Emergency Fund Replenishment

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
TD2626
Posts: 528
Joined: Thu Mar 16, 2017 3:40 pm

Emergency Fund Replenishment

Post by TD2626 » Sat Oct 28, 2017 9:47 am

I’m trying to figure out how emergency funds would get replenished if they are ever need to be used, especially in a down stock market.

I have in my Investment Policy Statement (IPS) something along these lines:
The reason for holding an emergency fund or cash allocation is to have a ready supply of money if a sudden, unexpected expense occurs when the stock market is down. In order to avoid being forced to sell stocks to pay for a roof or car repair at the bottom of a bear market, 5% of the portfolio, or 6 months expenses (whichever is greater) shall be held in “cash”, defined as checking accounts, high yield savings accounts, liquid I Bonds, short-duration CDs, or money markets.
I realized there could be an issue if using "5% of the portfolio in cash" and re-balancing to that.

In the event the market crashes and the roof simultaneously starts to leak, I would use much of the cash allocation to pay for the roof repairs. This would deplete the cash allocation... requiring me to rebalance… by selling stocks in a down market – which is exactly the eventuality I wanted to avoid by having the cash allocation!

I tried to resolve this discrepancy by writing in the IPS the following:
If the market is doing well, it is acceptable to replenish the emergency fund immediately by rebalancing out of stocks. If the market is “obviously down”, though, the emergency fund will be replenished more slowly
This, though, seems to open up a whole can of worms. First, what is the definition of the market being “obviously down”? Sure, it was clear that that was the case in 2009. But can I define it better? Maybe “If the Vanguard Total World Stock Fund is 25% or more below its all-time highs” could be the right language to use?

Also, how quickly should emergency funds be replenished if they are depleted? What is the proper definition of how fast to replenish emergency funds when they are used?

EHEngineer
Posts: 613
Joined: Sat Feb 28, 2015 4:35 pm

Re: Emergency Fund Replenishment

Post by EHEngineer » Sat Oct 28, 2017 9:52 am

The emergency fund gets replenished from your earned income, not from rebalancing. It is easier to not include it in your retirement portfolio.

You are correct that if one's emergency fund is included in their retirement portfolio that it will/could affect the entire allocation.

Of course, if you are in retirement, then your entire portfolio IS your emergency fund. And you must have an allocation that allows you to feel OK about spending in the event of a surprise expense like a roof replacement.

Emergency funds are about sleeping well at night. The size of it and rate at which you replenish after an emergency are really a personal choice. At some point, you have to accept that you cannot plan for or insure against every possible scenario. that's why emergency funds recommendations are all rules-of-thumb. Just like appropriate asset allocations and withdrawal rates, it's a personal choice.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Olemiss540
Posts: 188
Joined: Fri Aug 18, 2017 8:46 pm

Re: Emergency Fund Replenishment

Post by Olemiss540 » Sat Oct 28, 2017 10:04 am

If your emergency fund is low after an emergency fund, you still have a taxable account as another tier. You wouldn't want to "lock in " losses by selling them in a down market just to replenish cash, so I do not see the need to rebalance into cash as part of your IPS.

chevca
Posts: 458
Joined: Wed Jul 26, 2017 11:22 am

Re: Emergency Fund Replenishment

Post by chevca » Sat Oct 28, 2017 10:05 am

This comes down to, does one count their EF as part of or separate from their portfolio? There was recent thread on the very subject. Some do some don't.

I don't, so I would replenish the EF from earned income like mentioned above.

OP, it sounds like you don't really have a designated EF. You hold a cash position in your portfolio just in case. I would say you would rebalance and then contributions would go towards your AA. The question for you might be, do you really want a cash position in your portfolio? Maybe just have a stock bond portfolio and withdraw from that, or bonds if an emergency comes up. If one has plenty of assets, I think that's a fine way to go about it. I don't have that much yet and that would make me uncomfortable, so I keep an EF in plain old cash savings account(s).

Rupert
Posts: 2670
Joined: Fri Aug 17, 2012 12:01 pm

Re: Emergency Fund Replenishment

Post by Rupert » Sat Oct 28, 2017 10:29 am

The accounting is so much easier if you treat your emergency fund separately from your other investments. You replenish from earned income, and when your EF is full again, you divert that earned income back to your other investment accounts.

