Hi! I have a healthy emergency fund ok 100k. It is sitting in high yield saving account.
I constantly struggle knowing that, over last several years, I could have earned a lot of return if that was in the market.
I have about 13k monthly expenses. Do I literally just leave 100k sitting there forever waiting for an emergency?
Coping with emergency fund
byu/UpstairsAide3058 inpersonalfinance
Posted by UpstairsAide3058
19 Comments
Describe your obligations and risk tolerance
Yes as long as it’s in a HYSA or laddered CD. E-Fund is insurance.
Yes, literally leave $100k (7.5mo of expenses) sitting there forever waiting for an emergency. That’s what an emergency fund is for.
Think of it as Tony Soprano’s “Go-Bag”.
I’m running into this thought process as well. Accessibility and stability vs lack of growth.
I am planning to do this:
3 months expenses in Checking/HYSA, another 4 months in brokerage with 1 month of that in a MMF and the other 2 months investing in ETFs. This is about $100k total for us as well. $15k checking, $30k HYSA, $60k brokerage
FWIW we are dual income with 2 stable jobs, with a 70/30 split. The job bringing in 70% is in healthcare and could easily find another job within 3 months.
How stable is your job? How much of that $13k monthly could you cut if you lost your job? Is yours the only income or do you have a partner who also works? Depending on those answers I might say you could cut back the emergency fund a bit, but realize that if you have an emergency, you might have to sell some stocks/funds when the market is down.
it really depends. You have about 7 months of expenses sitting in cash which is a bit on the higher side. If you have a lot of other assets not in retirement accounts that even if they lost 50% it could still cover you for an extended period in an emergency, you can probably move some of that money into bonds to get a slightly better yield. medium term (less than 10 years) is where I buy individual bonds and hold until maturity. It’s not quite the return of equities, but it should outperform a HYSA. There are some tax advantages if you live in a high tax state as well. Also you can consider the bonds you invest in as part of your allocation percent of investments to get you to 80/20, 90/10, 70/30 or whatever mix you think it appropriate.
Would you feel better if you had an emergency and had to spend all that money?
I mean if your monthly expenses are $13k then your income must be very high and I hope $100k is only a small portion of your net worth.
Assuming the rest of your assets are invested you could think of your emergency fund as a bit of hedging. 90% equities/10% bonds or treasuries is still pretty aggressive.
When I had this revelation that I had a ton in HYSA and no real plan for it other than “What if there’s an emergency?”, I paid off my mortgage. I was left with about $10k and, luckily, no emergencies sprang up while I was rebuilding.
$100k is a perfectly reasonable amount to have in your emergency fund when you have $13k/mo expenses. You don’t need to add to it, but I would leave it as is, personally.
The longer you save and invest the smaller a percentage of your overall portfolio that $100k is going to become. Just keep doing what you’re doing and at some point you’ll stop worrying about this $100k entirely.
A HYSA doesn’t have to literally be a bank savings account earning 0.01%. A brokerage account with $100k partially invested in a MMF is fine. So, $26k (2 mo expenditures) in cash, available right now, earning 0.01%. $74K in a MMF, such as SWVXX, earning 3.5%.
Assuming your checking account isn’t with your brokerage, you have 2 days access to $26k, and 3 day access to $74k. If you think you need quicker access, leave $5k in your checking account and $21k in cash at the brokerage.
If you kept 6 months of $13k monthly expenses you could still put $22k into the market.
(1) What are your NON-NEGOTIABLE monthly expenses? Actual obligations that couldn’t be cancelled or reduced? Sure, you might spend $13k/month, but if you lost your job, could you cut back on many things?
A huge factor in this is kids. If your kids are in private school or daycare, and $3k of that is care, travel sports, etc. you probably can’t cut it on short notice. If it is all mortgage, car debt etc, you can’t cut it.
If you can get it down to $10k, then you could definitely cut the emergency fund to $60k, which is 6 months of cut expenses, 4.5 months of full expenses.
(2) What are your likely emergencies and how much do they cost? Do you own a house and have the potential of easily $20k emergencies? One car, so no backup if something happens and you just have to buy a new one ASAP? One job, so a job loss reduces income 100%? How likely do you think a job loss is based on your industry?
Or, are you a renter, with a spouse who works and has a second vehicle, living in an an urban area with transit?
(3) What’s the alternative? Certificate of Deposit, Treasury Bond, then I’d say go for it. Put it all on Nvidia and let it ride? A bit too risky.
What’s the alternative if you have an emergency? HELOC? Sell some other investments? Fail to pay the mortgage?
I think for many people without kid expenses that would be life changing if cut, but with a house with some equity, two stable jobs, I think 3 months expenses is likely enough. Most house emergencies won’t cost you more than $30k, and if they do your e-fund buys enough time to finance the expense.
Of course, people regret this when they are out of work for 99 weeks in a “great recession” and have lost their home, or declared bankruptcy, or emptied their retirement account at 49 years old.
It really depends on the person. what is your 9 month EF? What are your sinking funds for annual expenses that are not monthly? What js your time horizon for the money in excess of EF and sinking funds (meaning so you have short term goals)? How would you feel if you experienced a loss of 20%? Would you withdraw your money?
HYSA? Muni bonds might be better.
My emergency fund is I will cut costs, sell stocks, or go into debt.
If I had left 100K out of the market last 5 years I’d be down a few hundred K at least. Even if the market halves I’m still in a better spot.
Do you understand the point of an emergency fund and the trade off?
How lucky do you feel?
Yield chasing and your emergrncy fund: https://old.reddit.com/r/personalfinance/comments/ttwbma/_/i30b533
What would your life look like if you had to stretch 6 months of 13k to last 12 months instead? What could be eliminated and would you be okay with that?
At higher incomes and higher spends rates, typically a lot of those expenses are more Want than they are Need. Would you be okay dropping down to Need plus small amounts if Want? Or would you want your life to continue looking exactly as it does now?
Keep $40,000 in your HYSA, then start putting $10,000 each month into 6-month CDs, and have those auto-renew. At the end of 6 months, you’ll still have $40,000 liquid, and if, by chance, you need more, you’ll be able to stop the auto-renew and cash out the CD.