Emergency fund

[Seroma]

Do you count for Efund as part as your asset allocation?

I do as I consider cash and bonds to be part of it.

[jfoxcpacfp]

We don't include the emergency fund in the asset allocation for our clients. The emergency fund has a specific purpose, which is to be segregated and kept liquid and secure to be used for emergency spending only. Asset allocation is how we define the proportions of a portfolio that are used to buy specific sectors or fund categories. Some of the allocation may, indeed, be in cash, but that cash is for specific needs such as RMDs, not emergency spending.

[PhysicianOnFIRE]

I'm with you, Seroma.  It's part of the cash / bond  allocation on my spreadsheet.

That being said, I don't necessarily keep a set amount of cash in the emergency fund.   I've usually got at least 1 or 2 months worth of expenses in checking savings, and I've got a taxable account with more than 10 years worth of expenses that can become cash in the bank in 2 days if desperately needed.

[Zaphod]

I wouldnt categorize it as cash among your asset allocation if it truly is an emergency fund, as I agree with Johanna, that would imply its cash looking to be invested and not emergency, which is more cordoned off for a very specific purpose.

That said, I usually have a couple months in checking, and my taxable is basically my emergency fund (usually munis serve the e fund purpose) and it takes all of 2 clicks to transfer it to cash and then the bank account instantly (small margin loan would technically accrue until the trades settled).

[The White Coat Investor]

It's on my spreadsheet, but not part of my retirement asset allocation as it has a different goal than my retirement funds. I separate my accounts by goal.

[Papaya]

I do fold it into my overall AA calculations.

In all likelihood, my E-fund will just be a part of my nestegg after retirement. So, that's how I count it today. If I have to empty it in a financial catastrophe, my allocation would suddenly be much more aggressive than my target. No big deal, especially if it's still early in the accumulation stage. But in the more likely scenario of not needing to tap it, I would rather count it in my overall AA, satisfying part of my bond/cash allocation, rather than pretending it's not part of my portfolio and necessarily requiring that much more in bonds to get my portfolio AA to my target. We are dual-earner household saving 50% of our take-home, or 37% of our gross, so it wouldn't be instant destitution if one of us lost a job. A double job loss would be quite a black swan, but her gig is about as secure as it gets.

After a few years, the taxable account will be quite a bit bigger than the E-fund, so I wonder if I will even keep an arbitrarily separate E-fund. Sure, in an emergency I'd have to eat some capital gains tax to liquidate the cash, but that's a small penalty I don't need extra "insurance" against in the way of keeping a bunch of idle cash forever.

 

[Zaphod]

Though this has been discussed elsewhere, but mostly the merits of it and not the how, its an interesting topic it seems.

As the taxable/emergency fund grows I plan to somewhat artificially divide the fund among that set aside for emergencies and that part of it that is truly invested and on a purpose based assessment more risky. That is, I will not have a separate e fund, actually dont even have one now, its just heavily into municipal funds.

I'll keep most of the "emergency" portion in municipal bond funds, and the rest in indexes and the like. Over time the taxable (one hopes) should dwarf the emergency fund and it may no longer be needed to have it in cash or cash like assets. I like the cash free income from the munis, just feels nice.

[Osiris]

I use my HELOC as my emergency fund. I hate to have cash on the side line and I do not have bonds.

[PNWskindoc]

I'm finishing up my residency in CA but will be moving to WA (state income free) to start my first attending job in August of this year. I'm interested in parking some of my Efund in muni bonds but does it matter whether I buy a CA-specific one or just a general muni fund? Thanks!

[Zaphod]

You can buy general federal/amt free ones and do not have to pick specific CA ones. You should have a much broader universe of funds so thats a good thing.

[climbhigh]

I keep bonds in my taxable account and I consider that part of my portfolio to be my "emergency fund". We do keep a small buffer of cash in the checking account, plus have credit cards available if need be.

I think the emergency fund was much more applicable, say, 30 years ago before the internet and before modern trading (e.g. ETFs) was around. Back then you would have to send in documentation by snail mail to the brokerage firm requesting to liquidate shares of a holding and wait for them to mail you a check or deposit the money in the bank. So it very well could take a week or two or longer to get some extra cash if need be. Now, with ETFs and the internet I can sell my holdings and transfer that money into my account in just a couple of days. Also, with credit cards, I've got several months of expenses covered if need be, so why keep cash sitting around? I can put the emergency on the credit card, liquidate my holdings at Vanguard, then pay off the credit card before any interest is charged.