ThePrince
Posts: 77
Joined: Sun Aug 20, 2017 9:15 pm

Re: Emergency Fund Replenishment

Post by ThePrince » Sat Oct 28, 2017 11:48 am

Rupert wrote:
Sat Oct 28, 2017 10:29 am
The accounting is so much easier if you treat your emergency fund separately from your other investments. You replenish from earned income, and when your EF is full again, you divert that earned income back to your other investment accounts.
+1

User avatar
dratkinson
Posts: 3988
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Emergency Fund Replenishment

Post by dratkinson » Sat Oct 28, 2017 1:25 pm

The short answer. In the beginning (new investor, low total investments, don't yet have "enough"), it's simpler to keep your EFs separate from your (taxable) retirement investments. Refill your EFs with new money and redirected distributions, not by selling investments.



The long answer.

Our EFs are cash in a drawer, checking, savings, mmkt account/fund, CDs, savings bonds,.... These are (re)filled from our salary, redirected distributions (also helps with TLHing), pension, SS,....

When our EFs are full, the excess overflows into our taxable retirement investments. First into a stable value fund or shorter-duration bond fund (taxable or TE, based on our tax bracket) as the last tier of our formal EFs. Then into longer duration bond and stock funds of our 3-fund taxable portfolio.

Which gives 3-tiers to our taxable EFs.
--6-12mos in cash, checking, savings, mmkt, CDs, savings bonds,....
--1-5yrs in shorter-duration bond or stable value fund (last formal tier of our EFs, part of our AA).
--Remainder of our taxable retirement investments in longer duration bond and stock funds.


Above structure comes from this combination of different advice:
--It's simpler to track your EF separately (in the beginning).
--Retirees who report keeping 5yrs of livings expenses in safer bond or stable value funds, so they expect they'll never need to sell other taxable investments during a down market (assumes 4yr market recovery).
--Senior BHs who say "...when we have enough (as defined by us), then we don't need a dedicated EF as all of our investments become our EF."

Having enough. Keeping our EF separate in the beginning, and following above structure, the day will come (without our realizing it) when our separate EF morphs into being just a small cash component of our much larger total investments. When the day comes that our mental accounting changes, then we probably have "enough".

During retirement, it is from the cash component that we live. And with enough, the cash component will be refilled from distributions, pension, and SS. If not, then we must refill it by selling from our total investments.



Disclosure.

Management simplicity. When the day came that I believed I was approaching "enough", I began to simplify my accounts in advance of mental decline in old age. I redeemed all my savings bonds, didn't allow CDs to rollover, and sold remaining individual stocks. I used the proceeds to fund my shorter-duration bond/stable value fund EF-tier. Life is simpler without those additional accounts to manage.

Increased tax efficiency. I now follow livesoft's advice* to increase tax efficiency by avoiding taxable income reported on Sch B part I---interest from checking, savings, CDs, new account opening bonuses, and chasing teaser rates. (* His extension to the Wiki topic on "principles of tax-efficient fund placement".)

Market return on the next dollar. After livesoft's advice sunk in, I stopped chasing teaser rates. As my excess new cash overflows into my taxable AA and is earning the market return (~7% before tax), then any teaser rate below that is not worth pursuing.

What about the lost opportunity cost on my first year of living expenses? It's no longer worth it to me to pursue this complication.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

User avatar
TD2626
Posts: 528
Joined: Thu Mar 16, 2017 3:40 pm

Re: Emergency Fund Replenishment

Post by TD2626 » Sun Oct 29, 2017 1:47 am

Thanks to everyone for the thoughts and replies. Some reactions and ideas:
EHEngineer wrote:
Sat Oct 28, 2017 9:52 am
The emergency fund gets replenished from your earned income, not from rebalancing. It is easier to not include it in your retirement portfolio.

You are correct that if one's emergency fund is included in their retirement portfolio that it will/could affect the entire allocation.

Of course, if you are in retirement, then your entire portfolio IS your emergency fund. And you must have an allocation that allows you to feel OK about spending in the event of a surprise expense like a roof replacement.

