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With a high net-worth, can you keep your emergency fund in stocks?

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  • With a high net-worth, can you keep your emergency fund in stocks?

    I know that it's generally advised to keep things like your emergency fund and money saved for a downpayment in a safe, non-volatile place. The reasons for this that I am aware of are:
    1) you don't want to lose your emergency fund or downpayment
    2) you don't want to have to take your emergency fund out of the market at a loss
    3) you don't want to pay taxes on your emergency fund if you take it out at a gain

    But does this general rule still apply if you have a pretty comfortable net worth?

    We have a little over 2 mil saved and are in our late 30's.
    We also don't own a house and so we've saved ~150K for a downpayment in Ally bank.
    We're looking to buy a home but right now the market is crazy. We can't stop what we're doing to go look at homes in the middle of the week and it seems like homes sell in just a few days. So if we can't find something, we're fine with continuing to rent until the market cools down. Our home buying plan seems to keep getting pushed off.

    My car is also 20 years old and could break down at any point. If we have another kid, my wife plans to stop working for a year or so and I might cut back for a little while and our income will drop. Our combined income is around 370K pre-tax. We spend around 110K currently (40K is for nanny). If we have second kid, we might both temporarily go half time to keep our sanity (our toddler never sleeps through the night and needs constant attention). In addition, we do not know how we would keep a toddler alive with a newborn, so we'll likely keep the nanny to help out.

    So there are plenty of reasons for us to have money ready if an unpredictable situation happens or we find a home we want. I'm just wondering if that money should be sitting in a bank account or if it can go in a total stock market index fund in a taxable brokerage account.

    1) Given that we have 2 mil saved (1.5 mil in the taxable account), I don't think the market will drop so severely that we won't have any money for an emergency.
    2) I don't want to have to take emergency money out of the market at a loss but at the same time the market is more likely to go up than to go down, so it seems like it's better to keep the money in the market than in the bank, correct?
    3) I don't want to have to pay taxes on money I take out of the market. But if I'm paying taxes on it, that means that I've made money on it, right? So overall.. still better than the bank.

    In this situation would you all save money for a downpayment or emergency fund in the bank or in the market?

    As an aside, I've never actually taken money out of the market before (only put money in), so any tips on how to take money out in the most tax efficient way during your high earning years would be appreciated.

    Thanks for the advice!
    Last edited by Dusn; 12-03-2020, 07:29 PM.

  • #2
    We keep our emergency fund in a plain old savings account. Super boring and could probably find something higher yield that is equally low risk but not worth the effort to me. My reason is not any of the reasons you have listed.
    If we have a true emergency I don’t want to be making financial decisions of what to sell and how while my brain is stressed. I want the money part to be very easy because by definition the rest of life will not be easy in that situation. And we have enough actually invested that adding in the emergency fund is not going to move the needle much at all so I’m not worried about it.

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    • #3
      1. You don't have a crystal ball. Market will go down or up.
      2. Again, market timing. You do not know where the market is headed and when you'll need the money.
      3. What if the market goes down? Now you don't pay taxes on the new money you put in and pulled out, but you have to pull out "positive" money to make up for the lost money.
      Anything you are purchasing within 5 years should be in the bank. Our emergency accounts are at a bank offering 3% up to $15k/account and then ally for our planned big purchases.

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      • #4
        not really about net worth it’s about what’s liquid and realistically what emergency might you encounter that would actually require raiding funds

        More so have an emergency “plan”

        I mean I have six figure credit limit on CCs, and could get $300k tomorrow from my broker on margin at 2%, owner in a rock solid practice. I know what’s coming. I don’t keep a bunch of cash in savings. No need. I do keep some fixed income in taxable though, and I bonds, bc if s did hit the fan I don’t want to liquidate taxable equities with unrealized gains

        note savings for a down payment on a house is different

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        • #5
          Bank.

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          • #6
            Yes

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            • #7
              Minimize your maximum regret. If you keep your down payment/emergency fund at Ally (or even a MMF) you are foregoing market gains for the next few months, maybe a year. Let’s say you give up 10% gains on $150k, or $15k. No biggie, right? Alternatively you dump it all in the market. Goes up for a bit, and the COVID vaccines turn people purple. Stock market drops 50%. Just focusing on your emergency fund, it is now worth $75k. Will you pull it out, plus another $75K you make up from your previous stock investments to buy a house? I doubt it. Will you actually cut back at work for the newborn with the market down 50%. Only you can say, but hint from an old married guy - no. Would you pull it out for an emergency? Well, sure, is an emergency. But now you are suffering a double whammy by selling low and having to dip into principal so to speak because your emergency fun is now only half.

              Johanna has a nice rule: nothing in the market you need to spend in three years. Sounds like wisdom to me.

              By the way, the Early Retirement Now blog says this conventional wisdom is wrong as regards emergency funds. (I think he would agree that savings for a specific purpose like house down payment should not be in the market.) He argues your High income is enough of a buffer. I like his analysis but I think his psychology is terrible. Keep anything you plan to spend out of the market.

