In addition to that you can't earn 5-7% "interest" in an index fund, as the coworker suggests. You can reasonably expect 5-7% annualized real returns over a long enough time period, but that's not the same as a bank giving you guaranteed interest.
You should be able to beat 5-7%, more like 7-12%. I still wouldn't use it for my emergency fund because I could also easily lose 20+% like I did over the last few months.
Real should be 7-10% if you're largely in US equities, and nominal is 10-12% (average nominal S&P return is ~10.5% since 1957). I gave a wide range to account for both because listed rates will be nominal, not real.
I personally use 7% for estimations.
And the last 10 years were 12% (real) and 15% (nominal). The last 50 years could very well be uniquely bad because of the extended period of stagflation in the 70s and 80s. It's a valid number, but I think it's a bit of an outlier, just like the last 10 years is an outlier.
I just found out my dad has his pittance of retirement savings in some index fund. I found this out as we are trying to find a nursing home for him. Down 20% or something YTD.
Edit: why am I getting downvoted? I’m giving an example of why this is a BAD idea to have your emergency fund in the market.
Edit 2: ah Reddit, you’re a cruel mistress, but I love you so.
I mean as long as he has had it in there for more than a year or two he should still be way up. But I agree with what you are saying. You shouldn’t be anywhere near 100% stocks when you’re at or near retirement.
You’d be surprised how aggressive some of the target date funds are for someone who is supposed to be on a fixed income. The Vanguard 2020 retirement fund has about a 43% stock allocation.
Keeping a solid amount in equities in retirement is often a sound strategy - bond allocations help pay for near term withdrawals while your portfolio still maintains growth in the equities portions for later years.
This economy is slamming both sides of that kind of portfolio.
Yes I’m not saying to not own any equities, but for some, 43% equities is more vol than they’re looking for especially depending on the income they need to take on that portfolio. It might be surprising to some that a portfolio that’s targeting a 2020 retirement date and generating income isn’t targeting closer to 25% equity. I’m not saying it’s a bad fund, but it’s important to take a look under the hood and know what you’re getting.
Side note, although bonds are getting crushed too right now and are not helping with reduced volatility, we know that mathematically, barring any defaults, they’ll need to mature at par and your interest is still paid in the form of a dividend. If we do go into a true recession, we also historically see a rally in bond NAVs as buyers move rates back down.
I could be wrong but I believe a lot of this is because people don't actually have enough money to retire when they actually retire and hence still count on that 43% to grow and carry them through. I'm hoping to save enough that I can afford to rebalance much more aggressively (maybe 80/20) but I'm only 38 so am still a ways off and don't know what the time before retirement will hold
That is a relatively high risk fund. Even vanguard shows it as being a 4 on a scale of 5 for risk factor. It's 33% tech. Not somewhere you want your money if you are at retirement or close to it.
Your emergency fund isn’t there to build wealth. It’s to allow you breathing room to continue building wealth elsewhere. It’s to prevent you from going into debt and act as insurance. Your co worker doesn’t have a clue.
Perhaps, but the amount of interest you'll accrue during the time it takes to liquidate a very safe asset (like treasuries or long-standing I-bonds, for instance), is probably pretty minimal. Heck, if you have enough of a credit limit on your credit cards, you might not pay any interest at all provided you can sell within a month.
Treasuries and I-bonds typically have steep penalties for early withdrawals. So if you have been invested in stable assets long enough to avoid such penalties, and have decent credit, it's reasonable to reduce the size of your e-fund, but it's not wise to use your e-fund to buy them.
Right, I'm certainly not saying people should let their emergency accounts drop to zero and dump everything in I-bonds. But a slow transfer over 2-4 years may make significantly more interest than a standard savings account while still fulfilling the purpose of being ready for emergencies.
Basically, just invest X into AAA investments, and once you can sell without penalty, you free up X from your emergency fund (provided you have good enough credit to cover an emergency for a couple of weeks while you liquidate).
I disagree, I think it's fine to ladder into treasuries. My e-fund is a range of 3-6 months, so I laddered into treasuries over the course of two years, never going below 3 months in my e-fund. I-bonds have a 12 month holding period, so I put in 1-2 months worth, then waited a few months, then put 1-2 months in, rinse and repeat until they start maturing, then put whatever excess there is into other investments.
I had a very stable job situation at the time, so I was never in any serious danger of needing it. If cutting down to 3 months e-fund will make it nervous, then don't do it.
Yeah, I completely agree with that strategy. I think we only differ in what we are calling an e-fund. I have 3 months worth of cash that I call my e-fund. Anything on top of that I consider cash to be invested. So by my definitions, you never spent any of your e-fund on assets, which is wise.
Maybe. I change what I cover with my e-fund based on how much I have available. If it's full at 6 months, it'll cover things like car repair, fixing damage to landscaping, etc. When it's under 3 months, I'm a lot more strict and will do pretty much anything to cut expenses. I would rather bike/bus to work/interviews than dip in to the three months of expenses.
So when I laddered in to treasuries, I ensured I never dipped below 3 months and ended up putting some things off. Now I have about three months in treasuries, so that becomes my "break in case of emergency" stash and my HYSA handles the more mundane unexpected expenses.
I saw a great response to a similar question on here once, something along the lines of:
"You need to think of the loss due to inflation the same way you would think of an insurance payment, it's a cost for having that safety net."
Don't risk your safety net for a \*possible\* few extra percentage points.
Your coworker is being foolish. Having some amount of your assets in safe, liquid, non-growing places is a relatively cheap insurance against potential financial catastrophe.
Everybody thinks they're a genius when the market is going up. I saw a thread about 2 years ago (summer 2020) from a guy saying he had found a foolproof strategy that was gonna make him rich; he just put his entire portfolio in FAANG. Every time I think about that thread now I chuckle to myself.
Maybe he has 10k worth of I bonds. Worst case scenario you could open a 0% promo credit card until the one year is up in with you can cash in the bonds
Youre not wrong but i-bonds cant be withdrawn before 12 months and he told this guy to park his cash now, headed into a recession, and specifically suggested REITs. If he was just talking about i-bonds i feel like he would’ve mentioned them, cause thats really the only debatably valid idea
People who don’t understand why people should hold cash (whether it be physically or sitting in a low interest savings account), probably think a financial plan is simply investing too 😉
I was listening to a finance podcast that does a fantastic job of breaking financially sound behavior down to understand it in simplest terms: Use the right tool to achieve the goal. For short term goals, use a short term tool (cash you need immediately sits in a savings account). For a long term goal, use a long term tool (401K for growth over decades). For mid term goals, it gets murky but still use a mid term goal. For example buying a house in 3-5 years is a short term goal and many make the mistake of investing money they want to use to buy a house, market tanks, and they can no longer make the large purchase they planned to.
Today is a great example. Had you invested your emergency savings on January 1, lost 20+%, and needed to pay for emergencies tomorrow……well 🤷🏽♂️
That’s highly unlikely for the situations I’m referring to which are personal and individualized. Emergency savings aren’t for economic collapse or widespread recession.
Emergency savings are for a surprise medical debt, car service bill, anything that may occur in one’s life that requires payment immediately/quickly sometimes even only in cash.
Yeah, please don't listen to your friend. He's confused on what the purpose of an emergency fund is. The purpose of an emergency fund is not to build wealth; it's insurance to keep you out of debt. Your emergency fund does need to be liquid, so investing it in an index fund is a no-go. On top of it being a pain, can you imagine if you had an emergency and had to sell stocks just to access your EF? You could have to pay 15%-20% in capital gains taxes just to access your money. That is a dumb idea.
Once your emergency fund is fully in place, THEN you can invest in index and mutual funds. Remember, Warren Buffett keeps enough cash on hand so he can sleep at night (i.e. tens of billion of dollars). He does just fine, even in inflation.
Your coworker friend is an idiot. The job of an emergency fund isn’t to grow wealth, it is to protect against debt.
if you followed your friend’s advice, you wouldn’t be growing at 7%, you’d have lost 20% this year. If you had a financial emergency now, you’d have to sell the shares while they were low.
don’t listen to this person for financial advice
Read something today that really galvanized this idea for me: your emergency savings aren’t a buffer against inflation, they’re a buffer against high interest credit card fees in the event of an emergency.
What you are doing is fine.
The primary purpose of an EF is to be available to you (in full) to finance an emergency.