Emergency funds are about sleeping well at night. The size of it and rate at which you replenish after an emergency are really a personal choice. At some point, you have to accept that you cannot plan for or insure against every possible scenario. that's why emergency funds recommendations are all rules-of-thumb. Just like appropriate asset allocations and withdrawal rates, it's a personal choice.
Yes, I certainty recognize that I can't plan for everything - and trying to plan this intensely for the moderately unlikely scenario of needing to use emergency funds during a steep market decline may already be planning overkill.

Generally I include the liquid investable net worth in the a portfolio allocation calculation- this excludes cars/real estate held for transportation or housing, but includes cash. I may need to reconsider this, though. One reason I do it this way is that investments, in my view, are assets held primarily for, and on the expectation of, risk-efficient long-term profit. Cars are consumption items that don't fit this bill but in my opinion savings accounts are.

dratkinson wrote:
Sat Oct 28, 2017 1:25 pm
The short answer. In the beginning (new investor, low total investments, don't yet have "enough"), it's simpler to keep your EFs separate from your (taxable) retirement investments. Refill your EFs with new money and redirected distributions, not by selling investments.
Good point - one could chart out a scenario of someone with income of 120k and desired emergency fund size (based on 6 month's expenses) of 50k. If they are for whatever reason just starting out and have a net worth of 100k, they'd likely have a 50% stock, 50% cash allocation if they included their whole net worth in their portfolio.


The long answer.

Our EFs are cash in a drawer, checking, savings, mmkt account/fund, CDs, savings bonds,.... These are (re)filled from our salary, redirected distributions (also helps with TLHing), pension, SS,....

When our EFs are full, the excess overflows into our taxable retirement investments. First into awould have to ccome fr duration bond and stock funds of our 3-fund taxable portfolio.

Which gives 3-tiers to our taxable EFs.
--6-12mos in cash, checking, savings, mmkt, CDs, savings bonds,....
--1-5yrs in shorter-duration bond or stable value fund (last formal tier of our EFs, part of our AA).
--Remainder of our taxable retirement investments in longer duration bond and stock funds.


Above structure comes from this combination of different advice:
--It's simpler to track your EF separately (in the beginning).
--Retirees who report keeping 5yrs of livings expenses in safer bond or stable value funds, so they expect they'll never need to sell other taxable investments during a down market (assumes 4yr market recovery).
--Senior BHs who say "...when we have enough (as defined by us), then we don't need a dedicated EF as all of our investments become our EF."

Having enough. Keeping our EF separate in the beginning, and following above structure, the day will come (without our realizing it) when our separate EF morphs into being just a small cash component of our much larger total investments. When the day comes that our mental accounting changes, then we probably have "enough".

During retirement, it is from the cash component that we live. And with enough, the cash component will be refilled from distributions, pension, and SS. If not, then we must refill it by selling from our total investments.



Disclosure.

Management simplicity. When the day came that I believed I was approaching "enough", I began to simplify my accounts in advance of mental decline in old age. I redeemed all my savings bonds, didn't allow CDs to rollover, and sold remaining individual stocks. I used the proceeds to fund my shorter-duration bond/stable value fund EF-tier. Life is simpler without those additional accounts to manage.

Increased tax efficiency. I now follow livesoft's advice* to increase tax efficiency by avoiding taxable income reported on Sch B part I---interest from checking, savings, CDs, new account opening bonuses, and chasing teaser rates. (* His extension to the Wiki topic on "principles of tax-efficient fund placement".)
This seems odd. While tax efficency is important, is this a case of the tax tail wagging the dog? If I have to hold cash in taxable for short-term spending needs, for emergency fund purposes, or otherwise to sleep well at night, I want to be earning competitive interest rates on it via a high-yield savings account. Yes, the interest is taxed at marginal rates - but I'm still better off than if I used a negligible interest checking account instead of a high yield savings account. I would be interested in hearing the full details of this, though. What Livesoft post are you referencing?

Market return on the next dollar. After livesoft's advice sunk in, I stopped chasing teaser rates. As my excess new cash overflows into my taxable AA and is earning the market return (~7% before tax), then any teaser rate below that is not worth pursuing.

