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emergency fund question?
Old 09-25-2012, 08:53 AM   #1
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emergency fund question?

Married both collecting SS and I have a pension. Currently this income covers 100% of our basic expenses. We our debt free and our vehicles are in great shape. House is paid off and do not see any major expenses unless something strange happens. We both have IRA's totaling $750,000 and $45,000 in savings account making .9%. Health insurance seems under control and we both have LTH plan. I hate having money sitting in a taxable account making .9% and then paying taxes on it. Should we spend down some of this cash this next year rather then taking it out of the IRA's? We are planning two major trips next year and need some cash for them. Do you keep cash in the IRA's and not have it invested so it is a emergency fund?
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Old 09-25-2012, 09:42 AM   #2
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If you are collecting SS, you are over age 59 1/2, so you can take money out of your IRA any time you want. Of course, you will pay taxes on it.

I think that the larger question is which resources do you spend down first. There are several active threads on this topic now and many more to be found with a search.
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Old 09-25-2012, 10:16 AM   #3
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IMO leaving your emergency fund in a volatile account defies the whole concept of an emergency fund...I'd keep it in the .9% account.

What could go wrong? You could spend the .9% money on vacations, then the market turns down, and you need to withdraw from a depleted account for basic living expenses...essentially locking in a loss forever.
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Old 09-25-2012, 11:07 AM   #4
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IMO leaving your emergency fund in a volatile account defies the whole concept of an emergency fund...I'd keep it in the .9% account.
+1

Everyone knows that sure as tomorrow's sunrise (but hopefully not quite so soon) they're going to need a new furnace, A/C, refrigerator, new roof, transmission for the car, etc. and other stuff that happens in life. Trouble is, it's almost impossible to predict exactly when those expenses will happen.

To us, that's what the emergency fund is for.
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Old 09-25-2012, 11:22 AM   #5
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.9 percent is pretty good for a savings account--ours pays so little that we don't even have to pay taxes on it.

I'd leave it there--it keeps you from having to sell low. And if you had to take $$ from your IRA instead, you'd be paying taxes on the withdrawal that would be more than what you're paying on the $405 you're getting each year from this savings account.
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Old 10-05-2012, 11:52 AM   #6
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Where would you recommend keeping an emergency fund in one's financial portfolio? More specifically, do you recommend keeping it in the same savings fund as a sinking/vacation/wishlist fund? Or in an entirely separate savings account in the same bank for immediate accessibility? Or is it too risky to have it in an entirely separate bank savings account that is linked to the main account for transfers (e.g. Schwab bank checking/savings) where there may be a 1-2 day delay in transferring the funds to my main bank account (assuming I may even be able to float the costs of the emergency on a high limit credit card immediately)? Any insight would be greatly appreciated.

FYI, I currently have my emergency fund mixed with my sinking/vacation/wishlist fund and I'm not sure if this is so prudent.
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Old 10-05-2012, 12:11 PM   #7
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Most "emergencies" I can think of (car repairs, home problems, etc.) can stand a 1-2 day delay and/or accept a credit card (or a personal check post dated a day or two). FWIW, my emergency fund is in separate bank and it would take a few days to transfer funds.
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Old 10-05-2012, 01:56 PM   #8
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Originally Posted by mistershankly View Post
Where would you recommend keeping an emergency fund in one's financial portfolio? More specifically, do you recommend keeping it in the same savings fund as a sinking/vacation/wishlist fund? Or in an entirely separate savings account in the same bank for immediate accessibility? Or is it too risky to have it in an entirely separate bank savings account that is linked to the main account for transfers (e.g. Schwab bank checking/savings) where there may be a 1-2 day delay in transferring the funds to my main bank account (assuming I may even be able to float the costs of the emergency on a high limit credit card immediately)? Any insight would be greatly appreciated.

FYI, I currently have my emergency fund mixed with my sinking/vacation/wishlist fund and I'm not sure if this is so prudent.
In 2003 I opened Treasury Direct (TD) accounts for DW and myself and bought $30k of I-Bonds. 12 months later I designated TD as the place to keep our emergency funds, and also use it to save for other goals. Getting some money out only takes 1 or 2 business days.

