“Emergency Fund” Dilemma

[EMscout]

With improving net worth we are hoping to release a bulk of our emergency fund, which is really not an EF at all. It is a nice junk of money that I was too scared to invest in a taxable account because I was afraid to lose it. Instead, I have 150k sitting in a high interest savings account making a pathetic 1.3% taxable. I’m embarrased.

We are feeling more comfortable now and would like to take a sig chunk out of the savings account and put it to work. Not quite ready for an aggressive play (will be in a few years once more established professionally and financially) but certainly want to meet and even beat inflation.

Looking for help. Considering tax reform and anticipated increasing interest rates, where would you park this cash? Same state Muni, I-Bond?

Keep in mind that We will still keep a true EF in our savings account (3-6 months worth). We also max out all our retirement accounts etc.

Thanks.

[DMFA]

EMscout wrote:

With improving net worth we are hoping to release a bulk of our emergency fund, which is really not an EF at all. It is a nice junk of money that I was too scared to invest in a taxable account because I was afraid to lose it. Instead, I have 150k sitting in a high interest savings account making a pathetic 1.3% taxable. I’m embarrased.

We are feeling more comfortable now and would like to take a sig chunk out of the savings account and put it to work. Not quite ready for an aggressive play (will be in a few years once more established professionally and financially) but certainly want to meet and even beat inflation.

Looking for help. Considering tax reform and anticipated increasing interest rates, where would you park this cash? Same state Muni, I-Bond?

Keep in mind that We will still keep a true EF in our savings account (3-6 months worth). We also max out all our retirement accounts etc.

Thanks.

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You're being dramatic.  This isn't a dilemma...that sounds like a pretty appropriate use of an emergency fund - you need it to be liquid and available in an emergency.  Embarrassed?  Do I embarrass people?  I'd feel pretty awful if that were the case...

Municipal bonds should be fine.  If your state gives a tax benefit, then do your state's muni fund. If you're feeling risky, you can even put an equity allocation in there (like a 50/50 fund like VTMFX), but then it's transcending an emergency fund a bit and just being an extension of your non-retirement accounts.  Some people prefer short treasury bills, others CD ladders.  Take your pick.

[StarTrekDoc]

Sounds like you're risk adverse; so would also go with DMFAs advice on state Muni bonds as the next step in the 150k since already have the true EF on hand.

Didn't mention a mortgage, but if so, that maybe a good area to payoff on debt/risk adverse personality.

[WealthyDoc]

I wouldn't be embarrassed.  Also, a true dilemma has no solution.  This isn't one.

I have a lot more than that in cash.  I like to keep it handy for investment opportunities when they come up.  I don't mind the returns on money market funds or short-term bonds.  I'm not looking to those accounts for growth.  Those are for stability and liquidity.

 

[Ryan]

Love the mortgage idea. Your deduction-adjusted interest rate there is likely better than what you can expect from bonds. It costs you liquidity though.

To potentially do better than the mortgage, you want to find an asset allocation that takes enough risk to have a solid chance at earning meaningful money over time, but more importantly that doesn't hurt your sleep at night. It probably won't be an all or nothing deal.

With taxes, your effective yield from bonds is reduced because a significant portion of income is from distributions. That hurts because that reduces your compounding growth. Muni bond funds can do better in taxable accounts for us (people in the highest bracket), but give lower yields. With stocks, dividend income will be taxed immediately, but their rise in value isn't taxed until you cash in. So, more growth compounds prior to taxation.

That all means that bonds usually belong in nontaxable accounts. You could rebalance more heavily towards bonds in the retirement accounts, and invest in 100% stocks in the taxable. However, you have to have thick skin to not sell off during market crashes. And more importantly, you have to be able to sleep soundly while potentially (or actually) losing $50,000 of that $150,000.

[EMscout]

Thanks for the excellent advice. I too like the mortgage idea though we are sitting on a 3.25%/15 yr which we feel pretty good with. Our state muni is tax free. Perhaps embarrased was a bit much, but feel like a novice when reading this forum. Well aware that we could be making more financially sound decisions, even if we are risk averse at this stage of the game. Thanks again!

[hightower]

Personally I wouldn't bother messing with your mortgage.  That's an excellent rate and you'll have it paid off in no time anyway.  Invest that cash in stocks.

Have you developed your own investment policy statement yet?  You need to sit down and write one up.  WCI and Bogleheads have examples of it for you to follow if you don't know what it is.  It should include what your target asset allocation will be moving forward.  You need to pick an AA that you feel comfortable with buying and holding.  Remember that it's time in the market that matters most.  Everyday you keep those funds in cash is a day you're losing out on potential growth.