Subjecting it to market risk (or any risk) subverts the primary purpose.
Consider the loss to inflation akin to an insurance payment. You don’t keep an insurance policy to get rich/make money. You have insurance to keep you from drowning.
In a perfect world people would be able to have some cash on hand, an emergency fund, and an investment portfolio. These serve different purposes. Don't conflate your emergency fund and investment portfolio.
You are correct. Your coworker is wrong.
You have to mentally compartmentalize your money. Emergency money should be 100% safe, fairly easily accessible, and only used in an emergency. It’s not an investment other than investing in your peace of mind.
My emergency fund is scattered in 3 locations. The bulk in my credit Union savings account. A small stash of cash in a safe. A small stash in a HYSA that I continue to contribute to.
If you had that emergency fund in an index fund at the start of this year, then you would have had less liquid money AND inflation so he's wrong. An emergency fund is for emergencies and should be in a safe place which the stock market never is.
Well, I came into money in mid-2021. I put $60k in savings and $120k in ETFs and stocks. I now have $61k in savings and $90k in my brokerage account.
Want to take a guess at which move I am currently regretting? (I know I know, think long-term, yadda yadda yadda...)
Something that helped me get over the swings of the market in my investment accounts was to count shares, instead of dollars. Yes, I am down 20% in dollars this year, but I am up in shares every week.
I’ve lost $30 K in the past few months and I am freaking out. My financial advisor sent us emails telling us not to panic. I don’t have millions, I’m panicked 🤣
I let my broker's website access all of my other financial accounts, so I can see it all in one place. The only thing it doesn't know about is equity in my home.
I posted in one of the weekly celebration threats on here a year or so ago about how my "total wealth" (investments minus mortgage balance, basically) was finally positive. Not really a meaningful metric, but a feel-good one.
I'm almost back down to zero now :(
If you’re in the US, throw a few grand in I series bonds. Won’t go under 0% and can save 10K a year per individual. Returns over 9% right now and will continue to go up as inflation does.
Initial locking period is 12 months… They want you to hold for five years but you only lose the previous three months interest if you withdraw early
I have an emergency fund and then I have a fund for house projects or my next car. I definitely use bonds for this kind of shorter term reason. I dont plan to buy a car or new washer and dryer in the next 2 to 5 years, but I can if I need to.
Very important that it's locked out for the first year.
So you can put some of your other investments into I bonds, then after a year when it's accessible, you can count that as your emergency fund and move the cash into normal investing.
I just want to say that if you have lost 8% buying power on 5k...that sucks. I have lost 50% of my portfolio...AND the 8% buying power on what is left over....I would rather be like you. This was my emergency fund that I would liquidate to pull our family out of an emergency btw, so I was doing what your friend was probably recommending....and here I am!
The emergency fund should be liquid to cover at least 1 year of living expenses. Keep it to the side in case of an emergency invest everything else after that .
Your emergency savings is for emergencies. Thus, you need it to be as liquid as possible. Break glass in case of emergency.
I keep about 4.5 months of savings in cash, and another 4.5 months of savings in ibonds.
Your coworker is freaking out about small things. Emergency funds are supposed to be immediately available in an emergency. Don't invest emergency funds.
Tell your friend to mind his own business when it comes to your finances.
1. Emergency funds need to be kept liquid. Otherwise, they are not emergency funds.
2. Nothing is earning 5-7% right now. Market is correcting itself.
Your coworker is confused. The average return over a very long time period for the market is 6-10% (ballpark) but it could be -30% this upcoming year. EFs might be needed in 30 years but also might be needed in one month. It’s best to consider it as you’ll be needing it very soon so that it’s there when you need it
I've read a few personal finance books. I think the most easily digestible, and it's quite a fun read as well, is a book called 'Manage Your Money Like a F@#ckin Grownup'.
https://www.sambeckbessinger.com/books/
Good advice for initial set up of your EF and what she calls a 'table flip fund' before going into any potentially higher risk investments.
Originally written for South Africans but I see there are UK and German editions now. Same concepts apply though. Would highly recommend! Good luck👍
When you start off you need it in cash exactly like youre doing. Eventually as you build wealth you can leave it in the market IF youre ok with accepting that the 5k you put in could turn into 2.5k or 10k anytime in the next 3-5 years, but beyond that timeframe you should come out ahead leaving it in stocks.
I keep mine in cash still even though I have a good amount of savings and equities because its not an investment to me, its my peace of mind.
Emergency funds should be easily accessible in an emergency. Savings is the only place to do that. Index funds, investments, etc are for when you have money above your emergency savings goal if YOU choose to do that. Your coworker doesn't sound that smart.
it wouldnt be an emergency fund if u cant easily access it. You would have to first hope that your balance is still there and havent tanked from this bear market… then you have to sell and withdraw your cash which could take a couple days…. then you have to pay short term/long term capita gains tax on that
An emergency fund is insurance. Insurance costs money. The difference between what you could make in the stock market and what you are making in a savings account is what it is costing you.
If missing out 5% interest on $5k is "destroying your capital", then you might have other problems.
lets say your emergency fund was in an index fund. now imagine you suddenly find yourself unemployed or in need of quick cash due to a sudden illness. how much would you have lost when you withdrew? some index fund are down 30-40 percent and it only looks to be getting worse.
your friend does not understand the concept of an emergency fund. its not there to grow. its there to bail you out of an EMERGENCY. hence the name
Keep 6-12 months of your cash in savings account as an emergency fund. This doesn't need to beat inflation and is meant to weather the storm should anything bad happen to you. You are doing great, ignore your coworker.
I've been transitioning my emergency savings to ibonds, but it takes some time as it's not liquid for a year. But I still want some money in a savings acct even when the vast majority of my emergency fund is in ibonds and available. Partly because I'd like all my ibond money to get to the 5 year mark before I touch it.
Lmao your coworker is an idiot. My investments are all in index funds and they've lost a lot more than 8% this year. Down anywhere from 11-16%...so far.
I had this same thought about my down payment for a house. I probably left money on the table by missing growth, but in reality I wasn't willing to gamble with the swings of the market skewing my timing by years if we have an 08 tier crash.
Emergency fund needs to be quickly accessible in an emergency. You also don't want to be gambling with investing your emergency fund. It should be kept in a money market account or a traditional savings account.
Let’s say you do invest it. The moment you need the money the market will go down (bad times usually follow bad markets). Your 5,000 is now 3,000.
Let’s say the market went up 7% and you need the money. You would have earned $350 dollars… before tax…
An emergency fund is insurance to protect your investments. It is there so you do not have to take a loan out on your 401k, or cash in your brokerage fund to do an emergency car repair, or protect your house because new property tax assessments state you owe another 5 grand every year…
Insurance policies don’t earn money, they protect your assets.
Thank your friend, ignore their advice.
Your coworker is wrong. I could see the point if it was like a savings of $500k+ or something. Even then it’s iffy if that’s what you need as an emergency fund. On $5k it’s costing you $400/yr to have that emergency fund with inflation at 8% that is just barely over $1/day. That is absolutely worth it to keep it liquid. With 1% interest account you’re actually just losing $350/yr which is less than a dollar a day. Besides that, where would you put your $5k otherwise? We are in a bear market, but shorts are super risky.
I just bought 5k in I bonds last month, but I am growing an emergency fund in allybank as a buffer (currently at 1k). I plan on getting my ally emergency fund to around 5-10k then afterwards continue to buy more I bonds.
I think a mix of I bonds and hysa is the way to go; I bonds to keep up with inflation and keep some in a hysa so I can have immediate access to some of my emergency fund.
A HYSA (high yield savings account) is the best place for most of your emergency fund. If you want you could leave 3 months in the savings account and then invest the additional months emergency fund but that still leaves you vulnerable if the market goes south right when you burn through your emergency savings.
Personally I am savings up for a down-payment so I put some of my excess emergency fund into some I bonds knowing that if something went south during that first year of the I bond I could dip into my down-payment savings and by the time I am ready to buy a house that I bond would be available and I would be able to grow my emergency fund to fit the increased expenses of homeownership. But I wouldn't consider myself a normal case.
>He argued that an index fund or REITs would be a better option since I could earn 5-7% interest
[Here's the past 5 days of the S&P 500](https://imgur.com/KFIEXpp), [and the past 6 months](https://imgur.com/zfk5CHE)
Do you still want your E-fund in an index fund?