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Old 10-05-2012, 04:06 PM   #9
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I keep enough in my checking account to pay for most bigger expenses I might hit during the year. After that, I've always been happy enough to use my taxable brokerage account to fund the bigger "emergencies" or between j*bs. All accounted for in Quicken so I know what's allocated for what. So no special accounts and no special handling. But, I never had a big emergency either.
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Old 10-05-2012, 04:41 PM   #10
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Not a recommendation, but something to think about. Some folks have a line of credit on their paid-off home's equity. They never actually plan to use it (except for emergencies) - and most never do if they are wise. Still, with all basic expenses covered and only worrying about MAJOR emergency expenses (uncovered flood damage, under-covered major medical services, etc.) a HELOC just might be viable. If one DOES need to use it, it costs a fair amount of interest (by today's standards), but it might allow one to keep a lot less than $45K in a .9% account. I would never want to use a HELOC for a transmission repair or a blown-over tree. Just an "in-case" (insurance) approach that might free up some investment money. Full disclosure. I used to have a HELOC (no cost if not used) and I NEVER touched it. Today, I keep from $10K to $50K in ready cash, depending upon the current level of special spending (vacations, home improvements, replacements, repairs, etc.) So I DO mix emergency funds with everyday in-and-out money - virtually 0% interest, dangit! As back-up, part of my 401(k) is in a stable-value fund (sometimes called a guaranteed-income fund or GIF). Though it's currently paying only about 2+%, I can have the money electronically transferred to checking within about 48 hours or less.

Never forget: YMMV.
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Old 10-06-2012, 08:54 AM   #11
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Originally Posted by Walt34 View Post
Everyone knows that sure as tomorrow's sunrise (but hopefully not quite so soon) they're going to need a new furnace, A/C, refrigerator, new roof, transmission for the car, etc. and other stuff that happens in life. Trouble is, it's almost impossible to predict exactly when those expenses will happen.
Uh, that's what a budget is for ...

Although most folks don't do it, if you buy any product (be it a car, or a new roof), eventually it will have to be maintained and/or replaced.

For a car? We buy for cash, but put away 10% for replacement every year (assuming a minimum 10-year holding period for the car).

For a roof? We put away 5% away for a replacement every year, assuming a 20 year actual use of a "30-year" roof (we just went through this on our then 16-year old house, with a "20 year" roof).

Simply, those that fail to plan - plan to fail.

Sure, it's tempting when you see all this "maintenance cash" tied up and you want the latest "thing", be it a vacation or the latest TV/phone, but it comes down to the old saying of pay me now, or pay me later.

We've always been the sort to "pay me now"; that way, later will take care of itself. BTW, we don't consider that "maintenance fund" as for emergencies. It's for those items that we knew needed some future consideration.
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Old 10-06-2012, 09:24 AM   #12
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Where would you recommend keeping an emergency fund in one's financial portfolio? ....
To me, money is money.

If I had an emergency, I would simply sell some stock mutual fund shares in my taxable account and have the money available the next day. I do this a few times a year anyways.

Folks will gag and say, "But, but, but what if stocks have gone down 50%!!" And my answer would be, "So what? Who cares?"

The reason is that even if I didn't call this stock mutual fund "My emergency fund", then stocks would have gone down 50% anyways and this fund would be down 50% anyways as well. All my stock funds would be down 50%, but I don't own only 100% stock funds. I have some bond funds as well.

So if in an emergency I had to sell the shares of the stock mutual fund in my taxable account (that is, my non-IRA, non-401(k), non-Roth accounts), I would just exchange from a bond fund to a similar stock mutual fund in my tax-advantaged account. The bond funds I use are VCSH (short-term corporate bond YTD 5.2% return), BIV (intermediate-term bond), FSITX (total bond index). After this exchange, I would end up with the same amount of money in stock funds that I had before selling shares in the taxable account to pay for the emergency.

Folks will gag and say, "But,but what if bonds have gone down 10%!!" And my answer would be, "So what? Who cares?" My bond funds are more than 30% of my total portfolio which is about 7 or 8 years of living expenses.

So the idea that an emergency fund has to be available to pay 1-year's of expenses in cash in one hour is ludricous. I am not sure where and when that myth started.

For folks who can't depart from a cash emergency fund, perhaps they can be weaned by having a multi-tiered emergency fund: checking account, credit cards, I-bonds, short-term bonds, etc.

So to directly answer the question: I recommend using a short-term bond fund in a tax-advantaged account for one's emergency fund. If you fear that the short-term bond fund might have dropped 10% when you have your emergency, then just put 10% more in the short-term bond fund to start with.
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Old 10-06-2012, 10:53 AM   #13
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We both work and are far away from retirement (10 years to FI). We keep an emergency fund of 6 months of basic expenses in a savings account. This allows us to keep 100% of our investments in equities without worrying about selling at the wrong time.
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