What about the lost opportunity cost on my first year of living expenses? It's no longer worth it to me to pursue this complication.
I certaintly understand if the small amount earned from getting the very, very best rates on an emergency fund isn't worth the complication. It's just that I think that generally one shouldn't actively avoid better paying opportunities in savings accounts solely to save on taxes.
ThePrince wrote:
Sat Oct 28, 2017 11:48 am
Rupert wrote:
Sat Oct 28, 2017 10:29 am
The accounting is so much easier if you treat your emergency fund separately from your other investments. You replenish from earned income, and when your EF is full again, you divert that earned income back to your other investment accounts.
+1
There are some concerning theoretical possibilities with this - what if earned income is not avaliable during that time? This could be the case if the emergency cash need involves a layoff, major illness, or occurrs during retirement. In this case, replenishment of cash would have to come from stocks at some point. Maybe the dividends could be set to not reinvest, and replenishment could come from that?

I use a "dual mandate" structure of x month's expenses or n% of the portfolio in cash, whichever's greater. This is such that over time, the amount that's "off the table" in cash will grow even if expenses stay constant. The dual mandate structure is widely applicable to varying levels of portfolio size, emergency fund size, and expense levels.

User avatar
dratkinson
Posts: 3988
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Emergency Fund Replenishment

Post by dratkinson » Mon Oct 30, 2017 4:09 am

TD2626 wrote:
Sun Oct 29, 2017 1:47 am
Thanks to everyone for the thoughts and replies. Some reactions and ideas:

...
dratkinson wrote:
Sat Oct 28, 2017 1:25 pm
The short answer. In the beginning (new investor, low total investments, don't yet have "enough"), it's simpler to keep your EFs separate from your (taxable) retirement investments. Refill your EFs with new money and redirected distributions, not by selling investments.
Good point - one could chart out a scenario of someone with income of 120k and desired emergency fund size (based on 6 month's expenses) of 50k. If they are for whatever reason just starting out and have a net worth of 100k, they'd likely have a 50% stock, 50% cash allocation if they included their whole net worth in their portfolio.


The long answer.

Our EFs are cash in a drawer, checking, savings, mmkt account/fund, CDs, savings bonds,.... These are (re)filled from our salary, redirected distributions (also helps with TLHing), pension, SS,....

When our EFs are full, the excess overflows into our taxable retirement investments. First into awould have to ccome fr duration bond and stock funds of our 3-fund taxable portfolio.

Which gives 3-tiers to our taxable EFs.
--6-12mos in cash, checking, savings, mmkt, CDs, savings bonds,....
--1-5yrs in shorter-duration bond or stable value fund (last formal tier of our EFs, part of our AA).
--Remainder of our taxable retirement investments in longer duration bond and stock funds.


Above structure comes from this combination of different advice:
--It's simpler to track your EF separately (in the beginning).
--Retirees who report keeping 5yrs of livings expenses in safer bond or stable value funds, so they expect they'll never need to sell other taxable investments during a down market (assumes 4yr market recovery).
--Senior BHs who say "...when we have enough (as defined by us), then we don't need a dedicated EF as all of our investments become our EF."

Having enough. Keeping our EF separate in the beginning, and following above structure, the day will come (without our realizing it) when our separate EF morphs into being just a small cash component of our much larger total investments. When the day comes that our mental accounting changes, then we probably have "enough".

During retirement, it is from the cash component that we live. And with enough, the cash component will be refilled from distributions, pension, and SS. If not, then we must refill it by selling from our total investments.



Disclosure.

Management simplicity. When the day came that I believed I was approaching "enough", I began to simplify my accounts in advance of mental decline in old age. I redeemed all my savings bonds, didn't allow CDs to rollover, and sold remaining individual stocks. I used the proceeds to fund my shorter-duration bond/stable value fund EF-tier. Life is simpler without those additional accounts to manage.

Increased tax efficiency. I now follow livesoft's advice* to increase tax efficiency by avoiding taxable income reported on Sch B part I---interest from checking, savings, CDs, new account opening bonuses, and chasing teaser rates. (* His extension to the Wiki topic on "principles of tax-efficient fund placement".)
This seems odd. While tax efficency is important, is this a case of the tax tail wagging the dog? If I have to hold cash in taxable for short-term spending needs, for emergency fund purposes, or otherwise to sleep well at night, I want to be earning competitive interest rates on it via a high-yield savings account. Yes, the interest is taxed at marginal rates - but I'm still better off than if I used a negligible interest checking account instead of a high yield savings account. I would be interested in hearing the full details of this, though. What Livesoft post are you referencing?