This sort of decision would be easy to make if you had already thought through an IPS and developed an AA.  Spend some time learning about market history as well.  Play around with some portfolio analyzers and back test your AA to see how they would have performed in the past (not to guarantee future returns but to see that even if you "lose" the invested money right after you invest it, it will come roaring back if you hold on and keep buying).  If buying in all at once makes you too nervous, then just buy a certain amount each month for the next year or two (10k/month for example).  That way if the market crashes during that time you'll be able to buy some shares on sale and at least feel better about it.

[Craigy]

Make sure your state has a good credit rating before buying their muni bonds.   :lol:

[adventure]

hightower wrote:

Have you developed your own investment policy statement yet?  You need to sit down and write one up.  WCI and Bogleheads have examples of it for you to follow if you don’t know what it is.

Click to expand...

 

[Zaphod]

Remember the part in your statement about rising rates, that will effect the muni bonds as well (if it happens, which looks likely). Make sure to look at the average duration and what projected increases in rates will do to your balance and that you're totally comfortable with that.

[White.Beard.Doc]

I also have a huge "emergency fund" with about 10% of my net worth in cash equivalents.  It lets me sleep well at night.

No one knows what the next stock market move may be.  The market could go up 20% this year, or down 50%.  Since the market is on an upward tear, you are kicking yourself.  But if there is a black swan event tomorrow and the market tanks, how will you feel then?

[Kamban]

My emergency fund is also big but it is not truly an emergency fund. It is money to be available readily to invest in commercial real estate. I cannot afford to invest in Vanguard total stock market or ETF and have a downturn for a year or more, and when the opportunities come up I might come up short. Some of my best investments came in the 2007-2010 period. So it sits in a money market fund.

[Zaphod]

White.Beard.Doc wrote:

I also have a huge “emergency fund” with about 10% of my net worth in cash equivalents.  It lets me sleep well at night.

No one knows what the next stock market move may be.  The market could go up 20% this year, or down 50%.  Since the market is on an upward tear, you are kicking yourself.  But if there is a black swan event tomorrow and the market tanks, how will you feel then?

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I know Im a stickler, but again, this shouldnt really matter to you as you should be doing things and allocating all your resources according to your plan. What the market does in the short term shouldnt matter. If it really does, then something was out of whack. Your age and how close you are to retirement of course all play into things but again, should be known far in advance.

Basing your decisions on how either the housing or stock market performs in the short/intermediate time frame relative to your retirement is not a good way to evaluate the decision making process. Things should be based on your longer term goals, accumulate wealth, pay down debts by x age, own x properties, x amount cash flow, etc...etc...

Doesnt mean that you wont experience FOMO or nausea given the conditions, just that the view should be towards the long term and overall plan.

 

[White.Beard.Doc]

Zaphod wrote:

White.Beard.Doc wrote:

I also have a huge “emergency fund” with about 10% of my net worth in cash equivalents.  It lets me sleep well at night.

No one knows what the next stock market move may be.  The market could go up 20% this year, or down 50%.  Since the market is on an upward tear, you are kicking yourself.  But if there is a black swan event tomorrow and the market tanks, how will you feel then?

Click to expand…

I know Im a stickler, but again, this shouldnt really matter to you as you should be doing things and allocating all your resources according to your plan. What the market does in the short term shouldnt matter. If it really does, then something was out of whack. Your age and how close you are to retirement of course all play into things but again, should be known far in advance.

Basing your decisions on how either the housing or stock market performs in the short/intermediate time frame relative to your retirement is not a good way to evaluate the decision making process. Things should be based on your longer term goals, accumulate wealth, pay down debts by x age, own x properties, x amount cash flow, etc…etc…

Doesnt mean that you wont experience FOMO or nausea given the conditions, just that the view should be towards the long term and overall plan.

 

Click to expand...

My asset allocation, including 10% in cash equivalents, is part of my investment plan.  If multiple bad events happen simultaneously, I am still in good shape.  I won’t need to sell anything in a downturn.

[StarTrekDoc]

Kamban wrote:

My emergency fund is also big but it is not truly an emergency fund. It is money to be available readily to invest in commercial real estate. I cannot afford to invest in Vanguard total stock market or ETF and have a downturn for a year or more, and when the opportunities come up I might come up short. Some of my best investments came in the 2007-2010 period. So it sits in a money market fund.

Click to expand...

We have the HELOC for that as the cashflow buffer to allow for fast moving access needs that can come up; then liquidate if needed if standard cashflow doesn't cover quickly.

Curious - What's your balance between equities/real estate these days?  minus the primary house, we're 50/50 balance at this time.