Safe Place for Emergency Fund

[2177V]

I am 67, retired and I have 3 financial resources:

1. Long term Investments in the stock market such as VFINX. (15 years of retirement income).
2. Short Term Corporate and Government Bonds such as VFSTX. (5 years of retirement income)
3. Home Equity Line of Credit or HELOC on my house which is free and clear.

My HELOC is my emergency fund because there is no yearly cost to maintain, no risk in the stock market and I can pay it back using 1 and 2 above. I do pay the market interest when there is an Emergency. When I look back in my life, I rarely had a significant emergency. Putting money aside for emergencies is dead money which means it rarely earn significant interest.

Financial planners would disagree with this portfolio because I have a 75% stock/25% bond which is too risky for my age. However, I always lived a life of danger (US Army veteran) and I am comfortable with this since 5 years of VFSTX should be long enough for 90% of the historical bear markets and crashes and the necessary recovery time. Financial planners will never advise using a HELOC as an emergency fund because that is also too risky. However, as long as I have enough money in 1 and 2, I am OK with this.

Everyone has their own risk tolerance.

My risk tolerance is higher than most people. My benefit is that I earn more money in my investments in return for my higher risk. This is the balance people have to take.

 

[brewer12345]

I use https://www.treasurydirect.gov/ once you get it all set up its easy..

I only buy " bills " the maturity is 4 weeks... all I did was setup the account and linked my checking account to it... it works like this...

you just log onto the site... input the amount to want to buy...
an example would be $200,000

and when they have the auction they take the discounted amount from your checking account... the discounted amount is what the bill pays in interest for that given 4 week period... so instead of them taking out the $200,000 they will just take out of your checking account $199,630 and the difference ( $270) represents the interest they will be paying you at the end of the 4 week period... $200,000 - $270 = $199,630... so at the end of the maturity they just send you $200,000 into the checking account...

so in this example if you were to do this each month for the year you would have gotten around $3240.00 per year.. if the interest rates didn't change...

hey it pays the insurance/utility bills on the house... for a year...

and if you don't want to mess with it each month they give the option of auto monthly purchase for you...

If you are as lazy as I am, you can buy 2 year treasury floating rate notes. They pay interest quarterly based on the average rate for 90 day t bills during the quarter. I have never not seen these things marked within a fraction of a point of par if you might need to sell early.

 

[brewer12345]

A career spent looking at financial institutions which usually die when they run out of liquidity makes me spooky when it comes to liquidity risk. I want to sleep well, so I use a layered approach. I have some funds in a money market, a sorta ladder of CDs stretching out to 5 years (all with modest early withdrawal penalties), some I bonds, margin on a taxable account, scads of untapped credit cards, and an untapped HELOC. There is a couple grand in folding money in the safe as well. I acknowledge that this is probably excessive, but it costs me nothing and the CDs are simply part of my fixed income allocation.

 

[Another Reader]

A career spent looking at financial institutions which usually die when they run out of liquidity makes me spooky when it comes to liquidity risk. I want to sleep well, so I use a layered approach. I have some funds in a money market, a sorta ladder of CDs stretching out to 5 years (all with modest early withdrawal penalties), some I bonds, margin on a taxable account, scads of untapped credit cards, and an untapped HELOC. There is a couple grand in folding money in the safe as well. I acknowledge that this is probably excessive, but it costs me nothing and the CDs are simply part of my fixed income allocation.

Great minds think alike...

Bricks and mortar banks, a lot of cash, outside my working capital checking account. Spread among the three biggies. Another pile spread around the high yield on-line bank accounts. Three years of RMD's for the inherited IRA's in treasuries and CD's. A currently dormant HELOC and six figures of credit card space. However, no folding money beyond the $40 I pick up at the ATM every few months.

I have a couple of dozen rentals that could suddenly need a roof or an A/C unit. I could be sued by a tenant or a vendor. We are going to have a serious earthquake here eventually and every year there is the wildfire risk. Real estate or some other asset class will go on sale at some point and I want to have the cash to stock up.

I value liquidity, the same as Brewer does. However, I think I will reduce the cash and pay off another rental mortgage at the end of the year unless an attractive alternative presents itself. That will put me on the edge of the worry zone, but I want these higher rate mortgages gone.

 

[pb4uski]

Often true, though some of them may charge you 3% more to do so.

Not in my experience.... I'm not talking about a cash withdrawal... just putting the bill for car repairs, medical bills or whatever the emergency is on a credit card and then paying it off when due... gives you 20-50 days of breathing room depending on how the emergency aligns with your credit card billing cycle.

 

[bq1993]

Thanks, y'all. You've motivated me to move my emergency fund from the local credit union MM account, paying 0.65% to Vanguard Prime MM, where it has the opportunity to grow a little more.