Market return on the next dollar. After livesoft's advice sunk in, I stopped chasing teaser rates. As my excess new cash overflows into my taxable AA and is earning the market return (~7% before tax), then any teaser rate below that is not worth pursuing.

What about the lost opportunity cost on my first year of living expenses? It's no longer worth it to me to pursue this complication.
I certaintly understand if the small amount earned from getting the very, very best rates on an emergency fund isn't worth the complication. It's just that I think that generally one shouldn't actively avoid better paying opportunities in savings accounts solely to save on taxes.
...

It's no longer worth it to me to pursue this complication. My major complaint is not with the tax efficiency, it's with the extra work. But the extra tax on ordinary income is also a consideration. Why?

Livesoft's idea made me think about the work I was doing (chasing rates, account opening bonuses,...), and the extra tax I then owed. And it annoys me to realize that I was doing extra work and then turning over a 30% windfall to uncle sugar (25%) and his nephews at state (5%). I decided that I would much rather let 1yr of livings expenses lie fallow and avoid the extra work which was punished be being taxed as ordinary income.

Now, if I don't get a QDI, LTCG, FTC, TLH, or tax-exempt dividend benefit, then I don't do the work.


5% savings. But as long as you don't mind a little extra work, you can earn 5% on savings.
See Netspend: http://google.com/search?q=netspend+5%25+savings
See Brinks: http://google.com/search?q=brinks+5%25+savings


Account opening bonuses. Others here report that with a little extra work they earn ~$2k/yr from account opening bonuses (savings, checking, CC). Can search forum for their description of doing this.


So with a little extra work, you could be earning $2.5K/yr on $50K in 5% savings, and another $2K/yr by churning accounts. After you decide to go this route, then the rest is just logistics. :)

I truly don't object to others working harder and earning more around the margins; it's just no longer my preference.

Best of luck.



Livesoft's additional ideas on tax efficiency.
See: viewtopic.php?p=2828673#p2828673

Sch B part II income. Funds that earn the FTC would also be appropriate here. Above does not mention FTC and is not as complete as I remember; it’s just the first reference I found when searching.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

User avatar
TD2626
Posts: 528
Joined: Thu Mar 16, 2017 3:40 pm

Re: Emergency Fund Replenishment

Post by TD2626 » Mon Oct 30, 2017 9:03 am

dratkinson wrote:
Mon Oct 30, 2017 4:09 am
TD2626 wrote:
Sun Oct 29, 2017 1:47 am
Thanks to everyone for the thoughts and replies. Some reactions and ideas:

...
dratkinson wrote:
Sat Oct 28, 2017 1:25 pm
The short answer. In the beginning (new investor, low total investments, don't yet have "enough"), it's simpler to keep your EFs separate from your (taxable) retirement investments. Refill your EFs with new money and redirected distributions, not by selling investments.
Good point - one could chart out a scenario of someone with income of 120k and desired emergency fund size (based on 6 month's expenses) of 50k. If they are for whatever reason just starting out and have a net worth of 100k, they'd likely have a 50% stock, 50% cash allocation if they included their whole net worth in their portfolio.


The long answer.

Our EFs are cash in a drawer, checking, savings, mmkt account/fund, CDs, savings bonds,.... These are (re)filled from our salary, redirected distributions (also helps with TLHing), pension, SS,....

When our EFs are full, the excess overflows into our taxable retirement investments. First into awould have to ccome fr duration bond and stock funds of our 3-fund taxable portfolio.

Which gives 3-tiers to our taxable EFs.
--6-12mos in cash, checking, savings, mmkt, CDs, savings bonds,....
--1-5yrs in shorter-duration bond or stable value fund (last formal tier of our EFs, part of our AA).
--Remainder of our taxable retirement investments in longer duration bond and stock funds.


Above structure comes from this combination of different advice:
--It's simpler to track your EF separately (in the beginning).
--Retirees who report keeping 5yrs of livings expenses in safer bond or stable value funds, so they expect they'll never need to sell other taxable investments during a down market (assumes 4yr market recovery).
--Senior BHs who say "...when we have enough (as defined by us), then we don't need a dedicated EF as all of our investments become our EF."

