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

[jacoavlu]

jacoavlu

e fund is fine
cash drag is fine
pretending it doesn't exist is either stupid or liar

[TheDangerZone]

I have always had my emergency fund in stocks. My networth is 300k. If you put your emergency fund in stocks and after 5 years at reasonable gains. The market tanks 50%.. You have exactly as much in your emergency fund as you would have had if you just put it in a savings account and let it ride...

Can you clarify your math on this hypothetical? Savings accounts pay less than 1% right now. For a 100% equity portfolio to be able to withstand a 50% tank and be at the same level as a zero interest account, it would have double in 5 years, which would require ~14.4% annualized gains according the rule of 72.

[EntrepreneurMD]

Bank.

jacoavlu

[jacoavlu]

jacoavlu

I don't understand the point that you're trying to make

[Random1]

With a high net worth , an emergency really isn't a new roof or new car, because most of these items can be addressed with regular investments. An emergency would be a devastating financial problem or health problem. Many of these can not be foreseen. So having a good contigency plan and not having to liquidate assets at in opportune times, because emergencies never happen when everything else is going good. As noted above a good , 30, 60 , 90d plan along with disabilty for longer periods.

[Tangler]

With a high net worth , an emergency really isn't a new roof or new car, because most of these items can be addressed with regular investments. An emergency would be a devastating financial problem or health problem. Many of these can not be foreseen. So having a good contigency plan and not having to liquidate assets at in opportune times, because emergencies never happen when everything else is going good. As noted above a good , 30, 60 , 90d plan along with disabilty for longer periods.

Emergencies happen when you don't expect it and don't want to pull out money from stocks. A perfect example was last march/april. Stocks are down (a lot) and docs were out of work. That was NOT something we had EVER seen. That was only a few months ago........how can that not resonate?

I used to say that: " MD = a recession proof / resistant job." In 07-09, I was killing it! Working extra, taking extra calls and shifts paying off 300k in student loans and piling the extra into index funds. Housing crash, smousing crash........recession my rump.....I was making bank!

Fast forward to 2019-2020. I am thinking: "I have a stable work situation, I can always find extra work, I can always sell some of the over 1M in taxable stocks I have and pay for any badness"..........well

No one needed extra docs. Except for CC jobs doing covid stuff in NY.......sound like fun?

Also, Hospital cut our pay, cut our retirement, and asked for "volunteers" to work extra intubating folks and doing CC..........

(I did a LOT of overnight and weekend shifts intubating people and these were for FREE, NOTHING EXTRA)

I think the one and only great thing about 2020 for me is this: . I learned!

What did I learn?

1. NO job is recession proof.

2. Every human needs an emergency fund

3. No one wants to face selling stocks (after a big loss) to pay for some awful emergency that sucks enough just by itself.

[docnews]

The biggest "efund" I have is disability insurance for me. The biggest "efund" my wife has is life insurance on me (currently worth more dead than alive but my future earnings might discourage her from offing me, ha).

My second biggest "efund" are ibonds which I would use if income dropped so taxes would be minimal.

My third biggest "efund" is my check for work already done but takes at least 2 weeks to come in but before credit card bills are due.

My smallest efund is cash in my account since I spend so little.

[EntrepreneurMD]

I don't understand the point that you're trying to make

I know. I realized that months ago.

A multipurposed fund is not a cash drag if it's a multipurpose fund, and it belongs safely in a bank when it's used over the short term for whatever purpose. It's like saying your home is a cash drag.

[JBME]

these threads always seem to pop up when we're at market highs

[billy]

these threads always seem to pop up when we're at market highs

yup. plus many people here have not experienced a prolonged bear/bubble burst. I had many friends be all "im going 100% in stocks, why do you have an efund or any bonds" last year, only to text "im pooping my pants, my salary got cut 15% or I got furloughed" like texts in March, going back to "100% stocks no efund" again. I wonder how they would've react in the mid aughts.