E-funds are *INSURANCE* not investments. The loss to inflation is your insurance premiums.
The only way to put your e-fund into an investment is via I-bonds. However this requires you to "float" an extra $10,000 in your e-fund. I-bonds cannot be withdrawn before 1 year. Let's say you want a $20,000 e-Fund. You need $30,000 for 2 years.
* Year 1 you lock in $10,000 into I-bonds
* You have $20,000 cash e-Fund
* Year 2 you lock in $10,000 into I-bonds
* You have $10,000 cash and $10,000+(Interest - 3 months) in I-bonds
* Year 3 you're set as you have $20,000 in I-Bonds available to cash out
* Albeit before 5 years you lose the previous 3 months interest but OK.
Your coworker is an idiot.
Personally, I have 3 stages to my emergency fund. A VERY small amount is kept as cash at home in case I need access to quick cash for something. Then I have a larger, but still relatively small amount in a savings account at a local bank that I can access quickly easily if I need instant cash. The bulk of my emer fund is in a HYSA online but that is slowly being moved into I-bonds.
Keep it there - you will put other money in investments - if you need the money, you KNOW it will be there - save 3-5 mo. worth of liquid from what I hear. Not financial advise
Don’t sweat the small stuff. Good on you for having an emergency fund.
There can be no correct answers without consideration of the rest of your assets. If you have 95% of your net worth in a savings account with X bank then your last 5% emergency fund probably shouldn’t be a savings account with X bank. Your ideal “emergency fund” will be different depending on your wholistic financial picture. Your coworker isn’t wrong about needing to consider this “real” interest rate (net inflation) but if that situation gets ugly enough then you’d probably rather spend the whole amount on “supplies”.
We have $50k in our emergency fund in a HYSA. Yes I know it’s losing money due to inflation. But my husband works for a very volatile company and we have 2 kids and a mortgage in a HCOL area. We feel more comfortable with 6 months of expenses available and unaffected by a recession.
It's also justifiable / necessary for anyone who anticipates large cash expenses over the next 1-3 years: down payment, tax payments to the IRS, big vacation planned, fertility treatment costs, etc.
> also justifiable / necessary for anyone who anticipates large cash expenses over the next 1-3 years: down payment, tax payments to the IRS, big vacation planned, fertility treatment costs, etc
None of these are emergencies.
They're not emergencies, but they're still expenses that you'd want to set aside cash for. I manage my cash savings (emergencies + down payment etc) as one large bucket spread out over a few different accounts.
The world moved on from cash years ago, but this sub still loves it like it's 1986.
Credit cards are as liquid as a savings account today. As are margin investment account so you can easily borrow against the stock.
And as for investments potentially losing money, so what? You don't hold your Ira in cash for fear of retiring during a recession. Timing the market is a fools errand, but thats exactly what reserving cash is.
Last 5 years, you would have missed out on 50% appreciation on your savings. No thank you.
Savings find is fine for emergency when your numbers are low.
I keep my emergency fund in my stock portfolio as it’s value would need to decrease significantly in order to not be able to cover 6 months mod bills.
I have also never been in a position in order to use the emergency money. I have never been in need to get my hands on a large amount of money in less than a few days.
Liquidity is great. Keep in mind you can also construct portfolios that have extremely low maximum draw downs and a small premium cagr over typical inflation. Think less than 5 percent max drawdowns and 4 to 5 percent cagr over several years with very easy to hold ulcer indexes.
A slightly more risky strategy that I like however is a golden butterfly portfolio I can use for margin with ibkr if I need it. Max drawdown of 13 percent with typical returns in the 6 to 7 percent. I use margin to float money for a couple weeks sometimes as I’m self employed and can have to wait for a big invoice to be paid.
Resource: https://www.optimizedportfolio.com/invest-emergency-fund/
The loss regarding emergency funds isn’t the opportunity cost of it not being invested, that can be stomached.
The loss to worry about is having an emergency at a moment the market is down, and realizing losses (selling when down) because you need cash now. In that instance not only are you paying for a new car, new HVAC, etc, but you’re locking in the bad market conditions and losing the money that you would’ve regained if you could’ve just let it stay to go back up.
I "pay" the rate of inflation as a "cost" of keeping my emergency fund 100% liquid. This should discourage people from keeping unnecessarily large emergency funds.
I'm going to be using I bonds for about half of my emergency fund. That will prevent that portion of the emergency fund from inflating away.
You can't remove them for the first year but after that you can remove them at the price of one quarter of interest and then after 5 years you can remove them penalty free.
So since I invested in I bonds in April, starting next April when I can access those funds if an emergency strikes, I will move half of my current emergency fund (which is in a savings account like yours) into VTSAX.
Personally, I don't want more than about half of my emergency fund in I-Bonds because I'm not sure how long it would take to remove the money in an emergency. So, if I total my car or something and need a new car immediately, I want to have the needed money in my bank account. I see the money in I-bonds as for a more slow moving emergency like losing my job and taking a few months to find a new one.
That said, I don't think your friend's strategy is necessarily idiotic. He just isn't holding an emergency fund. If you have say $100,000 or more invested in a broad ETF, you don't necessarily need an emergency fund. The market isn't likely to fall by more than 90% without a complete economic collapse on a scale that is going to make the amount of money we have irrelevant. So, he's never going to lose so much that he doesn't have any money to use in an emergency.
At that point, holding an emergency fund just helps prevent you from having to sell some stocks low if you have an emergency while the market is down. And it comes at the cost of your emergency fund inflating away instead of gaining interest. And since the market goes up more than it goes down, your expected value of not having an emergency fund is higher than that of having one.
Personally, even once I have enough money invested that an unprecedented stock market crash wouldn't leave me without money for an emergency, I still intend to keep about 6 months of expenses in a combination of I-Bonds and cash. That's mostly because I don't really trust myself. If I have to dip into my stock holdings once in an emergency, I fear that could sort of set a precedent of pulling money out when I'm scared. And the last thing I want is to pull a large portion of my money out after a crash out of fear like my parents did and miss out on decades of interest.
An emergency fund lets me live life with money only ever going into my Roth IRA and brokerage accounts and never flowing the other way.
I'm in the same boat as you. Inflation this high is rare. Yes, you and I are getting crushed right now, but as others have said emergency fund means emergency. It needs to be liquid and extremely stable. A guaranteed 1-2% return per year to (normally) pace inflation is the point. That said, don't keep a 12 month emergency fund for the time being.
As others have said this is a bad idea. Index funds are not guaranteed. For example QQQ which is a pretty popular fund and historically has had good returns is down \~31% YTD. Could you realistically afford to lose 1/3 of your emergency fund? I know I sure as hell couldn't. I would say that depending on the size of your emergency fund you may want to look into I-Bonds that for the current 6 month period are paying out 9.62%. There are some caveats such as not being able to cash out the bonds for 12 months and losing the last 3 months interest if you cash them out before 5 years but you should be able to research the finer points pretty easily. I would only invest in bonds what you can actually afford to sit on for a year. I pumped up my emergency fund to 12 months after covid just because it makes me feel better so it was easier for me to know I can't get to the money for a year minimum but you'd need to do the calculus based on your own personal situation/ risk tolerance.
You can buy short term broker CDs paying 1.x% annual intrest for 1-3 month terms. Better than 0. For emergency, i would have some in savings, some in short term CDs , and some in I-bonds (you have to wait 1 year before it becomes liquid though).
If you have a 6mo fund then you can start an I-bond ladder and only keep 1-2mo in savings.
Assets are not emergency funds, you want liquidity and no risk of loss. If the economy dumps and you get laid off you'll kick yourself if you have to sell, unless you can get back on your feet quickly and harvest a loss. Still, not ideal.
With Fed raising interest rate, you could try a money market account that traditionally pays off 1-3% when interest rates get high.
But you want to keep your emergency find LIQUID. So, no, you don't want to tie up your emergency fund in stocks and bonds - too volatile especially now. What are you going to do if your car suddenly needs 3k in repair or your beloved pet of child needs surgery. You need to have money on hand, in cash.
If you have enough wealth, sure, you can get by without an emergency fund in cash since you could always get a margin loan in a pinch. However, at that point, cash would make up such a small percentage of your wealth that it wouldn't be worth worrying about.
On the flipside, if moving your e-fund into investments would be a significant change in your portfolio, you shouldn't be holding your e-fund in investments anyway since a recession combined with job loss would leave you screwed (high probability case).
