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Old 02-27-2008, 12:23 PM   #41
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However I wouldn't recommend anyone transferring funds to Australia at the moment as with the US$ in the toilet you will be taking a total bath on the exchange rate.
I'm certainly no expert on exchange rates (to say the least!), but even if the current exchange rate is unfavorable, as long as it held steady while I had funds in an Australian interest bearing vehicle, I would suffer no penalty when I exchanged back. Right? It's the relative exchange rate varying over time that causes exchange rate risk, no?
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Old 02-27-2008, 12:29 PM   #42
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I have about 10% cash right now.
I think that is the critical metric. The percentage of cash/near cash you hold in your overall net worth to meet your planned and unplanned liquidity requirements is what matters. Putting special names on accounts might help you keep your head straight as to what you're doing, but doesn't change the liquid assets available. Nor does it change the opportunity cost you're paying for holding liquid assets.
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We don't have a "bucket" with the name "Emergency Fund" on it. If I need the cash I do a wire transfer into my checking account and then write a check. The "need" is planned but I choose not to have individual accounts for only narrowly focused items.
Yep. That's what works for me. I do admit, however, that back in the bad ole days when I was w**king, I did do some things with focused, segregated accounts. For example, after buying our first new car on time payments (1970 VW Superbeetle), I started a payroll deduction into a credit union account at work so I could buy the next one for cash. For some reason, I needed the clarity and security of seeing those bux accumulating unadulterated by other cash on hand. Of course, it was all in my head. If I had needed those new car account dollars for some emergency, I would have grabbed them without hesitation.......
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Old 02-27-2008, 12:34 PM   #43
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This is one big guessing game, but it's better than not guessing.

True, you can budget for a car lasting 10 years based on past experience and it could turn out that it dies in 5. Well, it could die in 2 years, it could die in 12 years, but you have to take a guess based on something.

Inflation is a key personal number. Again, you have to project forward based on a set of assumptions.

You can always put a "miscellaneous" line items for a fudge factor if you think there may be something else that could come up not accounted for.
I hope my post was not interpreted as questioning how you do things. If anything your post made the most sense, and I posed the questions as much to myself as I did to the whole board (is that a "rhetorical post"?).

My thought was this-

If many of those expenses are long term (roof, car, house repairs) and accounted for in withdraw rate, there are two slush funds

1) the slush factor built into expenses and the starting withdraw rate.
2) the slush factor on earning interest before the expenses accrue.

2) is more of the buckets thing. My thought was there are two buckets- the money accounted for for SWR and the money withdrawn but not spent yet.

Your choices for the latter are to not withdraw the money at all (you will pay taxes on the withdraw), or withdraw it, pay taxes, then set it aside. My thought was to withdraw it and set it aside. Put 50% into cash (earning an average of 3%), and put 50% into a moderate mutual fund (PRPFX is my personal choice- earning around 6%). In 12 years time the second portion of that doubled, minimizing need to continue including in withdraw rate.
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Old 02-27-2008, 01:39 PM   #44
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I hope my post was not interpreted as questioning how you do things.
Not at all. I was just elaborating.
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Old 02-27-2008, 01:55 PM   #45
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At what point are tax-exempt MMF's or Bond Funds worth it?

Is it as simple as comparing the ratio of returns to your marginal tax rate?
So if Taxable Fund A returned around 4% and Tax-Exempt Fund B earned 3%, then B/A = 25%. If your tax rate is over 25%, go with Tax-Exempt?

Is the answer the same for both bonds and money markets?
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Old 02-27-2008, 02:03 PM   #46
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We keep about 6 months of current expenses in a MM fund. Since DW and I both work for separate companies and the chances of us both getting laid off together are slim, this would be over a year's worth of one income earner for us.

If we anticipate a large expense, we start building up the MM.

Having walk-away money can be very comforting.
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Old 02-27-2008, 02:39 PM   #47
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At what point are tax-exempt MMF's or Bond Funds worth it?

Is it as simple as comparing the ratio of returns to your marginal tax rate?
So if Taxable Fund A returned around 4% and Tax-Exempt Fund B earned 3%, then B/A = 25%. If your tax rate is over 25%, go with Tax-Exempt?

Is the answer the same for both bonds and money markets?
For taxable accounts/taxable interest, the calculation is

(1-tax bracket)*interest rate=real rate

so if in 25% bracket, the real rate is 3/4 what you really get. (1-.25)*interest rate.

If tax free MMA was 2.5% and taxable MMA account was 3.5%, the math looks like this:

(1-.25)*3.5%=2.65%
which is greater than 2.5% tax free, so stick with taxable MMA.

The tax free accounts really kick in for 33 and 35% rates, is my experience. Same example above in 33% tax rate:

(1.-33)*3.5=2.34% which is less than 2.5% tax free, so the tax free MMA is a better deal.


The 3.5% and 2.5% rates I used are pulled out of thin air- no idea what the APRs are on those accounts right now (I am in 15% or 25% bracket and I use CDs for my savings).
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Old 02-28-2008, 12:12 AM   #48
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Nords: Let me guess. You quit buying a $10.00 Pizza at Costco on Fridays.
Well, hey, some necessities you just have to draw the line on and include in your core budget-- no matter how bad things get!