Having enough. Keeping our EF separate in the beginning, and following above structure, the day will come (without our realizing it) when our separate EF morphs into being just a small cash component of our much larger total investments. When the day comes that our mental accounting changes, then we probably have "enough".

During retirement, it is from the cash component that we live. And with enough, the cash component will be refilled from distributions, pension, and SS. If not, then we must refill it by selling from our total investments.



Disclosure.

Management simplicity. When the day came that I believed I was approaching "enough", I began to simplify my accounts in advance of mental decline in old age. I redeemed all my savings bonds, didn't allow CDs to rollover, and sold remaining individual stocks. I used the proceeds to fund my shorter-duration bond/stable value fund EF-tier. Life is simpler without those additional accounts to manage.

Increased tax efficiency. I now follow livesoft's advice* to increase tax efficiency by avoiding taxable income reported on Sch B part I---interest from checking, savings, CDs, new account opening bonuses, and chasing teaser rates. (* His extension to the Wiki topic on "principles of tax-efficient fund placement".)
This seems odd. While tax efficency is important, is this a case of the tax tail wagging the dog? If I have to hold cash in taxable for short-term spending needs, for emergency fund purposes, or otherwise to sleep well at night, I want to be earning competitive interest rates on it via a high-yield savings account. Yes, the interest is taxed at marginal rates - but I'm still better off than if I used a negligible interest checking account instead of a high yield savings account. I would be interested in hearing the full details of this, though. What Livesoft post are you referencing?

Market return on the next dollar. After livesoft's advice sunk in, I stopped chasing teaser rates. As my excess new cash overflows into my taxable AA and is earning the market return (~7% before tax), then any teaser rate below that is not worth pursuing.

What about the lost opportunity cost on my first year of living expenses? It's no longer worth it to me to pursue this complication.
I certaintly understand if the small amount earned from getting the very, very best rates on an emergency fund isn't worth the complication. It's just that I think that generally one shouldn't actively avoid better paying opportunities in savings accounts solely to save on taxes.
...

It's no longer worth it to me to pursue this complication. My major complaint is not with the tax efficiency, it's with the extra work. But the extra tax on ordinary income is also a consideration. Why?

Livesoft's idea made me think about the work I was doing (chasing rates, account opening bonuses,...), and the extra tax I then owed. And it annoys me to realize that I was doing extra work and then turning over a 30% windfall to uncle sugar (25%) and his nephews at state (5%). I decided that I would much rather let 1yr of livings expenses lie fallow and avoid the extra work which was punished be being taxed as ordinary income.

Now, if I don't get a QDI, LTCG, FTC, TLH, or tax-exempt dividend benefit, then I don't do the work.


5% savings. But as long as you don't mind a little extra work, you can earn 5% on savings.
See Netspend: http://google.com/search?q=netspend+5%25+savings
See Brinks: http://google.com/search?q=brinks+5%25+savings


Account opening bonuses. Others here report that with a little extra work they earn ~$2k/yr from account opening bonuses (savings, checking, CC). Can search forum for their description of doing this.


So with a little extra work, you could be earning $2.5K/yr on $50K in 5% savings, and another $2K/yr by churning accounts. After you decide to go this route, then the rest is just logistics. :)

I truly don't object to others working harder and earning more around the margins; it's just no longer my preference.

Best of luck.



Livesoft's additional ideas on tax efficiency.
See: viewtopic.php?p=2828673#p2828673

Sch B part II income. Funds that earn the FTC would also be appropriate here. Above does not mention FTC and is not as complete as I remember; it’s just the first reference I found when searching.
That's an impressive amount of work that that would take. I thought the main concern was tax efficiency but with this level of work the main concern is value of your time. Reading more about it, working that aggressively at pursuing bonuses and special offers probably isn't worth it- if you got a part-time / second job in the evenings instead of spending hours jumping through hoops for special offers, you would make more money in less time (probably). Still, I don't object to people going for offers, and if a particular offer is "low hanging fruit" that wouldn't require much work (e.g. I am opening an account anyway for unrelated reasons) I would go for even though it's not tax efficient.