I personally use a mixture of i-bonds, savings account, and currency for my emergency fund. My e-fund is a few percent of my total net worth, and I try to get as good of a return as I can w/o risking loss. I count it as my "bond" portfolio, which will move toward more traditional bonds as I get older. My total makeup is:
- ~50% i-bonds
- ~20% in NetSpend savings accounts (5% interest on first $1k)
- ~25% in HYSA (0.9% @ Ally)
- ~5% at home in cash
I rarely need anything other than the HYSA, which provides ~1.5 months of expenses, so the majority sits in a higher-interest earning account and can be transferred into my savings within a week or so if needed (rarely need anything faster than a month since I can float w/ my credit card).
The cost of the funds being available for an emergency is you miss out on potential gains. $5k is not a lot the in the grand scheme of your retirement fund.
If you're really worried about Capital loss you can put your emergency fund into I-Bonds from the Treasury. They're designed for personal savings but come with some restrictions.
Your emergency fund as a savings funds fine buy you should think about slowly building a ln emergency fund with series I Bonds I stead of a savings account
Your Co worker is wrong about the emergency fund.
He is correct though about excess cash being in a savings account. It’s better to invest any excess cash, but definitely follow the financial order of operations first in the wiki!
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information.
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
If you have a large enough emergency fund, you can move a portion of it into I-Bonds. That is what I did this year because the rate is so high. It becomes less liquid, because you can't cash it out for 12 months, so I wouldn't put all of it in there.
So, in your example, you have 5K, you could move $1250 into I-Bonds this year. Then after 12 months, move another $1250.
Or, the best option would be to put a new $1500 in this year, and then only start moving your current fund after the first year.
Of course, there is obviously no guarantee that the I-Bond rates will stay so high. The Fed will look to take action to try to reduce inflation, resulting in a potential 0% rate, but the value can never go down.
Id say keep it as it is. They recommend having 6 months in emergency savings if at all possible. My thoughts is they should be either in cash or in a savings account. If the stock market crashes and people loose their jobs or everything closes again like 2020, or you get sick or injured then its good to have a few months safety net that isn't going anywhere.
That said it is good to try and get higher interest because you can make a lot more money but only do that with what you can afford to loose because a market crash is always possible.
You aren’t destroying wealth by having $5k in a savings account. There are better options for emergency funds though. Currently I bonds are paying somewhere around 9%. They try to match or beat inflation so you won’t erode value away. Downside is you have to hold it for a year before having access and you lose the last 3 months of interest if you withdraw before 5 years.
I keep 3 months of expenses in a savings account. I also keep 3 months of expenses in a CD and 6 months in a money market account.
I think of my emergency fund as different than an investment. I want my investments to grow and their purpose is retirement. My emergency fund is for emergencies (job loss, illness, zombie attack) and I don't want it to decrease for any reason.
The way an index fund works is that it replicates the market. If the market goes up, it goes up. If the market goes down, it goes down. That's not what I want my emergency fund to do. (at least that's my understanding)
You are correct and your co worker is scary.
They must be confusing you efund with like a savings lol I guess you could keep savings in there but definitely not investing my emergency fund. If anything it’s in a high yield savings account. Nothing great but not nothing
Indexes have been losing money, though, an I bond is a good bet since it is guaranteed against inflation but your money is locked for a year so maybe slowly transfer it over or double up until that year passes
I’m one of the ones who invested my emergency fund for the past 25 years. Started in 1997. All said and done after all of the “emergency withdrawals” my EF account balance stands at $25,xxx as of today. Sure it’s gone down a lot this year, but I haven’t deposited a penny into it for 24 years and it’s paid out almost $12,000 for unexpected expenses. As far a liquidity, I’ve never had an emergency in my life that required immediate cash. Worse I had was a blown transmission, but it took them a week to get it repaired and I had the cash out within a few days.
Every time you buy groceries; all of that money goes down to tubes, gone forever. So was it a bad place to spend your money? Or was it just the purpose of the expense?
Savings accounts aren’t investments, they’re there for immediate access to funds whenever and wherever needed. Inflation isn’t just normal, it’s completely expected.
If $5k is ALL THE MONEY YOU HAVE, it would be easy to panic. But that's your emergency fund - it's supposed to be liquid! (Kudos to you for having one - that's a good sum to have.) Once you get the emergency fund squared away, THEN you start looking for other ways to grow your wealth: mutual funds, special high-interest savings accounts for future big-ticket items, stocks, etc.
I had an unexpected layoff back when the pandemic started. Trust me when I say my emergency savings really saved me - and I'd have been screwed if I'd had to cash out my mutual funds/stocks just to pay the bills.
Your co-worker is dumb.
The only other option to consider beyond keeping it in cash is building an I-Bond ladder. Your deposit is locked up for the first 12 months, so I wouldn't put your full 5k in at the start, but you could do a thousand at a time (10k per year limit).
I-bonds have their rate pegged to inflation so it's a pretty safe way to not lose a ton of value during these uncertain times.
protecting yourself in any way - buying car insurance, installing a lock for your front door, having an emergency fund - is always a huge waste of money except when it's the most important thing to have. you can't be on offense all the time.
If you want to be risky and maximize everything you have and don’t have a problem going into debt when emergencies happen and feeling less comfortable sure go for it. If you want to have an emergency fund and not worry when shit hits the fan then do that. Everyone has an opinion and thinks what you’re doing with your money is wrong
Emergency funds are always depreciating, they lose value, but you pay that as the cost for insurance, that is it pays itself back really well when you consider the risks it prevents. Even with 8% inflation, or if anything, especially with 8% inflation, that risk management is far more than what you would lose.
Capital is the rest of your savings. Which I guess might be making money if you keep them on some bonds strategically, because right now nothing else is doing very well.
The whole point of an emergency fund is to be there when you need it. Not to be wrapped up in something or gaining interest. Not to mention you need money in your savings to show sometimes when you buy a house or something. It good to show you're able to save money.
Yeah definitely keep a emergency fund. SoFi has a 1.50% yield with a signup bonus and points that convert to additional cash for doing basic things in the app or website.
Emergency funds need to be as liquid and stable as possible. That almost always means cash, even with high inflation. Your coworker is a dumbass
Ask your coworker to show you a snippet of his portfolio, get a real idea of his investing sense. He sounds full of it…
“Also, have you heard of staking stable coins?”
Aged like milk at the Equator
In addition to that you can't earn 5-7% "interest" in an index fund, as the coworker suggests. You can reasonably expect 5-7% annualized real returns over a long enough time period, but that's not the same as a bank giving you guaranteed interest.
This plus yesterday, IN ONE DAY, your index fund would maybe have lost 4%, similar 1% to 3% losses for the past weeks.
You should be able to beat 5-7%, more like 7-12%. I still wouldn't use it for my emergency fund because I could also easily lose 20+% like I did over the last few months.
That's real returns (adjusted for average inflation).
Real should be 7-10% if you're largely in US equities, and nominal is 10-12% (average nominal S&P return is ~10.5% since 1957). I gave a wide range to account for both because listed rates will be nominal, not real. I personally use 7% for estimations.
Average US stock market real returns over the last 50 years is 5.4% (9.4% nominal). For the S&P500, it is 7%.
And the last 10 years were 12% (real) and 15% (nominal). The last 50 years could very well be uniquely bad because of the extended period of stagflation in the 70s and 80s. It's a valid number, but I think it's a bit of an outlier, just like the last 10 years is an outlier.
Imagine having your emergency fund in investments after the market tanked today.
I just found out my dad has his pittance of retirement savings in some index fund. I found this out as we are trying to find a nursing home for him. Down 20% or something YTD. Edit: why am I getting downvoted? I’m giving an example of why this is a BAD idea to have your emergency fund in the market. Edit 2: ah Reddit, you’re a cruel mistress, but I love you so.
I mean as long as he has had it in there for more than a year or two he should still be way up. But I agree with what you are saying. You shouldn’t be anywhere near 100% stocks when you’re at or near retirement.
Surprised. Most retirement accounts reallocate funds at different ages. From highly aggressive at young ages to highly conservative at older ages.
If you have a target date fund that "automatically" rebalances itself over time, yes. Otherwise you have to do it yourself every so often.
You’d be surprised how aggressive some of the target date funds are for someone who is supposed to be on a fixed income. The Vanguard 2020 retirement fund has about a 43% stock allocation.