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              • #8
                My emergency fund is not for earning money.

                This spring when everything hit the fan, the market tanked and physicians took pay cuts, were furloughed, and even laid off. Sure would have been a terrible time to have to dip in to the taxable account to pay for expenses.

                That being said, what you propose is not going to cripple you but why risk it? The market could tank any time and then your down payment would be up in smoke.

                I’m fine with the cash drag in my e fund. Helps me sleep at night.
                Last edited by TheDangerZone; 12-03-2020, 08:28 PM.

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                • #9
                  Originally posted by jacoavlu View Post

                  I mean I have six figure credit limit on CCs, and could get $300k tomorrow from my broker on margin at 2%, owner in a rock solid practice. I know what’s coming. I don’t keep a bunch of cash in savings. No need. I do keep some fixed income in taxable though, and I bonds, bc if s did hit the fan I don’t want to liquidate taxable equities with unrealized gains
                  This is my husband’s argument too, and he would have no or little emergency fund if entirely up to him. But I am not built like that and my biggest emergency would be if something happened to him medically—I would want to be completely focused on that and not thinking about anything else. So I keep a tidy pile readily accessible, sleep well at night, and don’t care about the fact that that relatively small amount is not invested because the heavy lifting is already being done.

                  Edited to add: I think a lot of people on here are built like my spouse, and would be able to (or at least think they would be able to) deal with a true emergency and making great financial decisions at the same time. But consider, if you are married, that the emergency may be your incapacitation and your spouse will have to deal with that and the money access issues without you before deciding not to have an easily accessible emergency fund.

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                  • #10
                    You asked about tax efficient withdrawals:
                    1. Use specific lot identification and sell the shares with the highest basis
                    2. If you were able to tax loss harvest in the last down turn in April, use those losses to offset any capital gains on withdrawals
                    3. If you were going to make a charitable donation, it is most tax efficient to use the lowest basis shares. You avoid capital gains and get a tax deduction for the DAF contribution.
                    4. Sell in a year you make <$250k to avoid the ACA additional 3.8% on top of capital gains
                    5. Make sure the lots are > 1 year old to avoid ST capital gains

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                    • #11
                      Originally posted by Anne View Post

                      This is my husband’s argument too, and he would have no or little emergency fund if entirely up to him. But I am not built like that and my biggest emergency would be if something happened to him medically—I would want to be completely focused on that and not thinking about anything else. So I keep a tidy pile readily accessible, sleep well at night, and don’t care about the fact that that relatively small amount is not invested because the heavy lifting is already being done.

                      Edited to add: I think a lot of people on here are built like my spouse, and would be able to (or at least think they would be able to) deal with a true emergency and making great financial decisions at the same time. But consider, if you are married, that the emergency may be your incapacitation and your spouse will have to deal with that and the money access issues without you before deciding not to have an easily accessible emergency fund.
                      reasonable points.

                      a good plan should involve written instructions for a spouse or someone else who could end up in charge

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                      • #12
                        Murphy's Law will make sure that when you need to tap your emergency fund the stock market will be down by 50%. Plan accordingly. I always have around $50k in cash for just that reason.

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                        • #13
                          Originally posted by artemis View Post
                          Murphy's Law will make sure that when you need to tap your emergency fund the stock market will be down by 50%. Plan accordingly. I always have around $50k in cash for just that reason.
                          yes if a $50k expense requires you to sell equities then in my book you had a poor plan

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                          • #14
                            Hypothetical situation that I would never wish this on anyone, but- wife gets pregnant, complications during labor- wife and newborn require long hospitalization. Loss of 1 income (wife). Car breaks down during this time- need new car (new expense). You take off of work to deal with sick spouse, newborn in NICU, and of course your first born- loss of 2nd income. Medical bills +cobra (second new expense). Nanny for first born. Happens during bear market (lost decade, or short term crash, doesnt really matter if it happens when you need to withdraw funds). Hospital/group losing more money due to covid or another pandemic- you get laid off/furloughed even when you want to come back. Now imagine if instead it was you who suddenly became sick/disabled while wife is pregnant. Does she know how and which funds to draw money from? Doubt youll regret having the efund in the bank as opposed to the stock market.
                            My advice- have enough to cover a few months expenses plus enough for a car and cobra in the bank. Speaking from experience, when your loved one is fighting for their life you'll be in no position to think clearly enough to optimize selling your stocks in a tax efficient manner, nor will you be paying attention to the market.

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                            • #15
                              Originally posted by TheDangerZone View Post
                              I’m fine with the cash drag in my e fund. Helps me sleep at night.
                              Me, too. And one thing the OP should remember is that it becomes as smaller and smaller cash drag over time, because the amount you need to keep liquid for an emergency doesn't increase quickly as the years pass, but the stock shares can and do. So the emergency fund becomes a smaller and smaller part of the overall portfolio over time.

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