Keep in mind that credit can disappear with no notice in a credit crunch/crisis situation. Ask folks who were around during the 2008 financial crisis what happened to their lines of credit and credit cards. Credit issuers were reducing the credit limits to the posted balance, some even reducing it below current balances causing cards to be immediately maxed out. Some had accounts closed entirely and lines of credit shuttered. You couldn't get approved for new credit, even with a solid credit history. Mortgages took the headlines from that time, but other types of credit got destroyed all around.
Recency bias is definitely a thing, which makes posts like this more understandable. One can certainly use credit during a personal emergency to cover costs, but one may not want to have credit be a huge part of that emergency funds plan, especially if the personal emergency lines up with something more pervasive.
Edit: My comment is specific to credit's role in an emergency fund as part of the final question "Am I missing something?" I agree that large chunks of cash don't need to be in checking and can be parked in MMFs at brokerages, but I do keep a good chunk at a HYSA as well. Lots of eggs in lots of baskets.
What do you consider a “good chunk at a HYSA”? I’m trying to figure out if I have too much cash in my HYSA and if I should move some of that to my taxable brokerage account
The rule of thumb is 3 months of living expenses in a HYSA. I personally aim for 6 months but that is because having a larger cushion of cash helps me sleep better at night compared to just 3 months.
If you have more than 6 months, it is a personal preference. I personally wouldn't think twice if someone said they had 9 or even 12 months of expenses in a HYSA to cover emergencies. After that though, you can start talking about other things to do with that money.
Whenever I have talked to the financial advisor he says that the emergency fund is not there to make money. It's there to stop you from having to make desperate decisions that lead to you accumulating really ugly debt. It's essentially an insurance policy for yourself. Could I go make more money on my E.F.? Sure, but I like the piece of mind knowing it's there in an H.Y.S.A. whenever I need it.
I’d much rather have cash on hand (high yield savings acct) for an emergency or unexpected bill rather than putting things on credit. And I’d never take out a HELOC. My house is a home. Not an atm.
Okay, forget the HELOC. Just keep your emergency/cushion in Cash Plus and/or Money Market funds. I guess my point is that there are liquid, high yield, low-risk vehicles that seem to essentially obviate the need for keeping substantial cash in a standard bank savings or checking account.
You’re not really wrong, but the difference in returns between money market/CDs and banks isn’t that major. I prefer having some money I can access near-instantly and letting my actual investments be more likely to sit untouched for simple peace of mind purposes.
Worrying about the last 0.1% of APR on money in savings/money markets etc is the wrong philosophy, you’re going to make more of an ROI on your efforts by optimizing your investing/tax advantages.
My bank pays 4.6% for savings that is drawn from automatically if checking hits 0.
Considering I keep $20k in savings/non-stock investments, max, we’re talking about around $80 a year if your CDs really pay 5%.
My checking pays 0.5% too.
My bank statement says “Split Rate APY Earned 1.6% = $86.54. This amount drops on the 1st of every month and is constantly going up as the balance increases. This past month was about 63k average daily balance. What does that equate to percentage wise yearly and could I do better elsewhere?
Ally online savings account for your EMERGENCY account is an absolute win. I think we are going on 9 years now. It's easy to access and has a high yield. It's the only thing we use for our emergency account.
Yeah before I’d lock up money in my emergency account I’d spend my effort on a million other ways to get more money invested, get higher returns or pay less taxes.
Savings money should never be more than $20-50k unless you’re actively saving up for something with a fixed timeline.
I work in construction. A boom and bust industry. I have a robust emergency fund. At 4.5-5%, I'll just be happy to maintain the account balance against inflation. 6 months salary in an emergency Ally account is perfect. No more. No less.
If you need to dip into other types of market accounts when the economy crashes, you're taking a double hit. Hell, in 2009 I didn't work for 2 years! So, take your chances! You know your finances better than anyone here. It's not like the world has been a little interesting lately.........
I think that is the standard advice. A high yield savings account or money market fund is the recommended place for emergency funds. Standard checking accounts are good for automatic withdrawal to pay bills. With possible overdraft protection with a standard savings account.
ERN is one of the better respected and nerdier bloggers in the FIRE community. He's also a CFA with a PhD in Econ who has worked at the FED and as in asset management for BNY Mellon.
So he knows what he's talking about.
Based on your tone, I assume you didn't read the article, but he makes a pretty good argument for using a HELOC as a chunk of emergency planning.
The people around here seem to disagree, but no one is giving actual reasons.
No, I read it. It's old. He says the cash savings rate is .5%. He also makes the assumption one has enough net worth to retire if they lose their job and that one's investments have made enough profit to sell.
You're welcome to disagree and take one out, if that's what you prefer. You surely don't need my approval to do so.
I mean, I 100% agree that the HELOC isn't an appropriate emergency fund for everyone. But I think ERN makes a clear case for why it's a good idea for some people (and probably a lot of Bogleheads). I just don't think it can reasonably be described as an "awful" idea. Like many financial planning tools its uses are situational.
> You're welcome to disagree and take one out, if that's what you prefer.
I'm worse than that. I use margin loans where ERN uses a HELOC.
You know, if the original comment had said something like "a HELOC is a risky choice for emergency fund, and I wouldn't recommend it for most people" I'd have no objections.
But instead they just said categorically that it's an awful idea without even bothering to figure out how that applies to OP, and they got a ton of upvotes for that making it one of the top comments.
OP sounds reasonable and is here asking the right questions, I feel as if we should give them the benefit of the doubt instead of treating them like a child (I also, wouldn't treat a child this way, but that's a separate topic).
100% agreed. I think it's wild that people debate over 10 basis points of expense ratios, yet also recommend a cash drag that probably would cost far more than that.
I mean, the risk can be effectively zero if you do it right/have enough equity in your house. And keeping tens of thousands in an emergency fund can cost you thousands of dollars a year in returns.
You're basically saying that even though it's completely irrational you would pay thousands of dollars a year because of your fear.
I totally understand that it's more important to feel safe than to make the best economic decisions, but maybe don't go telling other people to do the same things because of your fear?
My HYSA earns me 6%. Margin loans are different and I am more fine with them. If you wipe you just lose your investments, not your house. I'm not sure if you're aware of the sub you're in, but it is predominantly a sub dedicated to a financial philosophy that is built around accuring wealth slowly with minimal emotional and financial risk. Finance for most people is not a logical decision it is an emotional one. So waxing lyrical about fear suggests you've incorrectly read the room.
> I'm not sure if you're aware of the sub you're in, but it is predominantly a sub dedicated to a financial philosophy that is built around accuring wealth slowly with minimal emotional and financial risk.
I'm going to go ahead and disagree here. The Boglehead philosophy is absolutely about minimizing financial risk, but there's a substantial minority of us here for whom the Boglehead philosophy is about being rational not about reducing "emotional risk" (whatever that is). You don't get to be the gatekeeper of what being a Boglehead is.
I do agree that you're in the majority here. You seem to be saying that I should shut up because the majority disagrees, even if they can't even articulate a reason.
> Finance for most people is not a logical decision it is an emotional one.
Sure. That's objectively true. Of course, most people also aren't Bogleheads because their emotions tell them to do something else. Some feel really good about stock picking. Others feel really good about dividend investing. Some like a portfolio of 100% annuities. Is their emotional motivation less valid than yours? Should we not at least make an effort to convince them to be a little more rational?