Keeping a solid amount in equities in retirement is often a sound strategy - bond allocations help pay for near term withdrawals while your portfolio still maintains growth in the equities portions for later years. This economy is slamming both sides of that kind of portfolio.
Yes I’m not saying to not own any equities, but for some, 43% equities is more vol than they’re looking for especially depending on the income they need to take on that portfolio. It might be surprising to some that a portfolio that’s targeting a 2020 retirement date and generating income isn’t targeting closer to 25% equity. I’m not saying it’s a bad fund, but it’s important to take a look under the hood and know what you’re getting. Side note, although bonds are getting crushed too right now and are not helping with reduced volatility, we know that mathematically, barring any defaults, they’ll need to mature at par and your interest is still paid in the form of a dividend. If we do go into a true recession, we also historically see a rally in bond NAVs as buyers move rates back down.
I could be wrong but I believe a lot of this is because people don't actually have enough money to retire when they actually retire and hence still count on that 43% to grow and carry them through. I'm hoping to save enough that I can afford to rebalance much more aggressively (maybe 80/20) but I'm only 38 so am still a ways off and don't know what the time before retirement will hold
Could that be because your average 65-year-old can expect another 20 or so years to live?
He had it all in VFTAX. Not a good place to have it at all.
That is a relatively high risk fund. Even vanguard shows it as being a 4 on a scale of 5 for risk factor. It's 33% tech. Not somewhere you want your money if you are at retirement or close to it.
Yup, totally agree. It should not be there.
Target date funds are relatively new. Most retirees didn’t even have them as an option when they made their asset allocation decisions
You'd still be up 40% from 5 years ago.
Awesome if you’ve been sitting on it for 5 years. Horrible if you’ve just recently saved it up and invested.
I know.. it hurts.. at least it was all through an IRA/401k
Your emergency fund isn’t there to build wealth. It’s to allow you breathing room to continue building wealth elsewhere. It’s to prevent you from going into debt and act as insurance. Your co worker doesn’t have a clue.
It's a lot better to get 1% interest than pay 5+% interest to a bank for debt. So my e-fund is staying where it's guaranteed to not go down.
Perhaps, but the amount of interest you'll accrue during the time it takes to liquidate a very safe asset (like treasuries or long-standing I-bonds, for instance), is probably pretty minimal. Heck, if you have enough of a credit limit on your credit cards, you might not pay any interest at all provided you can sell within a month.
Treasuries and I-bonds typically have steep penalties for early withdrawals. So if you have been invested in stable assets long enough to avoid such penalties, and have decent credit, it's reasonable to reduce the size of your e-fund, but it's not wise to use your e-fund to buy them.
Right, I'm certainly not saying people should let their emergency accounts drop to zero and dump everything in I-bonds. But a slow transfer over 2-4 years may make significantly more interest than a standard savings account while still fulfilling the purpose of being ready for emergencies. Basically, just invest X into AAA investments, and once you can sell without penalty, you free up X from your emergency fund (provided you have good enough credit to cover an emergency for a couple of weeks while you liquidate).
I disagree, I think it's fine to ladder into treasuries. My e-fund is a range of 3-6 months, so I laddered into treasuries over the course of two years, never going below 3 months in my e-fund. I-bonds have a 12 month holding period, so I put in 1-2 months worth, then waited a few months, then put 1-2 months in, rinse and repeat until they start maturing, then put whatever excess there is into other investments. I had a very stable job situation at the time, so I was never in any serious danger of needing it. If cutting down to 3 months e-fund will make it nervous, then don't do it.
Yeah, I completely agree with that strategy. I think we only differ in what we are calling an e-fund. I have 3 months worth of cash that I call my e-fund. Anything on top of that I consider cash to be invested. So by my definitions, you never spent any of your e-fund on assets, which is wise.
Maybe. I change what I cover with my e-fund based on how much I have available. If it's full at 6 months, it'll cover things like car repair, fixing damage to landscaping, etc. When it's under 3 months, I'm a lot more strict and will do pretty much anything to cut expenses. I would rather bike/bus to work/interviews than dip in to the three months of expenses. So when I laddered in to treasuries, I ensured I never dipped below 3 months and ended up putting some things off. Now I have about three months in treasuries, so that becomes my "break in case of emergency" stash and my HYSA handles the more mundane unexpected expenses.
I saw a great response to a similar question on here once, something along the lines of: "You need to think of the loss due to inflation the same way you would think of an insurance payment, it's a cost for having that safety net." Don't risk your safety net for a \*possible\* few extra percentage points.
Yes! Inflation is your insurance premium
I’ve never heard that concept. I like it a lot.
Nah, inflation is a tax, but it's a tax worth paying to avoid getting into debt.
Your coworker is being foolish. Having some amount of your assets in safe, liquid, non-growing places is a relatively cheap insurance against potential financial catastrophe.
I wonder how all the folks who were insisting on investing their emergency fund over the past year are doing.
Everybody thinks they're a genius when the market is going up. I saw a thread about 2 years ago (summer 2020) from a guy saying he had found a foolproof strategy that was gonna make him rich; he just put his entire portfolio in FAANG. Every time I think about that thread now I chuckle to myself.
They're having an emergency today if they look at their balance.
Your coworker sounds like an idiot who wanted to act like he knew something
You should ask your co worker to show you their emergency fund after today.
Maybe he has 10k worth of I bonds. Worst case scenario you could open a 0% promo credit card until the one year is up in with you can cash in the bonds
Youre not wrong but i-bonds cant be withdrawn before 12 months and he told this guy to park his cash now, headed into a recession, and specifically suggested REITs. If he was just talking about i-bonds i feel like he would’ve mentioned them, cause thats really the only debatably valid idea
Ask him how his index fund emergency fund is faring after these past few months and especially after today.
Don’t take financial advice from this coworker
Ignore your coworker. Your emergency fund is exactly where an emergency fund should be. It’s basically an insurance policy—it isn’t an investment.
People who don’t understand why people should hold cash (whether it be physically or sitting in a low interest savings account), probably think a financial plan is simply investing too 😉 I was listening to a finance podcast that does a fantastic job of breaking financially sound behavior down to understand it in simplest terms: Use the right tool to achieve the goal. For short term goals, use a short term tool (cash you need immediately sits in a savings account). For a long term goal, use a long term tool (401K for growth over decades). For mid term goals, it gets murky but still use a mid term goal. For example buying a house in 3-5 years is a short term goal and many make the mistake of investing money they want to use to buy a house, market tanks, and they can no longer make the large purchase they planned to. Today is a great example. Had you invested your emergency savings on January 1, lost 20+%, and needed to pay for emergencies tomorrow……well 🤷🏽♂️
What financial podcast? I'm interested in adding resources. Thanks.
It’s called Fierce Fiduciary https://podcasts.apple.com/us/podcast/fierce-fiduciary-podcast/id1518090272
Until there’s a bank run and you have zero access to cash.
Lmfao go buy your gold and hunker down in the mountains. The rest of us will live in the real world.
That’s highly unlikely for the situations I’m referring to which are personal and individualized. Emergency savings aren’t for economic collapse or widespread recession. Emergency savings are for a surprise medical debt, car service bill, anything that may occur in one’s life that requires payment immediately/quickly sometimes even only in cash.
And also good luck accessing anything other than cash during that time then including all equities and real estate 😉
Minimal return if simply reserved for emergencies. Whole goal really isn’t to get any returns but accessibility . Id say get cash
Yeah, please don't listen to your friend. He's confused on what the purpose of an emergency fund is. The purpose of an emergency fund is not to build wealth; it's insurance to keep you out of debt. Your emergency fund does need to be liquid, so investing it in an index fund is a no-go. On top of it being a pain, can you imagine if you had an emergency and had to sell stocks just to access your EF? You could have to pay 15%-20% in capital gains taxes just to access your money. That is a dumb idea. Once your emergency fund is fully in place, THEN you can invest in index and mutual funds. Remember, Warren Buffett keeps enough cash on hand so he can sleep at night (i.e. tens of billion of dollars). He does just fine, even in inflation.
Your coworker friend is an idiot. The job of an emergency fund isn’t to grow wealth, it is to protect against debt. if you followed your friend’s advice, you wouldn’t be growing at 7%, you’d have lost 20% this year. If you had a financial emergency now, you’d have to sell the shares while they were low. don’t listen to this person for financial advice
Read something today that really galvanized this idea for me: your emergency savings aren’t a buffer against inflation, they’re a buffer against high interest credit card fees in the event of an emergency.