But I have cut back on the ice cream...
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Old 02-28-2008, 06:43 PM   #49
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I just take large purchases out of the MM account that has about a year's worth of expenses, just like I pay for small expenses. The MM account gets replenished with whatever my estimate is for spending over the next year, which includes anticipated large purchases. But I'm not at all exact on the MM account balance... if I'm off by $10k no problem just cash out more bond funds next time.

The way I look at it, it's useful to segregate the large expenses for budgeting purposes, including say $200/mo for car replacement on the budget. But for spending and investing there's no advantage I can see to segregating. The only exception might be if a very large purchase were to significantly distort your asset allocation.
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Old 02-29-2008, 08:56 AM   #50
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I'm certainly no expert on exchange rates (to say the least!), but even if the current exchange rate is unfavorable, as long as it held steady while I had funds in an Australian interest bearing vehicle, I would suffer no penalty when I exchanged back. Right? It's the relative exchange rate varying over time that causes exchange rate risk, no?
Well the greatest problem is who knows which way the exchange rates will go. For us it is not such an issue, as money we transfer to Australia we intend to leave there. Of course if we decided to pull all our cash out of Oz and moved it to the US now I am sure that we can do well on the exchange rate, but if we were to have to move it back we would be screwed unless the timing was right.
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Old 03-01-2008, 12:49 AM   #51
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I'm certainly no expert on exchange rates (to say the least!), but even if the current exchange rate is unfavorable, as long as it held steady while I had funds in an Australian interest bearing vehicle, I would suffer no penalty when I exchanged back. Right? It's the relative exchange rate varying over time that causes exchange rate risk, no?
Yes, if all you got 'charged' was the exchange rate. However when you go the banks you will see that they have a 'buy' and a 'sell' price. It's the way they make their money (the spread). So you are going to get hit on the way in and on the way out when you exchange USD for AusD.
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Old 03-01-2008, 12:58 AM   #52
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Rich for the Insurance premiums, I just put that into the expenses side of the equation. So it's figured in the swr. No bucket or fund needed.

I have about 10% in cash, CD, MM (cash bucket). It represents 5 years of money that are used to add to my pension, income bucket (preferreds, muni's, and other income producing investments) to make up my swr. My 'swr' has a bit of fluff in it, so I don't really spend the entire planned allocation, so this adds to (or is left in) the cash bucket. The cash bucket actually has 6 years worth of funds, so the slush is for the roof leaks, the new boiler, and yes even the new (used) car.
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Old 03-01-2008, 10:03 AM   #53
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I use a Heloc

We budget for everything. But as you all know there are unexpected expenses, so if they are large enough we have a heloc to tap for large expenses. Last year our fridge and dishwasher died but we just paid it out of normal expenses. If it's something larger we may have to hit the heloc.
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Old 03-03-2008, 09:30 AM   #54
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I've been struggling with this.

My house is paid off. I have a HELOC with a zero balance that is large enough to cover maybe five years of living expenses. The HELOC has a $50 per year account fee. My marginal tax rate is 25%. Income minus expenses is good enough that there is always a couple thousand dollars per month in excess money. So an emergency fund would be more for $10k-plus expenses, and more to smooth out cash flow issues than anything else.

My internal struggle is that an emergency fund would make me feel more comfortable. There's a significant psychological difference to me between taking on debt and taking money out of a fund earmarked for such things. I hate being in debt.

The flip side is that money markets or short term bond funds are horribly tax-inefficient. It seems silly to have a $25k emergency fund that is barely matching inflation, if that. I could always increase my bond holdings in my 401k by $25k and call that my emergency fund. If I needed that 25k, I could sell that much out of my tax efficient Total Stock Market after-tax account and then re-jigger my allocations to drop $25k from my 401k bond total and correspondingly increase my 401k Total Stock Market allocation.

But, like Rich in Tampa said early on, even though it is smoke and mirrors, there is a comfort in having a "real" emergency account, rather than kind of a virtual emergency fund.

Is this too much angst for $250-$300 per year?
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Old 03-03-2008, 09:44 AM   #55
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Instead of MM or ST Bonds in taxable accounts, try a CD ladder and accept the penalties if/when you need to cash one in early?
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Old 03-03-2008, 09:48 AM   #56
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My emergency fund was a few piddling dollars, until last January, when Megaconglomocorp made the dreaded announcement.

I switched to emergency mode, and now have about two years worth of basic living expenses stashed in VGMMX. My severence runs out in June; unemployment will last about 4.5 more months. Plus I have about 250 hours of timebank left to cash out. So, I'm good for a l-o-n-g stretch, if necessary...
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Old 03-03-2008, 10:22 AM   #57
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Instead of MM or ST Bonds in taxable accounts, try a CD ladder and accept the penalties if/when you need to cash one in early?
Why? I'm probably missing something, but CD's don't seem to have a big return premium (if any) over short-term bonds, though the returns are of course guaranteed for CDs. The money isn't particularly liquid, you still have taxes on the interest, and you have to do the work every month or three to reinvest in a new CD. I just don't see the appeal unless you're talking about a lot more money than this.
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