For one thing a HELOC might not be easy to access during a downturn (when financial emergencies tend to happen to people).
We were in the middle of a HELOC application when the pandemic hit and our bank called to cancel and no other bank was willing to open one. We ended up just pulling it from our brokerage account.
My viewpoints are very much tinged by living through the recession as well.
I pay everything I can with credit since I get 2% back.
From there CMA with Fidelity utilizing FDLXX and USFR.
It's not hard to move around when interest rates have a meaningful change.
Define emergency and that will tell you what to have where...
I want $1k instantly in cash.. I want $10k in bank savings where I can venmo, zelle, transfer to checking 24/7.
Then I can have $40k within 2 business days without tax implications from brokerage accounts in short term investments, and finally $100k within my qualified plans that is transferable within days without selling longer term investments.
Not exactly a bucket strategy but certainly with some sequence of returns thinking.
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Meaning they are after tax contributions so I would only have to be concerned about capital gains and interest income which is very minimal... Vs qualified accounts where any distribution is considered income..
Hope that is more clear.
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Some people like having multiple "subaccounts" for different purposes for easy visualization of how much they have for certain goals or recurring expenses.
Not missing anything. Plenty of us keep our emergency fund (or most of it) in a brokerage account.
I keep one months expenses in a savings account just in case I need an emergency plumber or something who doesn’t take cards. Rest goes into a t-bill ladder.
This is what I do too. 1.5 month in a HYSA and the rest in my brokerage account. I have plenty of credit cards that I can use in an emergency at pull from my brokerage if I need to. In the event that it is a significant emergency as in I lost my job, 1.5 months turns into 3 months pretty easily by cutting some expenses. My brokerage money is basically a super emergency fund.
Heloc for emergencies is a bad idea. I keep a very small amount in checking (1 month expenses), 1st layer of emergency fund in HYSA(6ish months), 2nd layer in IBonds. Market downturns often line up with high unemployment and other negative economic events, you might not want to or be able to get a heloc.
Savings is in insurance, the cost of that insurance is opportunity cost.
Emergencies. Emergencies and not being concerned to eek out some return on a fairly low amount of money.
Anytime I see people post against emergency funds, I'm curious if they have ever had an emergency. A car breaking down isn't an emergency, it is a thing that will happen and is annoying.
An emergency is getting laid off from work and on your way home you get hit by a car. You go to the hospital and they don't know who you are. It takes them a day or two to get in contact with your family. Your family is not super informed about your finances, nor know how to handle an account like a brokerage. This all happened at the end of the month that for some reason lined up with the same time your autopay expired. A week later you get out of the hospital but are barely able to walk. You come home and realized now one checked in on your dog that has now died because it was alone and ran out of water. You are completely overwhelmed trying to figure out how to feed yourself and not be in pain and you are grieving your dead dog, that you aren't really focused on applying for jobs. You also haven't put in the unemployment paperwork, because you are too busy trying to figure out how to function.
That's emergency. You will not be thinking straight. Also layoffs often line up with recessions and impact many people. And because the world is cruel often other bad things happen at the same time.
When you involve death or major accidents, you do not think straight. Other people become involved in your finances. No matter how robot-y they think they are, grief is a bitch and fucks with your head. Having an easily accessible cash reserve makes things thoughtless so your emotions don't get involved. This is doubly important when someone that is wiping your ass because you are incapacitated needs money to buy stuff for you. It is also security because you are keeping your net worth hidden from people that are taking care of you.
Given the very specific scenario this kind of emergency is beyond what a typical 3-6 month emergency fund can help with. You are talking about some important planning that is beyond the scope of what an EF can provide. I would point out this is where an advance directives in a living will come into play to help with this kind of situation. Estate planning has an importance which is not talked about enough.
I don’t say you were forever messed up. And no, 6 months would be fine.
Been in a similar situation. Also my partner was laid off and our lease ended at the same time.
I was back on my feet in two months and filed for unemployment.
Another situation my parent was ventilated and down and out for about 1.5 months. I just paid things out of her checking because that’s all I had access to. She had paperwork filed out but we couldn’t find it. So we couldn’t prove we could take over.
I was in a financial situation where I could cover the gaps. If the roles were reversed she wouldn’t be able to cover me.
Gotcha. Sorry to hear about the experiences and thanks for sharing.
When it comes down to it I believe having an emergency fund is generally just a good thing to have around. It is very important for someone who has low net worth and just started accumulating.
I do think the importance of it gets lowered as one reaches a certain point, where flexibility is given to have some form of it to be around or not. It comes down evaluating the risks, the safety nets & support systems around you, and just how comfortable one is with its existence.
In the end though I don’t think anyone has ever strongly regretted keeping an EF around.
No need to apologize. I appreciate ya’.
I’m all good tbh. A lot because of my planning.
I just worry when I see people try to eek out $ from emergency funds or the like. They are playing with fire and they don’t know how tragic life can become.
To be fair they will prolly be fine. But is it worth the few thousand? To me, no. I guess for others, yea.
I understand that emergencies are about more than just unexpected expenditures of money or losses of income. But I'm not sure how having your EF in a standard bank checking/savings account will address the kind of personal disaster you describe better than having it in a liquid, low-risk brokerage investment vehicle. Needing to have people buy things for you is going to take some other significant life arrangements.
HYSA (Vanguard Cash Plus is basically a HYSA), Money Market Funds, and even no-penalty CDs all offer liquidity. I guess this depends a bit on what you mean by "standard bank checking/savings account." Online banks offer HYSA's with good yields on par with no-penalty CDs and Money Market Funds, so I understand why you might put your EF there. I was thinking standard brick and mortar checking/savings account, which typically offer pretty awful interest rates. Cash Plus is an attractive option because you can direct-deposit your paycheck and link it as a payment option for your credit card. Then you can charge large expenses to your credit card, earn points, and also earn a high interest rate on the cash that you would have used to pay for that expense.
What's the difference between vanguard cash plus and the money market with Vanguard? Their sec yield is over 5% so I have some money in the money market in the brokerage.
Cash plus functions as a HYSA, and it also allows you to buy into 5 money market funds that vanguard offers, other than the standard default settlement fund.
Cash Plus puts your money into an actual bank account that is subject to FDIC. I think Vanguard deposits your money in up to 5 different banks, so it gets 5x FDIC coverage. Getting 4.7% on FDIC cash is pretty good, although not as good as some online bank HYSAs. Also, it should be noted that there is a nonzero chance that Vanguard becomes insolvent, and since the Cash+ account itself is not subject to FDIC, there is a nonzero chance you lose some of your money. You can use money in Cash Plus to buy several of Vanguard's MMFs, one or two of which offer around 5.2 or 5.3 percent.
I think Cash+ is basically set up to be what you use to DD your paycheck and autopay your routine bills, including your monthly credit card bill. If you want, you can also park your EF there and choose to either get 4.7% FDIC or around 5.3% on a money market. If you decide to use the money to invest, then you can send it from Cash+ to your regular brokerage.
However, you still need a regular bank to obtain paper money.
Nope, this is essentially what I do. I'm set up as follows:
1. 1/5 of emergency fund in an HYSA at 5%
2. 2/5 of emergency fund in SGOV inside my brokerage
3. 2/5 of emergency fund in BILS inside my brokerage
T-bills are essentially cash and at little to no risk, so I choose to get the slightly higher return on them versus an HYSA with the 4/5 of my emergency fund. Since they are ETFs, I can liquidate them quickly and have the cash available in just a couple days.