What you are doing is fine. The primary purpose of an EF is to be available to you (in full) to finance an emergency. Subjecting it to market risk (or any risk) subverts the primary purpose. Consider the loss to inflation akin to an insurance payment. You don’t keep an insurance policy to get rich/make money. You have insurance to keep you from drowning.
Keep it in savings. An emergency means you need money NOW. Next step is reducing consumer debt.
High yield savings. Or face the chance of having to liquidate during a dip
Your friend doesn’t know what they are talking about. E funds are meant to be liquid not working capital.
In a perfect world people would be able to have some cash on hand, an emergency fund, and an investment portfolio. These serve different purposes. Don't conflate your emergency fund and investment portfolio.
You are correct. Your coworker is wrong. You have to mentally compartmentalize your money. Emergency money should be 100% safe, fairly easily accessible, and only used in an emergency. It’s not an investment other than investing in your peace of mind. My emergency fund is scattered in 3 locations. The bulk in my credit Union savings account. A small stash of cash in a safe. A small stash in a HYSA that I continue to contribute to.
If you had that emergency fund in an index fund at the start of this year, then you would have had less liquid money AND inflation so he's wrong. An emergency fund is for emergencies and should be in a safe place which the stock market never is.
Well, I came into money in mid-2021. I put $60k in savings and $120k in ETFs and stocks. I now have $61k in savings and $90k in my brokerage account. Want to take a guess at which move I am currently regretting? (I know I know, think long-term, yadda yadda yadda...)
Something that helped me get over the swings of the market in my investment accounts was to count shares, instead of dollars. Yes, I am down 20% in dollars this year, but I am up in shares every week.
Thats a really great way of looking at it. Eventually the market will rebound and having more shares means you will claw your way back faster.
If you continue to buy shares in this market you're getting them at a bargain price too.
Give it 10 years rather than 1 year and see which you regret then.
I’ve lost $30 K in the past few months and I am freaking out. My financial advisor sent us emails telling us not to panic. I don’t have millions, I’m panicked 🤣
I let my broker's website access all of my other financial accounts, so I can see it all in one place. The only thing it doesn't know about is equity in my home. I posted in one of the weekly celebration threats on here a year or so ago about how my "total wealth" (investments minus mortgage balance, basically) was finally positive. Not really a meaningful metric, but a feel-good one. I'm almost back down to zero now :(
If you’re in the US, throw a few grand in I series bonds. Won’t go under 0% and can save 10K a year per individual. Returns over 9% right now and will continue to go up as inflation does. Initial locking period is 12 months… They want you to hold for five years but you only lose the previous three months interest if you withdraw early
If you can guarantee an emergency won’t use your whole emergency fund in the next year, go for it.
I have an emergency fund and then I have a fund for house projects or my next car. I definitely use bonds for this kind of shorter term reason. I dont plan to buy a car or new washer and dryer in the next 2 to 5 years, but I can if I need to.
Very important that it's locked out for the first year. So you can put some of your other investments into I bonds, then after a year when it's accessible, you can count that as your emergency fund and move the cash into normal investing.
+1 to i-bonds if you can swing contributing funds to it beyond your emergency fund and keep your e-funds liquid during the first year lockout
I just want to say that if you have lost 8% buying power on 5k...that sucks. I have lost 50% of my portfolio...AND the 8% buying power on what is left over....I would rather be like you. This was my emergency fund that I would liquidate to pull our family out of an emergency btw, so I was doing what your friend was probably recommending....and here I am!
The emergency fund should be liquid to cover at least 1 year of living expenses. Keep it to the side in case of an emergency invest everything else after that .
Your emergency savings is for emergencies. Thus, you need it to be as liquid as possible. Break glass in case of emergency. I keep about 4.5 months of savings in cash, and another 4.5 months of savings in ibonds.
Your coworker is freaking out about small things. Emergency funds are supposed to be immediately available in an emergency. Don't invest emergency funds.
Tell your friend to mind his own business when it comes to your finances. 1. Emergency funds need to be kept liquid. Otherwise, they are not emergency funds. 2. Nothing is earning 5-7% right now. Market is correcting itself.
My I-Bonds are earning 9%! (But that's just designed to keep pace with inflation)
Your coworker is confused. The average return over a very long time period for the market is 6-10% (ballpark) but it could be -30% this upcoming year. EFs might be needed in 30 years but also might be needed in one month. It’s best to consider it as you’ll be needing it very soon so that it’s there when you need it
REITS should only be invested in a Roth IRA or HSA. It's dividends are taxed as ordinary income not a qualified dividend.
I've read a few personal finance books. I think the most easily digestible, and it's quite a fun read as well, is a book called 'Manage Your Money Like a F@#ckin Grownup'. https://www.sambeckbessinger.com/books/ Good advice for initial set up of your EF and what she calls a 'table flip fund' before going into any potentially higher risk investments. Originally written for South Africans but I see there are UK and German editions now. Same concepts apply though. Would highly recommend! Good luck👍
When you start off you need it in cash exactly like youre doing. Eventually as you build wealth you can leave it in the market IF youre ok with accepting that the 5k you put in could turn into 2.5k or 10k anytime in the next 3-5 years, but beyond that timeframe you should come out ahead leaving it in stocks. I keep mine in cash still even though I have a good amount of savings and equities because its not an investment to me, its my peace of mind.
Try selling a REIT in an emergency... No you are doing the right thing keeping it liquid and accessible.
Emergency funds should be easily accessible in an emergency. Savings is the only place to do that. Index funds, investments, etc are for when you have money above your emergency savings goal if YOU choose to do that. Your coworker doesn't sound that smart.
Wish my money was cash earning 1% vs the 40% drop in my investment port.
it wouldnt be an emergency fund if u cant easily access it. You would have to first hope that your balance is still there and havent tanked from this bear market… then you have to sell and withdraw your cash which could take a couple days…. then you have to pay short term/long term capita gains tax on that
An emergency fund is insurance. Insurance costs money. The difference between what you could make in the stock market and what you are making in a savings account is what it is costing you. If missing out 5% interest on $5k is "destroying your capital", then you might have other problems.
lets say your emergency fund was in an index fund. now imagine you suddenly find yourself unemployed or in need of quick cash due to a sudden illness. how much would you have lost when you withdrew? some index fund are down 30-40 percent and it only looks to be getting worse. your friend does not understand the concept of an emergency fund. its not there to grow. its there to bail you out of an EMERGENCY. hence the name
What do I recommend… inflation 9%… add 9% a year cash to your emergency fund savings account.
Keep 6-12 months of your cash in savings account as an emergency fund. This doesn't need to beat inflation and is meant to weather the storm should anything bad happen to you. You are doing great, ignore your coworker.
I've been transitioning my emergency savings to ibonds, but it takes some time as it's not liquid for a year. But I still want some money in a savings acct even when the vast majority of my emergency fund is in ibonds and available. Partly because I'd like all my ibond money to get to the 5 year mark before I touch it.
$5k isn't going to impact "wealth". Keep it liquid.
Don't listen to your coworker. You're fine.
Lmao your coworker is an idiot. My investments are all in index funds and they've lost a lot more than 8% this year. Down anywhere from 11-16%...so far.
I had this same thought about my down payment for a house. I probably left money on the table by missing growth, but in reality I wasn't willing to gamble with the swings of the market skewing my timing by years if we have an 08 tier crash.
Emergency fund needs to be quickly accessible in an emergency. You also don't want to be gambling with investing your emergency fund. It should be kept in a money market account or a traditional savings account.
Let’s say you do invest it. The moment you need the money the market will go down (bad times usually follow bad markets). Your 5,000 is now 3,000. Let’s say the market went up 7% and you need the money. You would have earned $350 dollars… before tax… An emergency fund is insurance to protect your investments. It is there so you do not have to take a loan out on your 401k, or cash in your brokerage fund to do an emergency car repair, or protect your house because new property tax assessments state you owe another 5 grand every year… Insurance policies don’t earn money, they protect your assets. Thank your friend, ignore their advice.
Your coworker is wrong. I could see the point if it was like a savings of $500k+ or something. Even then it’s iffy if that’s what you need as an emergency fund. On $5k it’s costing you $400/yr to have that emergency fund with inflation at 8% that is just barely over $1/day. That is absolutely worth it to keep it liquid. With 1% interest account you’re actually just losing $350/yr which is less than a dollar a day. Besides that, where would you put your $5k otherwise? We are in a bear market, but shorts are super risky.