As your net worth gets higher, the percent in an efund (if just doing the few month expense method) gradually gets lower, to where you kinda forget about it. Which is nice bc then you cant do anything stupid with it. Especially in a time with COVID when weve all seen the 1/a million chance of the 30 something year old requiring long term hospitalization, the potential "gain" of having the efund in stocks does not out weigh the risk, which for an efund should be as close to zero as possible. Again to the OP- how would you feel if you and your wife just bought the house youve been seeking while shes pregnant, your old car broke down and then you ended up in the hospital for 12 weeks on a vent? So loss of both incomes + downpayment for house + new car. If you feel your wife can handle it with CC's and selling stocks, then ok you dont need an efund. But writing a check is so much easier in that situation.

[JBME]

exactly! there were a bunch of posts in march, april, and may across the physician finance blogosphere specifically talking about how COVID is a clear piece of evidence for why a doc (even a high nw one) needs an emergency fund. The "cost" of low yield is piece of mind! It ensures you are living in a brick house when the big bad wolf/bear comes to blow down the houses and yours is still standing. We had a decent efund by the end of february, didn't have to dip into it this year, and instead built it up due to lower expenses through the year due to COVID. Now we're happy with the efund.

[Dusn]

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.

What you described is the type of situation that concerns us the most.

Just to clarify I definitely agree with having 50K in the bank. My issue is more about getting over the psychological barrier of keeping ~270K in the bank:

Our potential home would be about 800K. So 20% down would be 160K. Then I estimated an additional ~50K for closing costs, moving costs, etc (I could be complete off on this...). However, we don't know how long it'll take to actually find a home in this crazy market.

On top of that is the emergency fund of at least 60K. In the above scenario I'm not even sure that would be enough and so if withdrawing money from a taxable investment account is not a good option, I might want the emergency fund to have even more than 60K. (We do have disability insurance, 90k post-tax for me and 40k post-tax for my wife... they will not let her go higher due to a stable medical condition. And we have both have 1.75 mil term life insurance)

Previously I was thinking that, in the worst case scenario, our income has dropped to almost nothing due to both of us not working. In that case, our taxes on withdrawal from the stock market would be very low.

On the other hand, if the market dropped significantly at the same time that would suck. So you all have convinced me.

(Just to answer some questions that people have asked: prior to having a kid, we were earning almost 500K pre-tax and spending about 50k for a few years. That's where most of our 2 mil in savings comes from. The first year after our kid was born we found easier jobs because we were so sleep deprived we thought we were going to miss a diagnosis and harm a patient or fall asleep while driving. We're also kind of burned out. So now our income has decreased to around 370K and spending has increased to ~110K because of a nanny (due to covid, we took our kid out of daycare) and had to move to a larger rental home. Unfortunately our savings rate and cash flow have decreased but I'm hoping that we've saved enough for retirement, so that the savings will grow over the next few decades even if we can't add a lot more each year.)

Thank you all for the advice.

[Doc Spouse]

Yeah, I think this thread went a bit off the rails. The original question seemed to be, "Do I keep this 150k in the bank or put it in the market until we're ready to buy".

I think most people here would say that having an emergency fund is important (5-6 months of expenses). At your current spending level, that appears to be around 50k'sh, 70k'sh if you want to play it safe. If you want to throw the remaining 80-100k in the market until you're ready to buy, I don't think anyone would call you foolish for doing so. Your emergency fund is full funded and it's your money.

Just keep in mind, you can't predict what the market is going to do, and there's always the chance it'll drop by 50% right when you find the perfect home. No big deal with your net worth (it's only 50k loss we're talking about here and you can cover it), but it's something to consider.

[Nysoz]

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

So OP is asking 2 things. Down payment (or anything else that you have a planned use for in the near future) should be in HYSA.

I think once you're at a higher net worth, I like the term emergency plan better (thanks jacoavlu). I personally keep enough cash to pay off the highest credit card bill I've ever had, which turns out to be around a 3 month emergency fund. Otherwise, we're healthy, young, are essentially FI, have access to cheap margin interest, large credit card limits, don't do anything risky, no kids, relatively low monthly spend. Odds are we won't have a traditional emergency that we couldn't fund easily with cash flow and other sources.

To me, the traditional emergency fund was for people that aren't high net worth. Where a car breaking down or washing machine going bad is their emergency. They wouldn't be able to fund this without paying exorbitant credit card interest or pay it at all. Once you're at the point where you can just pay off whatever you need (if my car were to break down, I could just buy/finance another one without issue) then a true emergency fund is less needed.