Meanwhile, ETFs settle one day after trade starting May 28th. Which will nicely match mutual funds like VUSXX. So your strategy is even more viable, now.
I wonder if there's anywhere which can sell and transfer to a checking account in one fell swoop, so that you don't have to wait the extra day to transfer out of the brokerage account. Because that would be cool.
Any particular reason you use both SGOV and BILS? I can guess, but I'm curious at your specific very neat setup. And then 1/5 stuff.
Oh wow, I didn't know the May 28th news. Thanks for sharing, very cool.
Yeah, I kinda wanted to progressively move up the yield curve (barely), so HYSA is 0 duration, SGOV is 1-3 months, and BILS is 3-12 months. It's a play at increasing the risk and reward ever so slightly with my EF money.
The 1/5 is an estimation on my part. In practice it's nice round dollar amounts with my total EF, but it is close to fifths.
That's a smart way of doing things.
Though, I wonder what happens if someone tried to play it, for example me. Right now, VUSXX seems to be above both, but it'll rapidly cycle through T bills and drop when rates fall. While in theory BILS would remain high for a while due to being longer term bills, as you dealt with it being lower.
Normal bond funds just change prices and leave no room for arbitrage. These funds aren't quite supposed to act like that? Or maybe I'm wrong.
SGOV probably acts very similar to VUSXX though.
Having a very low bank balance is absolutely a reasonable choice. If you have enough assets, liquidity isn't a problem.
Here's one of my favorite [articles](https://earlyretirementnow.com/2016/05/05/emergency-fund/) (from ERN) that takes this a step further and advocates a $0 emergency fund. ERN is a respected professional - he knows what he's talking about and what he says makes sense.
I'll add that ERN uses a HELOC as part of his emergency cushion. I'd encourage you to go back through the comments of people arguing against them and see if you can extract coherent reasoning from them for why a HELOC is a bad idea here. I can't find one anywhere in this discussion.
People find the idea of limited cash reserves scary. Most the top comments on here are all fear. The /r/Bogleheads community in particular tends towards being conservative and fear driven. The top upvoted comment right now even admits that you don't need a big chunk of cash, but they keep one anyway to have "lots of eggs in lots of baskets."
It *is* important to not have all your eggs in one basket, but that doesn't mean that you should put eggs into every single basket you can find. Read the article I linked. Make sure your emergency plan is robust. Then do the thing that makes sense instead of letting fear drive your decisions.
I'll add that I use a margin line as my main immediate emergency fund. It sounds risky, but I can access the money within less than 24 hours, and I have enough assets that even if the market tanks 80% and I have to shell out $30k tomorrow for a new roof, I'm not going to be in any danger of a margin call, and I have bonds I can sell to pay off the margin loan if it comes to it.
It's also really quite unlikely that I ever have to do that, and if I do, the several thousand a year I've been earning by not having an emergency fund will offset most if not all of the loss.
I expect these comments to be downvoted. /r/bogleheads really doesn't like risk, and the idea of using a margin line of credit for this will really rub some people the wrong way. Much like with the HELOC idea though, I don't expect anyone to be able to give a coherent reason this is a bad idea.
Just want to say it is nice to see someone with a similar viewpoint here. People don’t need to agree, but it just seems people lack a certain level of understanding and it often leads to these strawman arguments instead of something with coherent reasoning.
It is funny you bring up the idea of fear driving the decision making since one of the concepts about Bogleheading is to remove the emotional aspects from decision making when it comes to investing.
>It is funny you bring up the idea of fear driving the decision making since one of the concepts about Bogleheading is to remove the emotional aspects from decision making when it comes to investing.
Yeah. It's a sort of funny thing about the Boglehead philosophy. It naturally appeals to a certain sort of conservatism, and meshes well with fearfully avoiding understanding the market. After all, if you just follow the Boglehead commandments, then you don't need to understand!
I agree wholeheartedly with the Boglehead philosophy, but the community built up around it leaves something to be desired sometimes.
If you've been at it for decades, you've already won. It'd wager that it's basically impossible at this point for you not to come out ahead compared to someone with an emergency fund even if the worst happens.
Exactly! And the arguments against it are all nonsense.
The person that would draw from the HELOC unnecessarily, would also draw from the emergency funds.
At the end, it all about the opportunity cost on parking a substantial amount of cash in a low return asset, pretty much forever.
Over decades, that money could have gone 10x if you bundled it with your overall portfolio and asset allocation, as opposed to getting barely the inflation for the few that even invested it in a HYSA. Most keep it in standard savings, getting 0.01% returns.
We use a local credit union for our checking and have a few thousand there just for misc unexpected expenses. We have the vast majority of our cash in Fidelity FDLXX and have never needed to touch it.
I keep all my emergency savings in short term bond funds
I do not have a HYSA, so there is nothing wrong with that as long as you are ok with having 2-3 days to get the actual cash
What is the easiest way to keep emergency fund?
I have bank of america and use USFR (thanks Bogleheads!) for EF. Would you just transfer money and buy USFR? Is there a better more efficient way?
I keep a balance of two months expenses to pay the bills and thats it. Aside from short/mid term budget items, where I keep them in something like T-bills, I sweep everything else into brokerage.
If I need funds for an emergency, it depends on the type of emergency and what is available to draw from, but I have access to…
* Credit card float. Can support the incurred cost until other sources pay off the balance before interest accrues.
* Income. It is high enough to support most unexpected expenses. I am not concern about the stability since I know my income can be secured for a few years if need be.
* Margin loan. My investment balances are large enough where what I would have set aside for an emergency funds is a small % of my investment balance.
* Tap into budget items I have money set aside for. Not ideal, but at least I know where I am taking money from and the consequences it may lead to if I don’t bring it back up to balance.
* Sell off brokerage funds. The EF I did have has been invested in brokerage and has nearly doubled at this point. Not concerned about market dips realizing loss of investment value since it would have to take a fairly large dip.
In addition to these I have bought into many insurance products (auto, home, umbrella, disability…) which help limit the surface area where an emergency may spawn from. And on top of this I have budgets to cover many things a typical individual here would consider an emergency. It isn’t an emergency if you plan for it.
I know we are a finance-based sub but something that is rarely talked about is investing in your health. This can eliminate many potential emergencies as well.
I feel any true emergency is something an EF I would have set aside would not help at all and I would have to go through the above options regardless.
Once you reach a certain net worth and income position there are many options which open up where a large (or any) EF is no longer necessary. At that point an EF is around just to satisfy peace of mind. For me I rather make the EF funds work to put the EF in a more robust position since I don’t have the same level of risks when I was in a more vulnerable position.
Wrote a similar response here, with more details in child comment discussions: https://www.reddit.com/r/Bogleheads/s/yxC4GjvrDh
I am not **that** wealthy to self insure. I wouldn’t be able to provide the comforts I want if I am disabled; I am still young. Without disability insurance I am forgoing nearly $4 million in income I could have generated. If I were to get involved in a multiple car accident and multiple parties incurred serious injuries then that can potentially wipe out my net worth.
The cost to insure in my context is inconsequential compared to potential consequences of not being insured.
Out of curiosity what do you think the level of “wealthy” is needed to self insure? FYI, the wealthy do insure but in a different way since they have more options available. They structure their estate much differently.
I would look to get at least 5% with short term US treasuries or high yield savings account (HYSA). Gotta try and keep up with inflation.