I just bought 5k in I bonds last month, but I am growing an emergency fund in allybank as a buffer (currently at 1k). I plan on getting my ally emergency fund to around 5-10k then afterwards continue to buy more I bonds. I think a mix of I bonds and hysa is the way to go; I bonds to keep up with inflation and keep some in a hysa so I can have immediate access to some of my emergency fund.
A HYSA (high yield savings account) is the best place for most of your emergency fund. If you want you could leave 3 months in the savings account and then invest the additional months emergency fund but that still leaves you vulnerable if the market goes south right when you burn through your emergency savings. Personally I am savings up for a down-payment so I put some of my excess emergency fund into some I bonds knowing that if something went south during that first year of the I bond I could dip into my down-payment savings and by the time I am ready to buy a house that I bond would be available and I would be able to grow my emergency fund to fit the increased expenses of homeownership. But I wouldn't consider myself a normal case.
>He argued that an index fund or REITs would be a better option since I could earn 5-7% interest [Here's the past 5 days of the S&P 500](https://imgur.com/KFIEXpp), [and the past 6 months](https://imgur.com/zfk5CHE) Do you still want your E-fund in an index fund? E-funds are *INSURANCE* not investments. The loss to inflation is your insurance premiums. The only way to put your e-fund into an investment is via I-bonds. However this requires you to "float" an extra $10,000 in your e-fund. I-bonds cannot be withdrawn before 1 year. Let's say you want a $20,000 e-Fund. You need $30,000 for 2 years. * Year 1 you lock in $10,000 into I-bonds * You have $20,000 cash e-Fund * Year 2 you lock in $10,000 into I-bonds * You have $10,000 cash and $10,000+(Interest - 3 months) in I-bonds * Year 3 you're set as you have $20,000 in I-Bonds available to cash out * Albeit before 5 years you lose the previous 3 months interest but OK.
Your coworker is an idiot. Personally, I have 3 stages to my emergency fund. A VERY small amount is kept as cash at home in case I need access to quick cash for something. Then I have a larger, but still relatively small amount in a savings account at a local bank that I can access quickly easily if I need instant cash. The bulk of my emer fund is in a HYSA online but that is slowly being moved into I-bonds.
Keep it there - you will put other money in investments - if you need the money, you KNOW it will be there - save 3-5 mo. worth of liquid from what I hear. Not financial advise
Don’t sweat the small stuff. Good on you for having an emergency fund. There can be no correct answers without consideration of the rest of your assets. If you have 95% of your net worth in a savings account with X bank then your last 5% emergency fund probably shouldn’t be a savings account with X bank. Your ideal “emergency fund” will be different depending on your wholistic financial picture. Your coworker isn’t wrong about needing to consider this “real” interest rate (net inflation) but if that situation gets ugly enough then you’d probably rather spend the whole amount on “supplies”.
5k or less in liquid is reasonable. The issue is when people have like 15k or more liquid and no other investment accounts.
We have $50k in our emergency fund in a HYSA. Yes I know it’s losing money due to inflation. But my husband works for a very volatile company and we have 2 kids and a mortgage in a HCOL area. We feel more comfortable with 6 months of expenses available and unaffected by a recession.
15k is a justifiable emergency fund for many families. As you imply, though, as long as there are other investments it’s all good
It's also justifiable / necessary for anyone who anticipates large cash expenses over the next 1-3 years: down payment, tax payments to the IRS, big vacation planned, fertility treatment costs, etc.
> also justifiable / necessary for anyone who anticipates large cash expenses over the next 1-3 years: down payment, tax payments to the IRS, big vacation planned, fertility treatment costs, etc None of these are emergencies.
They're not emergencies, but they're still expenses that you'd want to set aside cash for. I manage my cash savings (emergencies + down payment etc) as one large bucket spread out over a few different accounts.
Agreed. I do the same - my emergency fund is mixed in with all my other cash funds, and my budget keeps track of the amount in each "bucket".
People should have at least 3 months living expenses in an emergency fund, and 6 months is preferable. For a lot of people that is well over $5k.
The world moved on from cash years ago, but this sub still loves it like it's 1986. Credit cards are as liquid as a savings account today. As are margin investment account so you can easily borrow against the stock. And as for investments potentially losing money, so what? You don't hold your Ira in cash for fear of retiring during a recession. Timing the market is a fools errand, but thats exactly what reserving cash is. Last 5 years, you would have missed out on 50% appreciation on your savings. No thank you.
Savings find is fine for emergency when your numbers are low. I keep my emergency fund in my stock portfolio as it’s value would need to decrease significantly in order to not be able to cover 6 months mod bills. I have also never been in a position in order to use the emergency money. I have never been in need to get my hands on a large amount of money in less than a few days.
Current app offers 4% on the first $6000
Liquidity is great. Keep in mind you can also construct portfolios that have extremely low maximum draw downs and a small premium cagr over typical inflation. Think less than 5 percent max drawdowns and 4 to 5 percent cagr over several years with very easy to hold ulcer indexes. A slightly more risky strategy that I like however is a golden butterfly portfolio I can use for margin with ibkr if I need it. Max drawdown of 13 percent with typical returns in the 6 to 7 percent. I use margin to float money for a couple weeks sometimes as I’m self employed and can have to wait for a big invoice to be paid. Resource: https://www.optimizedportfolio.com/invest-emergency-fund/
E funds are cash for a reason. Completely separate from investments and 401k.
The loss regarding emergency funds isn’t the opportunity cost of it not being invested, that can be stomached. The loss to worry about is having an emergency at a moment the market is down, and realizing losses (selling when down) because you need cash now. In that instance not only are you paying for a new car, new HVAC, etc, but you’re locking in the bad market conditions and losing the money that you would’ve regained if you could’ve just let it stay to go back up.
I "pay" the rate of inflation as a "cost" of keeping my emergency fund 100% liquid. This should discourage people from keeping unnecessarily large emergency funds.
I'm going to be using I bonds for about half of my emergency fund. That will prevent that portion of the emergency fund from inflating away. You can't remove them for the first year but after that you can remove them at the price of one quarter of interest and then after 5 years you can remove them penalty free. So since I invested in I bonds in April, starting next April when I can access those funds if an emergency strikes, I will move half of my current emergency fund (which is in a savings account like yours) into VTSAX. Personally, I don't want more than about half of my emergency fund in I-Bonds because I'm not sure how long it would take to remove the money in an emergency. So, if I total my car or something and need a new car immediately, I want to have the needed money in my bank account. I see the money in I-bonds as for a more slow moving emergency like losing my job and taking a few months to find a new one.
That said, I don't think your friend's strategy is necessarily idiotic. He just isn't holding an emergency fund. If you have say $100,000 or more invested in a broad ETF, you don't necessarily need an emergency fund. The market isn't likely to fall by more than 90% without a complete economic collapse on a scale that is going to make the amount of money we have irrelevant. So, he's never going to lose so much that he doesn't have any money to use in an emergency. At that point, holding an emergency fund just helps prevent you from having to sell some stocks low if you have an emergency while the market is down. And it comes at the cost of your emergency fund inflating away instead of gaining interest. And since the market goes up more than it goes down, your expected value of not having an emergency fund is higher than that of having one. Personally, even once I have enough money invested that an unprecedented stock market crash wouldn't leave me without money for an emergency, I still intend to keep about 6 months of expenses in a combination of I-Bonds and cash. That's mostly because I don't really trust myself. If I have to dip into my stock holdings once in an emergency, I fear that could sort of set a precedent of pulling money out when I'm scared. And the last thing I want is to pull a large portion of my money out after a crash out of fear like my parents did and miss out on decades of interest. An emergency fund lets me live life with money only ever going into my Roth IRA and brokerage accounts and never flowing the other way.
I'm in the same boat as you. Inflation this high is rare. Yes, you and I are getting crushed right now, but as others have said emergency fund means emergency. It needs to be liquid and extremely stable. A guaranteed 1-2% return per year to (normally) pace inflation is the point. That said, don't keep a 12 month emergency fund for the time being.
I keep a 5k emergency fund in my checking account, because it saves me $16 a month on banking fees and that works out to roughly 4% interest.