dbr
Posts: 23745
Joined: Sun Mar 04, 2007 9:50 am

Re: Emergency Fund Replenishment

Post by dbr » Mon Oct 30, 2017 9:22 am

The obvious answer is that you need to have an emergency fund for your emergency fund. That is equivalent to the emergency fund being large enough in the first place for two emergencies. But, the actual advice is that you build up again by saving. The whole point of an emergency fund is to not have to do things you don't want to do with retirement investments and so on. Also, when an emergency actually occurs it is going to cost or it wouldn't be an emergency. I wonder if in some cases people are budgeting money into "emergency" that are really just normal expenses.

User avatar
TD2626
Posts: 528
Joined: Thu Mar 16, 2017 3:40 pm

Re: Emergency Fund Replenishment

Post by TD2626 » Mon Oct 30, 2017 11:43 pm

dbr wrote:
Mon Oct 30, 2017 9:22 am
The obvious answer is that you need to have an emergency fund for your emergency fund. That is equivalent to the emergency fund being large enough in the first place for two emergencies. But, the actual advice is that you build up again by saving. The whole point of an emergency fund is to not have to do things you don't want to do with retirement investments and so on. Also, when an emergency actually occurs it is going to cost or it wouldn't be an emergency. I wonder if in some cases people are budgeting money into "emergency" that are really just normal expenses.
Good point about having the emergency fund for the emergency fund. But where to put it - in cash? Then would I need an emergency fund for my emergency fund's emergency fund? It's turtles all the way down. :D

In all seriousness, though - I am intrigued by concepts of a 2 tier emergency fund where tier 1 is in FDIC type cash and tier 2 is in short-term bonds. For simplicity, though, I guess one could have cash + Total Bond (plus equities) and if tier 2 of the emergency fund is needed, selling the short term bonds could be roughly accomplished by selling Total Bond and putting part of the proceeds in an intermediate term or long term bond fund in my opinion.

Yes, I do agree that sometimes emergency fund assets are instead partly intermediate term savings. Any savings for probable or likely needs in 2-4 years likely should be in cash or maybe (short-term, high credit quality) bonds. If one has a car that has 150,000+ miles on it, or has a major appliance that is "experiencing occasional issues", suddenly needing to buy a car or get a replacement appliance when the old one breaks or wears out shouldn't come as a surprise.

scrabbler1
Posts: 1988
Joined: Fri Nov 20, 2009 2:39 pm

Re: Emergency Fund Replenishment

Post by scrabbler1 » Tue Oct 31, 2017 12:03 am

I have a multi-tiered emergency fund. The first tier is about $500 extra in my local bank's checking account beyond any minimum balance requirements to avoid monthly fees. This small buffer is used to cover small, unforeseen expenses. I frequently dip into this small buffer and it gets replaced by the following month's dividend income (I am retired, so no wage income anymore).

The second tier is about $40k in an intermediate-term muni bond fund. I rarely (i.e. less than once a year, on average; only once in the last 5 years) have to tap into this larger chunk of money which is part of my overall portfolio. It pays about 2% annually and is mostly tax-free. The monthly dividends slowly replenish whatever I withdraw from this fund which is used to cover larger, unforeseen expenses. I also have checkwriting privileges with this fund for easier access.

User avatar
dratkinson
Posts: 3988
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Emergency Fund Replenishment

Post by dratkinson » Tue Oct 31, 2017 7:47 pm

TD2626 wrote:
Sun Oct 29, 2017 1:47 am
...
That's an impressive amount of work that that would take. I thought the main concern was tax efficiency but with this level of work the main concern is value of your time. Reading more about it, working that aggressively at pursuing bonuses and special offers probably isn't worth it- if you got a part-time / second job in the evenings instead of spending hours jumping through hoops for special offers, you would make more money in less time (probably). Still, I don't object to people going for offers, and if a particular offer is "low hanging fruit" that wouldn't require much work (e.g. I am opening an account anyway for unrelated reasons) I would go for even though it's not tax efficient.
After giving up on chasing teaser rate, I still felt the urge to reach for additional yield, but wanted to work smarter, not harder.