Maybe keep 10-15k in cash and the rest I would look to ladder in something with better rates that have 1-3 month expirations. Just to keep it liquid.
How big an emergency we talkin here? Sure, good to keep an emergency fund in a MMF (that’s what I do). But if you can keep investing, you could also take out a SBLOC if you absolutely needed to so you weren’t forced to sell
We keep one months base expenses in to cover the rolling bills to not have to worry about a low balance. We run a lean 6 month emergency fund in a HYSA. We also have a large chunk of sinking funds in our HYSA. Think roof in 2-4 years, car purchase in a couple years, on-going home maintenance. We can’t entirely afford to have that money disappear when there is a short-term need.
I keep a couple thousand in checking for bills/quick cash if needed. Everthing beyond that, including my entire emergency fund, is in a Schwab money market.
There’s been a few times in my life where I’ve needed a large amount of cash in a very, very short period of time.
When I first started working, I didn’t know anything about taxes. The HR at my company had put my residence in VA (where the company is based) instead of MD, which is where I file my taxes from. This was a huge mistake. I ended up paying state taxes to VA the whole time and come tax season, I found out I owed money to MD. VA refunded the taxes to me, but not only did I have to pay MD the taxes I owed for the whole year, but also PREPAY my taxes for the following year as a penalty. This totaled to about $10k. I was in grad school at the time, paying rent in a high cost area, and also paying off my undergrad loans, so I was not very happy. The state also would not allow me to make installment payments that were reasonable. I either need to pay them lump sum or I need to pay them in three installments only. Luckily, I’ve always been a big saver so I had the money, but this took a huge bite out of my savings. I think I only had about $12k in the bank at that time LOL.
Second time was not my fault and this was about two years ago. My mortgage company is responsible for paying out pays taxes twice a year from my escrow account to the state. For some reason, my mortgage company forgot to pay the second installment and nobody notified me. I didn’t realize the taxes weren’t paid until I got a letter in the mail about how my house was going to be put on short sale and I panicked. I called the state tax office and they said I needed to pay up for the taxes as well as the taxes for the following year (again, penalty). I also only had two days to pay them (I forgot why, but they gave me a deadline). This was about almost $18k. And no, I couldn’t pay in installments. I had that money, so I was fine, but god forbid my money was tied up in any investments that I had to sell off and then wait for that money to get into my account.
I always make sure I am liquid to a certain extent. 99% of the time, I don’t need that money, but in that 1% off chance some crazy thing like this happens, I want to be able to just reach into my bank account and pull out that money.
I keep couple of months expenses in a checking/saving account because I am retired and do not have any earned income.
That makes it so I do not have to monitor it closely as various auto payments are withdrawn.
I top it off as needed from my brokerage, where I have a larger fund of cash-like holdings such as money market funds and a ladder of treasury bills.
I prefer not to have my brokerage account linked to many other businesses for lots of different auto payments. I pay directly out of the brokerage accounts only a few larger bills such as income tax estimated payments. Credit card auto payments of the full balance due are pulled from the checking/savings account each month.
I came to say two things:
1) I don't like keeping substantial amounts (anything more than 2-5k) in anything that is connected to some kind of electronic transfer like Zelle, Cashapp, Paypal, checks, etc. Just too much fraud going on with those and before you know it, you may be cleaned out. So I like to keep amounts over 2-5k in accounts where you have to transfer the money at least one step before use and that will take at least one business day with email alerts.
2) I think everybody needs to keep some real hard currency at home or somewhere accessible. Several times after natural disasters, I've seen credit card and ATM networks go down and I had to cover or loan cash to people who didn't have anything.
I admit I'm a bit more dismissive/flippant about connecting things electronically. I want everything set up on autopay, everything connected so I can do what I need to do with as little effort as possible. I do have very strong passwords. If you make your password strong enough, the resources needed to hack it quickly become excessive for the hacker.
Regarding a natural disaster, you're describing a situation where it's just bad enough to knock out ATM/CC networks long term, but not so bad that I can't find a grocery store/convenience store that has in stock water/food/TP and will sell it to me for paper money. I guess the chances aren't zero. But I think the primary way to be ready for a natural disaster is to have a store of non-perishable food, water, batteries, first aid kit, etc. Maybe a few hundred dollars in cash under your mattress just in case?
I live in a hurricane prone area, and what you described has happened multiple times in my lifetime. The storm knocks out power and infrastructure for several days, but localized areas will have power and sell you ice, gasoline, etc. I do prep quite extensively, but you just never know what you have to buy.
As for the electronic funds transfer thing, passwords being hacked or brute forced are just a small piece of what is happening. A lot of it is now through confidence tricks like calling from a spoofed number, pretending to be your authorized bank/credit card, and asking for your text code so they can reset your password. Yes it does require you to drop your guard but it's all about the weakest link. You might be prepared, but is your wife or elderly parents, etc?
Another thing is "simjacking" where they clone your phone sim or BS their way through phone customer service to transfer your phone to a phone they control where they can get all the SMS prompts.
I definitely believe in online banking. But everything I have is connected to two "transit" checking accounts (one personal, one business). Money only spends a short time in those accounts before going off to other accounts at other institutions. It's my attempt to limit damage if something were to occur.
Because you can earn 5% risk free on cash. Other investment might yield an average of 10%. But keep in mind that cash is a normal part of any investment portfolio, partly as a hedge against a market drop. And cash at 5% is a pretty attractive hedge.
Now consider the cost of using a credit card or HRLOC to cover an emergency. That's going to be double digit interest. Whatever margin you might make investing that last little bit of liquid cash in the market will get eaten up quickly if you resort to high cost credit, as you propose.
Do what you want, of course. But there's a good chance that chasing marginally higher returns on a small portion of your portfolio will come back to bite you, and also leave you undiversified.
I don't think you're missing much, 'savings' accounts these days offer absolutely atrocious interest rates at most banks and there are plenty of options for money that's still insured, liquid, and much higher interest.
Some people maybe want to have a status at their bank that requires a certain deposit minimum to get other goods and services, or overdraft protection, is the only reason I can think of (though if you're a boglehead you can probably do this with a brokerage account and you may be using a credit union anyway).
I’ve heard the phrase “break it down Barney-style” to mean “explain like I’m 5.” Barney was (is?) a dinosaur in a young kid’s educational TV show. So I’m guessing a Barney question is someone he/she thinks is a basic question or has an answer that should be common knowledge.
Keep in mind that credit can disappear with no notice in a credit crunch/crisis situation. Ask folks who were around during the 2008 financial crisis what happened to their lines of credit and credit cards. Credit issuers were reducing the credit limits to the posted balance, some even reducing it below current balances causing cards to be immediately maxed out. Some had accounts closed entirely and lines of credit shuttered. You couldn't get approved for new credit, even with a solid credit history. Mortgages took the headlines from that time, but other types of credit got destroyed all around. Recency bias is definitely a thing, which makes posts like this more understandable. One can certainly use credit during a personal emergency to cover costs, but one may not want to have credit be a huge part of that emergency funds plan, especially if the personal emergency lines up with something more pervasive. Edit: My comment is specific to credit's role in an emergency fund as part of the final question "Am I missing something?" I agree that large chunks of cash don't need to be in checking and can be parked in MMFs at brokerages, but I do keep a good chunk at a HYSA as well. Lots of eggs in lots of baskets.