Sure the universe may decide to come at a particular person with everything at once, but we kinda just experienced that. Stock markets tanked, some people got furloughed/salaries decreased, I'm sure some people got covid here too. How many of us needed to sell equities or raid the emergency fund to really get by and pay the mortgage/rent? Those that did raid their emergency fund, was there anything else you could've done instead of using those funds? As long as you have a reasonable plan in place, which may include selling equities, I think a true emergency fund is less needed. But I always say personal finance is personal as a one size fits all plan doesn't exist.

[Dont_know_mind]

What you described is the type of situation that concerns us the most.

Just to clarify I definitely agree with having 50K in the bank. My issue is more about getting over the psychological barrier of keeping ~270K in the bank:

Our potential home would be about 800K. So 20% down would be 160K. Then I estimated an additional ~50K for closing costs, moving costs, etc (I could be complete off on this...). However, we don't know how long it'll take to actually find a home in this crazy market.

On top of that is the emergency fund of at least 60K. In the above scenario I'm not even sure that would be enough and so if withdrawing money from a taxable investment account is not a good option, I might want the emergency fund to have even more than 60K. (We do have disability insurance, 90k post-tax for me and 40k post-tax for my wife... they will not let her go higher due to a stable medical condition. And we have both have 1.75 mil term life insurance)

Previously I was thinking that, in the worst case scenario, our income has dropped to almost nothing due to both of us not working. In that case, our taxes on withdrawal from the stock market would be very low.

On the other hand, if the market dropped significantly at the same time that would suck. So you all have convinced me.

(Just to answer some questions that people have asked: prior to having a kid, we were earning almost 500K pre-tax and spending about 50k for a few years. That's where most of our 2 mil in savings comes from. The first year after our kid was born we found easier jobs because we were so sleep deprived we thought we were going to miss a diagnosis and harm a patient or fall asleep while driving. We're also kind of burned out. So now our income has decreased to around 370K and spending has increased to ~110K because of a nanny (due to covid, we took our kid out of daycare) and had to move to a larger rental home. Unfortunately our savings rate and cash flow have decreased but I'm hoping that we've saved enough for retirement, so that the savings will grow over the next few decades even if we can't add a lot more each year.)

Thank you all for the advice.

DUSN,
- the main problem is not the EF but that you are short a house. What you invest the EF in doesn’t solve your underlying problem as you will still be short an 800k house in your area.
- my thoughts go out to you. I have been in this situation where I deferred buying a house when my wife had our third child. I made a number of major behavioural errors during this period: I deferred buying the house when I could afford it at 1.3M and then saw it appreciate to 2.5M four years later. It was like water torture. I started off saying “we can wait”, then ended up buying towards the relative peak of the cycle. Furthermore it led me to invest the amount I had as a deposit suboptimally.

Here is what I would do. It’s not advice for what you should do as it doesn’t take into account your psychological, behavioural and situational aspects.

- if I was short a house, having experienced what I have in the past, I would seek to cover that short ASAP. I would not attempt to market time as I have tried this in the past with houses we upgraded up from and I gained 5-10% twice on the price and lost 100% the last time.
- I would arrange a day off work here and there if needed and go to housing inspections.
- I would buy the house my wife wanted
- I would get a 90% or 100% loan
- I would figure out if I had enough liquidity with the remainder and if not sell a small amount of stocks
- If the interest rate differential bothered me, I would sell some stocks to keep loan 80%.

You may not be psychologically ready to go in hard with house bidding.

It may turn out ok anyway and maybe your housing market fizzles out and will give you a chance to buy when you are ready. My situation may have just been an unusual one. What I remember though is that the housing market in the area that I was interested in had a phase shift. Inspections over a period of weeks or a month suddenly had 5x more people. Then it boomed for about 6 years. I was anchored to previous prices and expectations. I was in denial about the problem for a number of years. I rate it in my 5 most unpleasant life experiences. Murphy’s law: it goes down 30% after you buy it and appreciates some crazy amount if you don’t.

Good luck with it!