds at 30% of my “not including this” portfolio, I do not consider the additional 3% of my assets utilized in this manner to move the needle on my retirement and wealth building prospects.
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Re: What counts as an Emergency Fund?

Post by H-Town »

rkhusky wrote: Mon Mar 20, 2023 12:08 pm
H-Town wrote: Mon Mar 20, 2023 11:52 am
cbox wrote: Mon Mar 20, 2023 10:58 am
dvvader wrote: Mon Mar 20, 2023 10:22 am an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc.
Correct. If you have to "sell low" or at a loss to raise emergency cash, it's not an emergency fund. It's a mistake.

You can twist yourself into a pretzel trying to justify a stock portfolio as constituting an emergency fund. All I can say to that is, "good luck." You'll need it.

This year I've been hit with ~$50K+ of emergency expenses. Without my emergency fund, I would have had to sell stock holdings at a loss. Not good.
That's the pitfall with emergency fund.

If I need $50k of emergency expenses today, I can look at my taxable lots and sell the lots that I bought prior to March 2020 with > 45% unrealized gain. And that's with all the market downturn in 2022 and 2023. If I were to leave the same fund in HYSA since 2020, it would have earned less than 5%.

Note that interest income is taxed at top ordinary income rate. LTCG is taxed at preferred rate (10% or 15%). You can also carryforward TLH to offset capital gain, if that's applicable to you.

You need an emergency response plan. Emergency fund is only appropriate when you start out with debts and not much saved.
I was thinking of the opportunity cost too, but realized that only looks good in hindsight. If you put your $50K EF into stocks and then soon you have a $50K emergency and the market drops in half, you are stuck. If the emergency doesn’t happen for 20 years and your stock EF is now $200K, it appears you made a good choice.
That's right. That's why emergency fund is appropriate for new investors just starting out. We wouldn't want them to sit on that 50k cash for many years. But once their portfolio exceeds 500k, I can't imagine the 50k cash has much utility.
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Marseille07
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Re: What counts as an Emergency Fund?

Post by Marseille07 »

TheTimeLord wrote: Mon Mar 20, 2023 9:57 am I often hear having an Emergency Fund discussed here and I maintained one my entire working career but now that I am "retired" I didn't think I had one anymore. Then I started thinking about some of the assets I was holding and it seems like a distinction without a difference. So is an emergency fund just an acceptable mental accounting device to allow you to group or allocate short term accessible liquid assets or is it something else? So please tell me what counts as an emergency fund and is a rose by any other name just as sweet?
I don't know about others but my EF definitely isn't mental accounting. I count Cash & Cash Equivalents as EF and everything else goes into equities.
Oddball
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Re: What counts as an Emergency Fund?

Post by Oddball »

rich126 wrote: Mon Mar 20, 2023 12:13 pm Although in my life I can't recall any same day/next day cash emergencies. I suppose if you needed bail but I avoid those troubles :)
Yeah. Any medical emergency I will not likely not know the actual cost for MONTHS afterward, any major home issues are likely known about well ahead of time and can be financed. Have a pile of cash in case of job lose sure I guess, but if I lost my job my monthly expenses would drop like a rock (no eating out, Target runs would dry up, put a hold on monthly ROTH contributions, only get the 36 pack of Bud Light instead of the "fancy" 24 pack of Sam Adams at Costco, etc.) - we are dual income and could squeak by on one income if needed.

So my E-fund is nothing. And everything.
secondopinion
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Re: What counts as an Emergency Fund?

Post by secondopinion »

KlangFool wrote: Mon Mar 20, 2023 10:57 am OP,

1) It does lose it's nominal value. Aka, you know exactly the dollar value.

2) Accessibility, you can get at it when you want it. It is not subject to someone's else decision. Aka, HELOC does not qualify since it can be cancelled.

3) It does not cost you to use the money. For example, you have to pay interest in order to use it.

4) Cash or cash equivalent.

KlangFool
1. Knowing the exact dollar amount on withdrawal is not the same as not not losing nominal value. A direct CD often has it where the nominal value is known but would be a loss with early withdrawal.

2. Sadly, almost everything counts as being subject to "someone else's decision" to some extent.

3. Some choices, it is at the point of use that the cost is had; other choices, it is the long-term interest you did not receive that could have been earned otherwise.

Hence, why should I hold a bunch of cash equivalents when I can hold short-term fixed income or direct CDs or other investment choices where the actual maximum possible loss is rather limited? Holding an extra 5-10% or so percent in an "emergency fund" to compensate for possible loss is rather harmless; if that does not work, then it is far more likely that the amount set aside in the emergency fund was too little rather than something went awry with how I stored the money.

If that is not an emergency fund, then I do not have much of one then. If it counts, I have a rather generous one.
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cbox
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Re: What counts as an Emergency Fund?

Post by cbox »

Everybody gets to do what they want to do and hear what they want to hear when it comes to emergency funds. I'm not sure I really understand the concern over the definition of this.

One thing I am sure of, though, is that you'll understand the need for an emergency fund when you have an unexpected need for more cash than you budgeted for. Sometimes you have to live a long time for this to happen.

I assume most of us are going to make bad money decisions at some point by the time we leave this earth. There are probably worse things that could happen than being 100% stocks all the time and needing to sell some of those in a down market because you need fast cash.

In other words, in the grand scheme of things, none of this matters a whole lot.
Flashes1
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Re: What counts as an Emergency Fund?

Post by Flashes1 »

For me, my emergency funds include anything I can quickly access with very minimal tax implications.