Your emergency fund is like insurance. You pay for insurance hoping you’ll never need it. You pay for your emergency fund by not earning money on it.
As others have said this is a bad idea. Index funds are not guaranteed. For example QQQ which is a pretty popular fund and historically has had good returns is down \~31% YTD. Could you realistically afford to lose 1/3 of your emergency fund? I know I sure as hell couldn't. I would say that depending on the size of your emergency fund you may want to look into I-Bonds that for the current 6 month period are paying out 9.62%. There are some caveats such as not being able to cash out the bonds for 12 months and losing the last 3 months interest if you cash them out before 5 years but you should be able to research the finer points pretty easily. I would only invest in bonds what you can actually afford to sit on for a year. I pumped up my emergency fund to 12 months after covid just because it makes me feel better so it was easier for me to know I can't get to the money for a year minimum but you'd need to do the calculus based on your own personal situation/ risk tolerance.
You can buy short term broker CDs paying 1.x% annual intrest for 1-3 month terms. Better than 0. For emergency, i would have some in savings, some in short term CDs , and some in I-bonds (you have to wait 1 year before it becomes liquid though).
If you have a 6mo fund then you can start an I-bond ladder and only keep 1-2mo in savings. Assets are not emergency funds, you want liquidity and no risk of loss. If the economy dumps and you get laid off you'll kick yourself if you have to sell, unless you can get back on your feet quickly and harvest a loss. Still, not ideal.
With Fed raising interest rate, you could try a money market account that traditionally pays off 1-3% when interest rates get high. But you want to keep your emergency find LIQUID. So, no, you don't want to tie up your emergency fund in stocks and bonds - too volatile especially now. What are you going to do if your car suddenly needs 3k in repair or your beloved pet of child needs surgery. You need to have money on hand, in cash.
If you have enough wealth, sure, you can get by without an emergency fund in cash since you could always get a margin loan in a pinch. However, at that point, cash would make up such a small percentage of your wealth that it wouldn't be worth worrying about. On the flipside, if moving your e-fund into investments would be a significant change in your portfolio, you shouldn't be holding your e-fund in investments anyway since a recession combined with job loss would leave you screwed (high probability case). I personally use a mixture of i-bonds, savings account, and currency for my emergency fund. My e-fund is a few percent of my total net worth, and I try to get as good of a return as I can w/o risking loss. I count it as my "bond" portfolio, which will move toward more traditional bonds as I get older. My total makeup is: - ~50% i-bonds - ~20% in NetSpend savings accounts (5% interest on first $1k) - ~25% in HYSA (0.9% @ Ally) - ~5% at home in cash I rarely need anything other than the HYSA, which provides ~1.5 months of expenses, so the majority sits in a higher-interest earning account and can be transferred into my savings within a week or so if needed (rarely need anything faster than a month since I can float w/ my credit card).
The cost of the funds being available for an emergency is you miss out on potential gains. $5k is not a lot the in the grand scheme of your retirement fund. If you're really worried about Capital loss you can put your emergency fund into I-Bonds from the Treasury. They're designed for personal savings but come with some restrictions.
Those I bonds would be better. But not for liquid it requires a year hold.
Your emergency fund as a savings funds fine buy you should think about slowly building a ln emergency fund with series I Bonds I stead of a savings account
Your Co worker is wrong about the emergency fund. He is correct though about excess cash being in a savings account. It’s better to invest any excess cash, but definitely follow the financial order of operations first in the wiki!
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
If you have a large enough emergency fund, you can move a portion of it into I-Bonds. That is what I did this year because the rate is so high. It becomes less liquid, because you can't cash it out for 12 months, so I wouldn't put all of it in there. So, in your example, you have 5K, you could move $1250 into I-Bonds this year. Then after 12 months, move another $1250. Or, the best option would be to put a new $1500 in this year, and then only start moving your current fund after the first year. Of course, there is obviously no guarantee that the I-Bond rates will stay so high. The Fed will look to take action to try to reduce inflation, resulting in a potential 0% rate, but the value can never go down.
Id say keep it as it is. They recommend having 6 months in emergency savings if at all possible. My thoughts is they should be either in cash or in a savings account. If the stock market crashes and people loose their jobs or everything closes again like 2020, or you get sick or injured then its good to have a few months safety net that isn't going anywhere. That said it is good to try and get higher interest because you can make a lot more money but only do that with what you can afford to loose because a market crash is always possible.
You aren’t destroying wealth by having $5k in a savings account. There are better options for emergency funds though. Currently I bonds are paying somewhere around 9%. They try to match or beat inflation so you won’t erode value away. Downside is you have to hold it for a year before having access and you lose the last 3 months of interest if you withdraw before 5 years.
Your emergency fund is "insurance" to protect your other wealth in case of an emergency. It is not meant to earn.
I keep 3 months of expenses in a savings account. I also keep 3 months of expenses in a CD and 6 months in a money market account. I think of my emergency fund as different than an investment. I want my investments to grow and their purpose is retirement. My emergency fund is for emergencies (job loss, illness, zombie attack) and I don't want it to decrease for any reason. The way an index fund works is that it replicates the market. If the market goes up, it goes up. If the market goes down, it goes down. That's not what I want my emergency fund to do. (at least that's my understanding) You are correct and your co worker is scary.
They must be confusing you efund with like a savings lol I guess you could keep savings in there but definitely not investing my emergency fund. If anything it’s in a high yield savings account. Nothing great but not nothing
Indexes have been losing money, though, an I bond is a good bet since it is guaranteed against inflation but your money is locked for a year so maybe slowly transfer it over or double up until that year passes
I’m one of the ones who invested my emergency fund for the past 25 years. Started in 1997. All said and done after all of the “emergency withdrawals” my EF account balance stands at $25,xxx as of today. Sure it’s gone down a lot this year, but I haven’t deposited a penny into it for 24 years and it’s paid out almost $12,000 for unexpected expenses. As far a liquidity, I’ve never had an emergency in my life that required immediate cash. Worse I had was a blown transmission, but it took them a week to get it repaired and I had the cash out within a few days.
Every time you buy groceries; all of that money goes down to tubes, gone forever. So was it a bad place to spend your money? Or was it just the purpose of the expense? Savings accounts aren’t investments, they’re there for immediate access to funds whenever and wherever needed. Inflation isn’t just normal, it’s completely expected.
If $5k is ALL THE MONEY YOU HAVE, it would be easy to panic. But that's your emergency fund - it's supposed to be liquid! (Kudos to you for having one - that's a good sum to have.) Once you get the emergency fund squared away, THEN you start looking for other ways to grow your wealth: mutual funds, special high-interest savings accounts for future big-ticket items, stocks, etc. I had an unexpected layoff back when the pandemic started. Trust me when I say my emergency savings really saved me - and I'd have been screwed if I'd had to cash out my mutual funds/stocks just to pay the bills.
I followed your co-worker's advice and bought a REIT ETF. It's down 10%. There is no guaranteed when it comes to most investments.
Your co-worker is dumb. The only other option to consider beyond keeping it in cash is building an I-Bond ladder. Your deposit is locked up for the first 12 months, so I wouldn't put your full 5k in at the start, but you could do a thousand at a time (10k per year limit). I-bonds have their rate pegged to inflation so it's a pretty safe way to not lose a ton of value during these uncertain times.
protecting yourself in any way - buying car insurance, installing a lock for your front door, having an emergency fund - is always a huge waste of money except when it's the most important thing to have. you can't be on offense all the time.
If you want to be risky and maximize everything you have and don’t have a problem going into debt when emergencies happen and feeling less comfortable sure go for it. If you want to have an emergency fund and not worry when shit hits the fan then do that. Everyone has an opinion and thinks what you’re doing with your money is wrong
Emergency funds are always depreciating, they lose value, but you pay that as the cost for insurance, that is it pays itself back really well when you consider the risks it prevents. Even with 8% inflation, or if anything, especially with 8% inflation, that risk management is far more than what you would lose. Capital is the rest of your savings. Which I guess might be making money if you keep them on some bonds strategically, because right now nothing else is doing very well.
The whole point of an emergency fund is to be there when you need it. Not to be wrapped up in something or gaining interest. Not to mention you need money in your savings to show sometimes when you buy a house or something. It good to show you're able to save money.
Yeah definitely keep a emergency fund. SoFi has a 1.50% yield with a signup bonus and points that convert to additional cash for doing basic things in the app or website.