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Start Taxable Savings without Emergency Fund?
Old 03-20-2011, 08:24 PM   #1
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Start Taxable Savings without Emergency Fund?

I started my first full-time job in Sept. I contribute 10% to my 401k (enough to get full match), max my Roth, max my HSA (including employer contributions), and save $400 monthly in an online savings account. The above equals 35% of my gross income.

I recently recieved a bonus for completing the primary credential for my field. Currently my emergency fund is only $1,200. However I think I would like to invest my bonus when the market is down a bit instead of putting it into my savings account paying 1.0% or so. What are your thoughts on this?

I don't have any debt besides student loans totaling ~3k at a low interest rate. My monthly expenses are roughly $1,400-1,600 so my goal is a 10k emergency fund, which would be complete in ~2 years at $400/month.
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Old 03-20-2011, 08:30 PM   #2
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Congratulations on the first credential.

I think investing the bonus is a great idea--you'll enjoy seeing what it does (we hope!) and you can add to it with future bonuses. It's not like you're spending it.
And your savings plan for the emergency fund stays on track.
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Old 03-20-2011, 08:34 PM   #3
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I'd say put it in the emergency fund. It will cut the time you expect it will take to build your emergency fund to your goal and who knows, the market could be lower in a year or so. Have fun! Sounds like you got some good advice already.
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Old 03-20-2011, 08:39 PM   #4
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I was always comfortable having my taxable investment accounts available as emergency funds. Unless your emergency is that stocks just crashed at the same time you lost your job.
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Old 03-20-2011, 09:28 PM   #5
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I was always comfortable having my taxable investment accounts available as emergency funds. Unless your emergency is that stocks just crashed at the same time you lost your job.
I'm the same.

A different thought: What about splitting the difference? 50% to emerg. fund, 50% invested?
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Old 03-20-2011, 09:32 PM   #6
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I'd advise putting it in the bank - - but that's not what I DID. I invested and paid off the house before I saved a decent emergency fund. Dumb, dumb, dumb, but now I have one.

So now you can puzzle over whether you should do as I say, or as I did.
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Old 03-20-2011, 09:44 PM   #7
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Since one can remove contributions to a Roth IRA without penalty, I suggest that if you have not contributed $5,000 for 2011 that you put it there and use the Roth as an emergency fund. Of course, you should not put it in equities if it is really earmarked as an emergency fund. Put it in a short-term bond fund like VCSH or VFSTX.

After you have maxed 401(k) & Roth, then you can build up your taxable account with tax-efficient equities. See also: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads with all the caveats there-in.
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Old 03-20-2011, 09:57 PM   #8
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After you have maxed 401(k) & Roth, then you can build up your taxable account with tax-efficient equities. See also: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads with all the caveats there-in.
In my situation, I do not think it currently makes sense to increase my 401k contributions above what it already is. I currently have around a 10% effective tax rate. I expect this to be higher in the future and when I withdraw the money.
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Old 03-20-2011, 11:42 PM   #9
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I never had what I considered an "emergency fund" in a money market savings or some other low-yielding account. I always wanted it to be returning some decent interest. I invested some of it in an intermediate-term muni bond fund which had checkwriting privileges so I could have quick access to it if needed.

The only money I would put into a low-yielding or interest-free checking/savings account is what I need to keep in there to get me free checking and dodge the monthly fees, maybe $2k.

Before I branched out into stock mutual funds in the mid-1990s, and after I had finished with the large purchase of buying my apartment in 1989, I had accumulated about $40k in muni bond funds like that, all paying me tax-free interest each month.
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Old 03-21-2011, 06:36 AM   #10
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I never had what I considered an "emergency fund" in a money market savings or some other low-yielding account. I always wanted it to be returning some decent interest. I invested some of it in an intermediate-term muni bond fund which had checkwriting privileges so I could have quick access to it if needed.

The only money I would put into a low-yielding or interest-free checking/savings account is what I need to keep in there to get me free checking and dodge the monthly fees, maybe $2k.

Before I branched out into stock mutual funds in the mid-1990s, and after I had finished with the large purchase of buying my apartment in 1989, I had accumulated about $40k in muni bond funds like that, all paying me tax-free interest each month.
+1
Exactly what I have done for over 10 years and continue to do.
I did, however, recently set up a $10K emergency fund in a TE money market fund. I may have some significant school tax increases coming in the near term unless NY gets its fiscal act together.
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Old 03-21-2011, 07:32 AM   #11
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A fully funded emergency fund, used correctly, will pay greater returns than any safe stock investing strategy. Having 6-12 months cash on hand lets you make riskier, more rewarding decisions with respect to your career.

Examples -

The company I started with out of school was bought by a megacorp. The owner of the company was being let go and starting a new business. Instead of joining slow, comfortable megacorp, I was able to leave for the fast paced new company. I got a couple months severance and a far more interesting, high potential job.

Within a year, when tasked a project higher level than I was getting paid for, I was able to tell my boss: "I'm happy to do this work, but you need to pay me going market rate". I negotiated a 15% raise.

Subsequently, as time went on, I negotiated paid overtime - on a salaried IT position

When things got to crazy, even with the paid overtime, I was able to say "don't take on this additional project, I can't make time for it". I could back it up with confidence because unemployment wasn't scary.

Any of these risks could have sent me home with no income. Having that cash cushion gave me control in the situation. I keep a year expenses in savings. It has paid off far more than the market could have.

Don't use your roth for the cash cushion. Once you take the money out, you lose the tax free benefit, and you can't get it back.
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Old 03-21-2011, 09:05 AM   #12
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Don't use your roth for the cash cushion. Once you take the money out, you lose the tax free benefit, and you can't get it back.
If you had to take the money out, though, how likely is it that someone would be able to put money back into it later in the year? Having said that, even if I were willing to use a Roth for an "emergency" emergency fund, I'd keep the funds liquid until almost April 15 of the following year and contribute to it only when the window for the previous tax year was about to close. And I wouldn't invest it aggressively until a more traditional emergency fund in a taxable account was in place.
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Old 03-21-2011, 09:36 AM   #13
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I was always comfortable having my taxable investment accounts available as emergency funds. Unless your emergency is that stocks just crashed at the same time you lost your job.
+1
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Old 03-21-2011, 10:18 AM   #14
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I started my first full-time job in Sept. I contribute 10% to my 401k (enough to get full match), max my Roth, max my HSA (including employer contributions), and save $400 monthly in an online savings account. The above equals 35% of my gross income.

I recently recieved a bonus for completing the primary credential for my field. Currently my emergency fund is only $1,200. However I think I would like to invest my bonus when the market is down a bit instead of putting it into my savings account paying 1.0% or so. What are your thoughts on this?

I don't have any debt besides student loans totaling ~3k at a low interest rate. My monthly expenses are roughly $1,400-1,600 so my goal is a 10k emergency fund, which would be complete in ~2 years at $400/month.

Congrats! Sounds like you are starting on the right track and definitely paying yourself first. Of your investments, are any part of it allocated in cash? That was how I treated my emergency fund back when I was w*rking. It wasn't a separate fund, but I held enough in my cash portion (money market fund) that in case of emergency, the money was there.

It was not until after I retired that I have a separate setup for my emergency fund outside of my investments. Now I keep two years living expense in it which serves both as my emergency and "simulated paycheck" that I have automatically deposited in my checking account each month.
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