Work smarter. I decided to focus on the section(s) of the tax code(s) that rewarded me with federal and state tax benefits. So I researched single-state muni funds. Following the advice* on the forum for what to choose/avoid, I eventually found one that I thought I could live with. (The fund was later recognized and won a Lipper fund-award for excellence. Yea! forum.)

* I read the BH-recommended bond books by Swedroe and Thau looking for the central route (authors’ agreements) and alternate routes (authors’ disagreements), and paid particular attention to Larry's posts describing how BAM selected individual muni bonds for its clients.

So my EF tiers became:
--Low-yield checking + savings (2mos, <$10/yr in interest earned), TE mmkt (10mos)
--VWIUX (IT national muni fund, 3yrs)
--VWLUX (LT national muni fund, 8yrs), single-state muni fund (IT, 8yrs), TSM + TISM (10yrs)

As both VWIUX and VWLUX are "daily accrual" funds, they are exempt from IRS 6mo holding period requirement to protect TE dividends. So they are as easy to sell as TBM during an emergency.


CD substitute. VWIUX does not always produce greater after-tax income than TBM in the 25% fed tax bracket, but it does produce more after-tax income than CDs from my local B&M CU. Plus it's a BH-recommended fund (IT duration, the sweet spot for total return investing) and its 52wk price spread is fairly stable at ~50 cents/yr. So for those reasons, I'm content to keep it as a CD substitute. It’s the last formal tier of my EFs, home project, new car, and dry powder fund.


The single-state muni fund is also IT duration, but it's after-tax income is greater than VWLUX's due in part to its additional state tax benefit. On the down side, it's a "monthly accrual" fund, so I must own shares for >.5yrs to sell and avoid additional IRS hurdles.


So livesoft's additional tax-efficiency advice, the Wiki's "principles of tax-efficient fund placement" and "daily accrual muni fund" advice, the forum's "taxable-equivalent yield" and muni selection advice, and my desire to avoid insufficiently rewarded extra work, helped me structure my EF tiers.


Insufficiently rewarded extra work. If I were to forget* and again reach for additional yield on my first-year of living expense, this would happen:
--My work load would go up. (I'm against that.)
--My after-tax return on the additional work would be less than what I'm currently getting on the muni funds (which receive fed/state tax benefits) and equities (which receive QDI/FTC benefits). And by proper selling, both will receive LTCG treatment.
--My taxes would go up. (I'm against working harder to give more to uncle sugar and his nephews.)

* I did forget once and responded to a $400 Capital One mailer to open a new CC account. But the process did not go smoothly and during the 2nd phone call to correct a problem, I woke up and thought, "...why am I doing jumping through hoops #1 to get a CC I don't need, #2 so I can earn less cashback than my current CC, and #3 pay more tax to uncle sugar and his nephews?" So I canceled the CC application. Capital One sent me a letter saying I was rejected because I didn't jump through all of their hoops, so lost the $280 (= $400 after 30% tax). Sorry about that, uncle sugar. :)



1yr of living expenses. At one time, while still trying to reach for additional yield, I kept only .5yrs of living expense in my 1st EF tier. But one year saw multiple large repair expenses in one month, so decided increasing to 1yr was easier on my mind. (Having more delays the need to figure out which 2nd-tier EF shares I need to sell by specific ID cost basis.)



Work and reward. Over the years I've restructured my EF tiers to make things easy for me (to avoid the need to sell to handle annoyances, to sleep well), to work to take advantage of the tax code, and to avoid work if I don't believe I'm adequately rewarded. I do realize I've left some low hanging fruit. If others want to pick it up, that's okay by me. :)
Last edited by dratkinson on Wed Nov 01, 2017 5:27 pm, edited 2 times in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

David Scubadiver
Posts: 522
Joined: Thu Mar 24, 2016 8:40 am

Re: Emergency Fund Replenishment

Post by David Scubadiver » Tue Oct 31, 2017 8:21 pm

If you make it prt of your portfolio you can stop worrying. You need $x in EF expenses. That is a smaller and smaller percentage of your portfolio as it grows. If you have to liquidate a small percentage of a portfolio during a bear market, so be it. Chances are you will make far more from being actually invested than you may lose from a hypothetical emergency that takes place during a hypothetical bear market.

Post Reply