My emergency funds:

1. HELOC at a systemic important bank. The LTV on my home is less than 20% so there's a very remote chance they would ever freeze it.
2. Gold and silver coins.
3. After-Tax TSM Index: I could pull out ~$40k without incurring tax liabilities.
4. A family member in the 0.01% club.
Last edited by Flashes1 on Mon Mar 20, 2023 5:19 pm, edited 2 times in total.
JBTX
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Re: What counts as an Emergency Fund?

Post by JBTX »

I tend to view it as liquidity. Maybe 9 months expenses in bank cash and another couple of years worth in ibonds.

I don’t view it as irrational to have a fixed stack of cash or cash equivalents. Some will say “mental accounting”, but that presumes an individuals risk aversion curve will always dictate the same asset allocation whether one has $100,000 or $1 million. By setting a hard minimum, via a fixed emergency/liquidity fund when the value of your portfolio goes down, your stock allocation will decrease if looking at entire net worth. That isn’t optimal for long term growth but it does provide a safety cushion. It is very plausible for a 60 year old to have a risk aversion based optimal asset allocation of 0/100 at $100k, 50/50 at 1 million or 60/40 at 2 million. There is no rule of the universe or human kind that says your asset allocation has to be the same at all points on the wealth spectrum.
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Re: What counts as an Emergency Fund?

Post by exodusNH »

H-Town wrote: Mon Mar 20, 2023 11:52 am If I need $50k of emergency expenses today, I can look at my taxable lots and sell the lots that I bought prior to March 2020 with > 45% unrealized gain. And that's with all the market downturn in 2022 and 2023. If I were to leave the same fund in HYSA since 2020, it would have earned less than 5%.
You'd really want to sell the lots with a loss. A share is a share. If you paid $100 for one and $75 for the other and the current price is $80, you wind up in a better position selling the one you paid $100 for. With either share, you wind up with $80 is your hand.

With the $75 share, you have to give 15%-40% of your $5 to the government. With the $100 share, you can use that $25 to offset other gains or ordinary income.
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Re: What counts as an Emergency Fund?

Post by scrabbler1 »

dvvader wrote: Mon Mar 20, 2023 10:22 am That being said, to me what strictly constitutes an emergency fund must meet at least two criteria:

1. It must be liquid and accessible
2. It must be principal-protected

To me, this strongly suggests an emergency fund consists of assets like cash in a savings account, iBonds held >1 year, short-term Tbills, etc. How this is managed (part of portfolio? rebalanced? how much?) are questions I'll let others debate over.
I tend to agree with this. I would split the first item into its 2 parts: liquid and accessibility. Your second item I feel has some wiggle room in that the principal doesn't have to be absolutely protected, just reasonably well protected.

I split my EF into 2 layers, or tiers, as others in this forum have stated when this issue arises. The first tier is cash held in my local bank's checking account. It is the most liquid (cash), the most easily accessible (ATMs or personal check), and is well protected (FDIC insured). The second tier is the money I have in a national muni bond fund. It is not as liquid and not as easily accessible as the first tier. But this account has checkwriting privileges, giving it added accessibility. It is not principally protected, but this type of bond fund is fairly stable. Also, it grows by about 2-2.5% a year (mostly tax-free), so if I have to sell shares at a loss, those losses may be overcome by the earnings it accumulates every year. A second-tier EF is not one I tap into often. I have accessed funds in this account on average less than once a year, and not every time due to a large, unforeseen expense.
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Re: What counts as an Emergency Fund?

Post by asset_chaos »

I think emergency funds are more important and a more salient concept the closer you are to living on the financial edge. The closer you are to living paycheck to paycheck, the more you need a cash cushion to prevent you falling over the edge. That typically means the young and the poor. Anecdote. Recently son runs over a rock in family car; $4000 repair bill. Retired, in my 60s with a life-time of employment, credit building, Boglehead type saving and investing, I paid the bill with a credit card and will pay off the card as usual in full with cash in the bank. But when I was 24, if I had had an unexpected (inflation deflated) bill of similar size, I would not have been able to pay it except for the fact that I'd built up about $4k in cash just for emergencies, or contingencies, if you like. It was only after I'd built up the cash cushion that I started to put savings into risky growth investments. Nowadays, cash is the lowest risk element of our total financial portfolio, but when I was young and poor, a slug of cash was definitely there for the purpose of smoothing over financial rough spots. And when young I had several of those, and that cushion was mighty helpful; nowadays, not so much.
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H-Town
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Re: What counts as an Emergency Fund?

Post by H-Town »

exodusNH wrote: Mon Mar 20, 2023 5:21 pm
H-Town wrote: Mon Mar 20, 2023 11:52 am If I need $50k of emergency expenses today, I can look at my taxable lots and sell the lots that I bought prior to March 2020 with > 45% unrealized gain. And that's with all the market downturn in 2022 and 2023. If I were to leave the same fund in HYSA since 2020, it would have earned less than 5%.
You'd really want to sell the lots with a loss. A share is a share. If you paid $100 for one and $75 for the other and the current price is $80, you wind up in a better position selling the one you paid $100 for. With either share, you wind up with $80 is your hand.

With the $75 share, you have to give 15%-40% of your $5 to the government. With the $100 share, you can use that $25 to offset other gains or ordinary income.
It's a good point. When I sell from taxable, I always look for lots that have loss, if there are any.

My example above just illustrates how awful to hold cash as EF when you have built up your portfolio.
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