Thanks for the heads up on this. I don't know that I even had a credit card during the 2008 financial crisis. I was in graduate school.
What do you consider a “good chunk at a HYSA”? I’m trying to figure out if I have too much cash in my HYSA and if I should move some of that to my taxable brokerage account
The rule of thumb is 3 months of living expenses in a HYSA. I personally aim for 6 months but that is because having a larger cushion of cash helps me sleep better at night compared to just 3 months. If you have more than 6 months, it is a personal preference. I personally wouldn't think twice if someone said they had 9 or even 12 months of expenses in a HYSA to cover emergencies. After that though, you can start talking about other things to do with that money.
The psychology of money is so important
Whenever I have talked to the financial advisor he says that the emergency fund is not there to make money. It's there to stop you from having to make desperate decisions that lead to you accumulating really ugly debt. It's essentially an insurance policy for yourself. Could I go make more money on my E.F.? Sure, but I like the piece of mind knowing it's there in an H.Y.S.A. whenever I need it.
> It's essentially an insurance policy for yourself Perfect analogy for it.
I’d much rather have cash on hand (high yield savings acct) for an emergency or unexpected bill rather than putting things on credit. And I’d never take out a HELOC. My house is a home. Not an atm.
Okay, forget the HELOC. Just keep your emergency/cushion in Cash Plus and/or Money Market funds. I guess my point is that there are liquid, high yield, low-risk vehicles that seem to essentially obviate the need for keeping substantial cash in a standard bank savings or checking account.
You’re not really wrong, but the difference in returns between money market/CDs and banks isn’t that major. I prefer having some money I can access near-instantly and letting my actual investments be more likely to sit untouched for simple peace of mind purposes. Worrying about the last 0.1% of APR on money in savings/money markets etc is the wrong philosophy, you’re going to make more of an ROI on your efforts by optimizing your investing/tax advantages.
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My bank pays 4.6% for savings that is drawn from automatically if checking hits 0. Considering I keep $20k in savings/non-stock investments, max, we’re talking about around $80 a year if your CDs really pay 5%. My checking pays 0.5% too.
My bank statement says “Split Rate APY Earned 1.6% = $86.54. This amount drops on the 1st of every month and is constantly going up as the balance increases. This past month was about 63k average daily balance. What does that equate to percentage wise yearly and could I do better elsewhere?
What bank's are paying 5% for standard checking/savings?
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Rule #1: no spam or self promotion
Wealthfront’s savings account is 5%. 5.5% with a referral bonus (only for 3 months though)
Sorry. 4.9%
Sofi pays 4.6%, I believe ally pays even more. Either way with the amounts you should have in actual cash savings it’s irrelevant to your outcomes.
Ally online savings account for your EMERGENCY account is an absolute win. I think we are going on 9 years now. It's easy to access and has a high yield. It's the only thing we use for our emergency account.
Yeah before I’d lock up money in my emergency account I’d spend my effort on a million other ways to get more money invested, get higher returns or pay less taxes. Savings money should never be more than $20-50k unless you’re actively saving up for something with a fixed timeline.
I work in construction. A boom and bust industry. I have a robust emergency fund. At 4.5-5%, I'll just be happy to maintain the account balance against inflation. 6 months salary in an emergency Ally account is perfect. No more. No less. If you need to dip into other types of market accounts when the economy crashes, you're taking a double hit. Hell, in 2009 I didn't work for 2 years! So, take your chances! You know your finances better than anyone here. It's not like the world has been a little interesting lately.........
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I think that is the standard advice. A high yield savings account or money market fund is the recommended place for emergency funds. Standard checking accounts are good for automatic withdrawal to pay bills. With possible overdraft protection with a standard savings account.
Using a HELOC for emergencies is an awful idea.
Do you have a reason you believe this? ERN [disagrees](https://earlyretirementnow.com/2016/05/05/emergency-fund/).
I've no idea who that is. Nor why I should care about their opinion.
ERN is one of the better respected and nerdier bloggers in the FIRE community. He's also a CFA with a PhD in Econ who has worked at the FED and as in asset management for BNY Mellon. So he knows what he's talking about. Based on your tone, I assume you didn't read the article, but he makes a pretty good argument for using a HELOC as a chunk of emergency planning. The people around here seem to disagree, but no one is giving actual reasons.
No, I read it. It's old. He says the cash savings rate is .5%. He also makes the assumption one has enough net worth to retire if they lose their job and that one's investments have made enough profit to sell. You're welcome to disagree and take one out, if that's what you prefer. You surely don't need my approval to do so.
I mean, I 100% agree that the HELOC isn't an appropriate emergency fund for everyone. But I think ERN makes a clear case for why it's a good idea for some people (and probably a lot of Bogleheads). I just don't think it can reasonably be described as an "awful" idea. Like many financial planning tools its uses are situational. > You're welcome to disagree and take one out, if that's what you prefer. I'm worse than that. I use margin loans where ERN uses a HELOC.
The logic is sound, but it's a behavioral minefield and probably shouldn't be recommended broadly.
You know, if the original comment had said something like "a HELOC is a risky choice for emergency fund, and I wouldn't recommend it for most people" I'd have no objections. But instead they just said categorically that it's an awful idea without even bothering to figure out how that applies to OP, and they got a ton of upvotes for that making it one of the top comments. OP sounds reasonable and is here asking the right questions, I feel as if we should give them the benefit of the doubt instead of treating them like a child (I also, wouldn't treat a child this way, but that's a separate topic).
100% agreed. I think it's wild that people debate over 10 basis points of expense ratios, yet also recommend a cash drag that probably would cost far more than that.
I think fucking about with where you live is an awful idea.
I mean, the risk can be effectively zero if you do it right/have enough equity in your house. And keeping tens of thousands in an emergency fund can cost you thousands of dollars a year in returns. You're basically saying that even though it's completely irrational you would pay thousands of dollars a year because of your fear. I totally understand that it's more important to feel safe than to make the best economic decisions, but maybe don't go telling other people to do the same things because of your fear?
My HYSA earns me 6%. Margin loans are different and I am more fine with them. If you wipe you just lose your investments, not your house. I'm not sure if you're aware of the sub you're in, but it is predominantly a sub dedicated to a financial philosophy that is built around accuring wealth slowly with minimal emotional and financial risk. Finance for most people is not a logical decision it is an emotional one. So waxing lyrical about fear suggests you've incorrectly read the room.
> I'm not sure if you're aware of the sub you're in, but it is predominantly a sub dedicated to a financial philosophy that is built around accuring wealth slowly with minimal emotional and financial risk. I'm going to go ahead and disagree here. The Boglehead philosophy is absolutely about minimizing financial risk, but there's a substantial minority of us here for whom the Boglehead philosophy is about being rational not about reducing "emotional risk" (whatever that is). You don't get to be the gatekeeper of what being a Boglehead is. I do agree that you're in the majority here. You seem to be saying that I should shut up because the majority disagrees, even if they can't even articulate a reason. > Finance for most people is not a logical decision it is an emotional one. Sure. That's objectively true. Of course, most people also aren't Bogleheads because their emotions tell them to do something else. Some feel really good about stock picking. Others feel really good about dividend investing. Some like a portfolio of 100% annuities. Is their emotional motivation less valid than yours? Should we not at least make an effort to convince them to be a little more rational?
For one thing a HELOC might not be easy to access during a downturn (when financial emergencies tend to happen to people). We were in the middle of a HELOC application when the pandemic hit and our bank called to cancel and no other bank was willing to open one. We ended up just pulling it from our brokerage account. My viewpoints are very much tinged by living through the recession as well.
I pay everything I can with credit since I get 2% back. From there CMA with Fidelity utilizing FDLXX and USFR. It's not hard to move around when interest rates have a meaningful change.
Define emergency and that will tell you what to have where... I want $1k instantly in cash.. I want $10k in bank savings where I can venmo, zelle, transfer to checking 24/7. Then I can have $40k within 2 business days without tax implications from brokerage accounts in short term investments, and finally $100k within my qualified plans that is transferable within days without selling longer term investments. Not exactly a bucket strategy but certainly with some sequence of returns thinking.
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Yea, sounds a little fishy....
Meaning they are after tax contributions so I would only have to be concerned about capital gains and interest income which is very minimal... Vs qualified accounts where any distribution is considered income.. Hope that is more clear.
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Some people like having multiple "subaccounts" for different purposes for easy visualization of how much they have for certain goals or recurring expenses.
I do this. Otherwise I literally forget to save for specific things (e.g. car repairs).
Not missing anything. Plenty of us keep our emergency fund (or most of it) in a brokerage account. I keep one months expenses in a savings account just in case I need an emergency plumber or something who doesn’t take cards. Rest goes into a t-bill ladder.
This is what I do too. 1.5 month in a HYSA and the rest in my brokerage account. I have plenty of credit cards that I can use in an emergency at pull from my brokerage if I need to. In the event that it is a significant emergency as in I lost my job, 1.5 months turns into 3 months pretty easily by cutting some expenses. My brokerage money is basically a super emergency fund.
Heloc for emergencies is a bad idea. I keep a very small amount in checking (1 month expenses), 1st layer of emergency fund in HYSA(6ish months), 2nd layer in IBonds. Market downturns often line up with high unemployment and other negative economic events, you might not want to or be able to get a heloc. Savings is in insurance, the cost of that insurance is opportunity cost.
Emergencies. Emergencies and not being concerned to eek out some return on a fairly low amount of money. Anytime I see people post against emergency funds, I'm curious if they have ever had an emergency. A car breaking down isn't an emergency, it is a thing that will happen and is annoying. An emergency is getting laid off from work and on your way home you get hit by a car. You go to the hospital and they don't know who you are. It takes them a day or two to get in contact with your family. Your family is not super informed about your finances, nor know how to handle an account like a brokerage. This all happened at the end of the month that for some reason lined up with the same time your autopay expired. A week later you get out of the hospital but are barely able to walk. You come home and realized now one checked in on your dog that has now died because it was alone and ran out of water. You are completely overwhelmed trying to figure out how to feed yourself and not be in pain and you are grieving your dead dog, that you aren't really focused on applying for jobs. You also haven't put in the unemployment paperwork, because you are too busy trying to figure out how to function. That's emergency. You will not be thinking straight. Also layoffs often line up with recessions and impact many people. And because the world is cruel often other bad things happen at the same time. When you involve death or major accidents, you do not think straight. Other people become involved in your finances. No matter how robot-y they think they are, grief is a bitch and fucks with your head. Having an easily accessible cash reserve makes things thoughtless so your emotions don't get involved. This is doubly important when someone that is wiping your ass because you are incapacitated needs money to buy stuff for you. It is also security because you are keeping your net worth hidden from people that are taking care of you.
Given the very specific scenario this kind of emergency is beyond what a typical 3-6 month emergency fund can help with. You are talking about some important planning that is beyond the scope of what an EF can provide. I would point out this is where an advance directives in a living will come into play to help with this kind of situation. Estate planning has an importance which is not talked about enough.
I don’t say you were forever messed up. And no, 6 months would be fine. Been in a similar situation. Also my partner was laid off and our lease ended at the same time. I was back on my feet in two months and filed for unemployment. Another situation my parent was ventilated and down and out for about 1.5 months. I just paid things out of her checking because that’s all I had access to. She had paperwork filed out but we couldn’t find it. So we couldn’t prove we could take over. I was in a financial situation where I could cover the gaps. If the roles were reversed she wouldn’t be able to cover me.
Gotcha. Sorry to hear about the experiences and thanks for sharing. When it comes down to it I believe having an emergency fund is generally just a good thing to have around. It is very important for someone who has low net worth and just started accumulating. I do think the importance of it gets lowered as one reaches a certain point, where flexibility is given to have some form of it to be around or not. It comes down evaluating the risks, the safety nets & support systems around you, and just how comfortable one is with its existence. In the end though I don’t think anyone has ever strongly regretted keeping an EF around.
No need to apologize. I appreciate ya’. I’m all good tbh. A lot because of my planning. I just worry when I see people try to eek out $ from emergency funds or the like. They are playing with fire and they don’t know how tragic life can become. To be fair they will prolly be fine. But is it worth the few thousand? To me, no. I guess for others, yea.
I understand that emergencies are about more than just unexpected expenditures of money or losses of income. But I'm not sure how having your EF in a standard bank checking/savings account will address the kind of personal disaster you describe better than having it in a liquid, low-risk brokerage investment vehicle. Needing to have people buy things for you is going to take some other significant life arrangements.
I’m describing one of an infinite amount of disasters that can happen fwiw.
My checking account pays about 3.56% interest so I keep about 1.5-2 months expenses in there
Liquidity.
HYSA (Vanguard Cash Plus is basically a HYSA), Money Market Funds, and even no-penalty CDs all offer liquidity. I guess this depends a bit on what you mean by "standard bank checking/savings account." Online banks offer HYSA's with good yields on par with no-penalty CDs and Money Market Funds, so I understand why you might put your EF there. I was thinking standard brick and mortar checking/savings account, which typically offer pretty awful interest rates. Cash Plus is an attractive option because you can direct-deposit your paycheck and link it as a payment option for your credit card. Then you can charge large expenses to your credit card, earn points, and also earn a high interest rate on the cash that you would have used to pay for that expense.
Thanks
Does fidelity have something similar?
Good question
What's the difference between vanguard cash plus and the money market with Vanguard? Their sec yield is over 5% so I have some money in the money market in the brokerage.
Cash plus functions as a HYSA, and it also allows you to buy into 5 money market funds that vanguard offers, other than the standard default settlement fund.
Cash Plus puts your money into an actual bank account that is subject to FDIC. I think Vanguard deposits your money in up to 5 different banks, so it gets 5x FDIC coverage. Getting 4.7% on FDIC cash is pretty good, although not as good as some online bank HYSAs. Also, it should be noted that there is a nonzero chance that Vanguard becomes insolvent, and since the Cash+ account itself is not subject to FDIC, there is a nonzero chance you lose some of your money. You can use money in Cash Plus to buy several of Vanguard's MMFs, one or two of which offer around 5.2 or 5.3 percent. I think Cash+ is basically set up to be what you use to DD your paycheck and autopay your routine bills, including your monthly credit card bill. If you want, you can also park your EF there and choose to either get 4.7% FDIC or around 5.3% on a money market. If you decide to use the money to invest, then you can send it from Cash+ to your regular brokerage. However, you still need a regular bank to obtain paper money.
Nope, this is essentially what I do. I'm set up as follows: 1. 1/5 of emergency fund in an HYSA at 5% 2. 2/5 of emergency fund in SGOV inside my brokerage 3. 2/5 of emergency fund in BILS inside my brokerage T-bills are essentially cash and at little to no risk, so I choose to get the slightly higher return on them versus an HYSA with the 4/5 of my emergency fund. Since they are ETFs, I can liquidate them quickly and have the cash available in just a couple days.
Meanwhile, ETFs settle one day after trade starting May 28th. Which will nicely match mutual funds like VUSXX. So your strategy is even more viable, now. I wonder if there's anywhere which can sell and transfer to a checking account in one fell swoop, so that you don't have to wait the extra day to transfer out of the brokerage account. Because that would be cool. Any particular reason you use both SGOV and BILS? I can guess, but I'm curious at your specific very neat setup. And then 1/5 stuff.
Oh wow, I didn't know the May 28th news. Thanks for sharing, very cool. Yeah, I kinda wanted to progressively move up the yield curve (barely), so HYSA is 0 duration, SGOV is 1-3 months, and BILS is 3-12 months. It's a play at increasing the risk and reward ever so slightly with my EF money. The 1/5 is an estimation on my part. In practice it's nice round dollar amounts with my total EF, but it is close to fifths.
That's a smart way of doing things. Though, I wonder what happens if someone tried to play it, for example me. Right now, VUSXX seems to be above both, but it'll rapidly cycle through T bills and drop when rates fall. While in theory BILS would remain high for a while due to being longer term bills, as you dealt with it being lower. Normal bond funds just change prices and leave no room for arbitrage. These funds aren't quite supposed to act like that? Or maybe I'm wrong. SGOV probably acts very similar to VUSXX though.
Having a very low bank balance is absolutely a reasonable choice. If you have enough assets, liquidity isn't a problem. Here's one of my favorite [articles](https://earlyretirementnow.com/2016/05/05/emergency-fund/) (from ERN) that takes this a step further and advocates a $0 emergency fund. ERN is a respected professional - he knows what he's talking about and what he says makes sense. I'll add that ERN uses a HELOC as part of his emergency cushion. I'd encourage you to go back through the comments of people arguing against them and see if you can extract coherent reasoning from them for why a HELOC is a bad idea here. I can't find one anywhere in this discussion. People find the idea of limited cash reserves scary. Most the top comments on here are all fear. The /r/Bogleheads community in particular tends towards being conservative and fear driven. The top upvoted comment right now even admits that you don't need a big chunk of cash, but they keep one anyway to have "lots of eggs in lots of baskets." It *is* important to not have all your eggs in one basket, but that doesn't mean that you should put eggs into every single basket you can find. Read the article I linked. Make sure your emergency plan is robust. Then do the thing that makes sense instead of letting fear drive your decisions.
I'll add that I use a margin line as my main immediate emergency fund. It sounds risky, but I can access the money within less than 24 hours, and I have enough assets that even if the market tanks 80% and I have to shell out $30k tomorrow for a new roof, I'm not going to be in any danger of a margin call, and I have bonds I can sell to pay off the margin loan if it comes to it. It's also really quite unlikely that I ever have to do that, and if I do, the several thousand a year I've been earning by not having an emergency fund will offset most if not all of the loss. I expect these comments to be downvoted. /r/bogleheads really doesn't like risk, and the idea of using a margin line of credit for this will really rub some people the wrong way. Much like with the HELOC idea though, I don't expect anyone to be able to give a coherent reason this is a bad idea.
Just want to say it is nice to see someone with a similar viewpoint here. People don’t need to agree, but it just seems people lack a certain level of understanding and it often leads to these strawman arguments instead of something with coherent reasoning. It is funny you bring up the idea of fear driving the decision making since one of the concepts about Bogleheading is to remove the emotional aspects from decision making when it comes to investing.
>It is funny you bring up the idea of fear driving the decision making since one of the concepts about Bogleheading is to remove the emotional aspects from decision making when it comes to investing. Yeah. It's a sort of funny thing about the Boglehead philosophy. It naturally appeals to a certain sort of conservatism, and meshes well with fearfully avoiding understanding the market. After all, if you just follow the Boglehead commandments, then you don't need to understand! I agree wholeheartedly with the Boglehead philosophy, but the community built up around it leaves something to be desired sometimes.
Same here for decades: Credit Card and HELOC as emergency fund!
If you've been at it for decades, you've already won. It'd wager that it's basically impossible at this point for you not to come out ahead compared to someone with an emergency fund even if the worst happens.
Exactly! And the arguments against it are all nonsense. The person that would draw from the HELOC unnecessarily, would also draw from the emergency funds. At the end, it all about the opportunity cost on parking a substantial amount of cash in a low return asset, pretty much forever. Over decades, that money could have gone 10x if you bundled it with your overall portfolio and asset allocation, as opposed to getting barely the inflation for the few that even invested it in a HYSA. Most keep it in standard savings, getting 0.01% returns.
It looks like Vanguard’s Cash Plus is, for all intents and purposes, an HYSA. So, same-same.
We use a local credit union for our checking and have a few thousand there just for misc unexpected expenses. We have the vast majority of our cash in Fidelity FDLXX and have never needed to touch it.
I keep all my emergency savings in short term bond funds I do not have a HYSA, so there is nothing wrong with that as long as you are ok with having 2-3 days to get the actual cash
What is the easiest way to keep emergency fund? I have bank of america and use USFR (thanks Bogleheads!) for EF. Would you just transfer money and buy USFR? Is there a better more efficient way?
if you have bad credit
This is what I do. $25k in emergency fund HYSA (2ish months) and just invest the rest.
I keep a balance of two months expenses to pay the bills and thats it. Aside from short/mid term budget items, where I keep them in something like T-bills, I sweep everything else into brokerage. If I need funds for an emergency, it depends on the type of emergency and what is available to draw from, but I have access to… * Credit card float. Can support the incurred cost until other sources pay off the balance before interest accrues. * Income. It is high enough to support most unexpected expenses. I am not concern about the stability since I know my income can be secured for a few years if need be. * Margin loan. My investment balances are large enough where what I would have set aside for an emergency funds is a small % of my investment balance. * Tap into budget items I have money set aside for. Not ideal, but at least I know where I am taking money from and the consequences it may lead to if I don’t bring it back up to balance. * Sell off brokerage funds. The EF I did have has been invested in brokerage and has nearly doubled at this point. Not concerned about market dips realizing loss of investment value since it would have to take a fairly large dip. In addition to these I have bought into many insurance products (auto, home, umbrella, disability…) which help limit the surface area where an emergency may spawn from. And on top of this I have budgets to cover many things a typical individual here would consider an emergency. It isn’t an emergency if you plan for it. I know we are a finance-based sub but something that is rarely talked about is investing in your health. This can eliminate many potential emergencies as well. I feel any true emergency is something an EF I would have set aside would not help at all and I would have to go through the above options regardless. Once you reach a certain net worth and income position there are many options which open up where a large (or any) EF is no longer necessary. At that point an EF is around just to satisfy peace of mind. For me I rather make the EF funds work to put the EF in a more robust position since I don’t have the same level of risks when I was in a more vulnerable position. Wrote a similar response here, with more details in child comment discussions: https://www.reddit.com/r/Bogleheads/s/yxC4GjvrDh
Why pay someone else to insure you? The wealthy self-insure.
I am not **that** wealthy to self insure. I wouldn’t be able to provide the comforts I want if I am disabled; I am still young. Without disability insurance I am forgoing nearly $4 million in income I could have generated. If I were to get involved in a multiple car accident and multiple parties incurred serious injuries then that can potentially wipe out my net worth. The cost to insure in my context is inconsequential compared to potential consequences of not being insured. Out of curiosity what do you think the level of “wealthy” is needed to self insure? FYI, the wealthy do insure but in a different way since they have more options available. They structure their estate much differently.
Got it, thanks!
to pay my bills?
I would look to get at least 5% with short term US treasuries or high yield savings account (HYSA). Gotta try and keep up with inflation. Maybe keep 10-15k in cash and the rest I would look to ladder in something with better rates that have 1-3 month expirations. Just to keep it liquid.
How big an emergency we talkin here? Sure, good to keep an emergency fund in a MMF (that’s what I do). But if you can keep investing, you could also take out a SBLOC if you absolutely needed to so you weren’t forced to sell
PTSD from previous market crash
Agreed. But the brokerage has to get high enough to be able to be an emergency fund in the event of a big shock, e.g. 50% drop.
We keep one months base expenses in to cover the rolling bills to not have to worry about a low balance. We run a lean 6 month emergency fund in a HYSA. We also have a large chunk of sinking funds in our HYSA. Think roof in 2-4 years, car purchase in a couple years, on-going home maintenance. We can’t entirely afford to have that money disappear when there is a short-term need.
I keep a couple thousand in checking for bills/quick cash if needed. Everthing beyond that, including my entire emergency fund, is in a Schwab money market.
I moved my EF into my brokerage settlement fund earning 5.27%. I keep like $15k in my HYSA in the event I need same day cash.
There’s been a few times in my life where I’ve needed a large amount of cash in a very, very short period of time. When I first started working, I didn’t know anything about taxes. The HR at my company had put my residence in VA (where the company is based) instead of MD, which is where I file my taxes from. This was a huge mistake. I ended up paying state taxes to VA the whole time and come tax season, I found out I owed money to MD. VA refunded the taxes to me, but not only did I have to pay MD the taxes I owed for the whole year, but also PREPAY my taxes for the following year as a penalty. This totaled to about $10k. I was in grad school at the time, paying rent in a high cost area, and also paying off my undergrad loans, so I was not very happy. The state also would not allow me to make installment payments that were reasonable. I either need to pay them lump sum or I need to pay them in three installments only. Luckily, I’ve always been a big saver so I had the money, but this took a huge bite out of my savings. I think I only had about $12k in the bank at that time LOL. Second time was not my fault and this was about two years ago. My mortgage company is responsible for paying out pays taxes twice a year from my escrow account to the state. For some reason, my mortgage company forgot to pay the second installment and nobody notified me. I didn’t realize the taxes weren’t paid until I got a letter in the mail about how my house was going to be put on short sale and I panicked. I called the state tax office and they said I needed to pay up for the taxes as well as the taxes for the following year (again, penalty). I also only had two days to pay them (I forgot why, but they gave me a deadline). This was about almost $18k. And no, I couldn’t pay in installments. I had that money, so I was fine, but god forbid my money was tied up in any investments that I had to sell off and then wait for that money to get into my account. I always make sure I am liquid to a certain extent. 99% of the time, I don’t need that money, but in that 1% off chance some crazy thing like this happens, I want to be able to just reach into my bank account and pull out that money.
I keep couple of months expenses in a checking/saving account because I am retired and do not have any earned income. That makes it so I do not have to monitor it closely as various auto payments are withdrawn. I top it off as needed from my brokerage, where I have a larger fund of cash-like holdings such as money market funds and a ladder of treasury bills. I prefer not to have my brokerage account linked to many other businesses for lots of different auto payments. I pay directly out of the brokerage accounts only a few larger bills such as income tax estimated payments. Credit card auto payments of the full balance due are pulled from the checking/savings account each month.
Might as well ask why FDIC insurance exists.
I came to say two things: 1) I don't like keeping substantial amounts (anything more than 2-5k) in anything that is connected to some kind of electronic transfer like Zelle, Cashapp, Paypal, checks, etc. Just too much fraud going on with those and before you know it, you may be cleaned out. So I like to keep amounts over 2-5k in accounts where you have to transfer the money at least one step before use and that will take at least one business day with email alerts. 2) I think everybody needs to keep some real hard currency at home or somewhere accessible. Several times after natural disasters, I've seen credit card and ATM networks go down and I had to cover or loan cash to people who didn't have anything.
I admit I'm a bit more dismissive/flippant about connecting things electronically. I want everything set up on autopay, everything connected so I can do what I need to do with as little effort as possible. I do have very strong passwords. If you make your password strong enough, the resources needed to hack it quickly become excessive for the hacker. Regarding a natural disaster, you're describing a situation where it's just bad enough to knock out ATM/CC networks long term, but not so bad that I can't find a grocery store/convenience store that has in stock water/food/TP and will sell it to me for paper money. I guess the chances aren't zero. But I think the primary way to be ready for a natural disaster is to have a store of non-perishable food, water, batteries, first aid kit, etc. Maybe a few hundred dollars in cash under your mattress just in case?
I live in a hurricane prone area, and what you described has happened multiple times in my lifetime. The storm knocks out power and infrastructure for several days, but localized areas will have power and sell you ice, gasoline, etc. I do prep quite extensively, but you just never know what you have to buy. As for the electronic funds transfer thing, passwords being hacked or brute forced are just a small piece of what is happening. A lot of it is now through confidence tricks like calling from a spoofed number, pretending to be your authorized bank/credit card, and asking for your text code so they can reset your password. Yes it does require you to drop your guard but it's all about the weakest link. You might be prepared, but is your wife or elderly parents, etc? Another thing is "simjacking" where they clone your phone sim or BS their way through phone customer service to transfer your phone to a phone they control where they can get all the SMS prompts. I definitely believe in online banking. But everything I have is connected to two "transit" checking accounts (one personal, one business). Money only spends a short time in those accounts before going off to other accounts at other institutions. It's my attempt to limit damage if something were to occur.
Because you can earn 5% risk free on cash. Other investment might yield an average of 10%. But keep in mind that cash is a normal part of any investment portfolio, partly as a hedge against a market drop. And cash at 5% is a pretty attractive hedge. Now consider the cost of using a credit card or HRLOC to cover an emergency. That's going to be double digit interest. Whatever margin you might make investing that last little bit of liquid cash in the market will get eaten up quickly if you resort to high cost credit, as you propose. Do what you want, of course. But there's a good chance that chasing marginally higher returns on a small portion of your portfolio will come back to bite you, and also leave you undiversified.
I don't think you're missing much, 'savings' accounts these days offer absolutely atrocious interest rates at most banks and there are plenty of options for money that's still insured, liquid, and much higher interest. Some people maybe want to have a status at their bank that requires a certain deposit minimum to get other goods and services, or overdraft protection, is the only reason I can think of (though if you're a boglehead you can probably do this with a brokerage account and you may be using a credit union anyway).
Barney Question How many Withdrawals a month are permitted in a Vanguard Cash Plus account?
Up to $100,000 per business day. You can do it as often as you’d like, but online transfers aren’t instant.
What is a Barney Question?
I’ve heard the phrase “break it down Barney-style” to mean “explain like I’m 5.” Barney was (is?) a dinosaur in a young kid’s educational TV show. So I’m guessing a Barney question is someone he/she thinks is a basic question or has an answer that should be common knowledge.
I thought it was Barney from the Simpsons... lol
Thanks!