Investment vehicle for emergency savings

[RatLabGuy]

We are working towards keeping 2 months income set aside for emergencies (unexpected unemployment, house disasters, kidnapping by the mob...). right now this is siting in savings account b/c its easy to transfer into and quickly accessible... however it's a large enough chunk of $$ that it kills me to know that we're basically losing money against inflation.

Looking for suggestions on a better place to keep said money. It seems all the things w/ a good rate of return are either long commitments or hefty penalties for withdrawal.
But even w/ that, I'm tempted to just dump it into a 401k or similar on the philosophy that if it's truly an emergency, then taking the hit on fees is worth it... just not sure if there is a better option.

 

[Falko]

Mine is in an S&P 500 index fund.

It will generally under perform a 401(k), but no fees apply.

 

[RatLabGuy]

Mine is in an S&P 500 index fund.

It will generally under perform a 401(k), but no fees apply.

I thought about that but as something that is supposed to be for emergency fallback I'm not fond of having much risk.

 

[Falko]

I thought about that but as something that is supposed to be for emergency fallback I'm not fond of having much risk.

depending on your age, the 401 (k) may have more risk that the index fund. That is unless your company offers a one size fits all approach.

 

[Ron]

Well...to be fair. If it is in a true Index fund, if it loses all its value your emergency isnt a real issue.

 

[shawn]

Mine is in an S&P 500 index fund.

It will generally under perform a 401(k), but no fees apply.

Those terms are not mutually exclusive. You can buy index funds within a 401k. Index funds also have fees, but they're typically much less than actively managed mutual funds. Performance is variable - you can buy a mutual fund with front side and back side fees and a 10 percent expense ratio that loses value.

There are several issues that you should be concerned about if you're keeping your emergency money in an index fund - or any other mutual fund. The primary one is that you can lose money. If you're keeping an eye on it, no big deal, you could always liquidate it if we had a repeat of 2008 and the S&P halves in value... But you'll likely still lose something.

The other issue (and the one that complicates the above) is that most mutual funds have minimum terms, typically 90 days for an index fund. So if you buy today and the market collapses in August, you're stuck.

You'd be better off just opening a brokerage account someplace cheap and buying some solid old man stocks with the money. Nice thing about stocks is that you can liquidate them essentially immediately during business hours.

 

[strange1]

You'd be better off just opening a brokerage account someplace cheap and buying some solid old man stocks with the money. Nice thing about stocks is that you can liquidate them essentially immediately during business hours.

With the recent 7-1 apple split, it is now an affordable stock again. It will creep back up, just no way of predicting how fast. As far as technology stocks, I believe apple is about as solid as you can get.

 

[shawn]

I own aapl right now, and I've made a fair bit of money off of it this year, but it would not be at the top of my list for capital preservation. We're talking about a stock that just got done pissing away almost half of its value for no good reason.

Now, if you want to put $2k in it on the belief that it'll surge on the iPhone 6 announcement and fall earnings, go right ahead. But don't do it if you're afraid you might lose some money.

 

[RatLabGuy]

Yeah let me be clear.
I'm not looking for "s good investment" or way to strengthen a portfolio. We have other services aside for that.
This is the $$ kept on hand to have for disaster recovery. E.g. it needs to be there if needed. Now I might take some part and put in something w a little risk but for this I'm more concerned about safety and access than getting rich.

Oh and I'm a fed employee so TSP has several funds of varying historical risk and growth.

 

[shawn]

I stand by my previous suggestion. Divvy your fund into chunks of about $2k each and buy old man stocks. You can have the money back in your checking account within a week. Possibly less if you do the brokerage through your bank, but be aware that you're probably trading price for convenience.

Or squirrel it away under the mattress.

With interest rates like they are, there's nothing out there that makes money.

 

[WARRIORWELDING]

mason jars. cause I sure as hell don't understand what you folks are jabbering about.

 

[rodney eppes]

I have funds in annuity, of which I'm now getting monthly retirement payments. But due to an inheritance, I also have monies in a money-management account, handled by my Financial Adviser. It's invested in stocks, but I can withdraw what ever I may need, with 3-5 days notice, in other words, time to sell needed stocks. I'm sure the interest averages 10+ %. It was 15-16% last year, but that doesn't happen every year. Beats the Crap out of banks!

 

[EdJonesJeeper]

Yeah let me be clear.
I'm not looking for "s good investment" or way to strengthen a portfolio. We have other services aside for that.
This is the $$ kept on hand to have for disaster recovery. E.g. it needs to be there if needed. Now I might take some part and put in something w a little risk but for this I'm more concerned about safety and access than getting rich.

Oh and I'm a fed employee so TSP has several funds of varying historical risk and growth.

Look at a c share mutual fund from a company like Ivesco. No cost to get in and no penalty to get out. They have everything from money market to short duration bonds that are low risk, and you can move a portion of the money into "old man stocks" like a dividend and growth fund.

Pm me if you need help.

 

[shawn]

Money market is only going to return a fraction of a percent. Probably a couple hundredths of a percent. Your savings account has a better return. Bond funds are better, but still would be lucky to turn a percent or two.

You can buy old man stocks that turn 4-15% in dividend alone.

 

[ManglerYJ]

I'm a big fan of Dave Ramsey's financial principles. Here is what he has to say on the subject:

"
I recommend keeping your emergency fund in a simple
money market account with a good mutual fund company. This
makes it available through basic check-writing privileges or
ATM access while keeping it separate from your regular bank
account. This kind of account won’t pay a great rate—somewhere
in the neighborhood of CD (certificate of deposit) rates—
but that’s okay. Your emergency fund is there for your protection,

not to make you money."

And his approach is working towards 3 to 6 months of expenses in this account.

Here are his "Baby Steps":
• Baby Step 1: Put $1,000 in a beginner emergency

fund ($500 if your income is under $20,000 per year).
• Baby Step 2: Pay off all debt using the debt snowball.
• Baby Step 3: Put three to six months of expenses into

savings as a full emergency fund.
• Baby Step 4: Invest 15 percent of your household

income into Roth IRAs and pretax retirement plans.
• Baby Step 5: Begin college funding for your kids.
• Baby Step 6: Pay off your home early.
• Baby Step 7: Build wealth and give.

 

[shawn]

I'm a big fan of Dave Ramsey's financial principles.

Just remember: Ramsey makes most of his money telling other people what to do. It's a great gig if you can get it.

If your emergency fund isn't making money, it's losing value.

 

[ManglerYJ]

Just remember: Ramsey makes most of his money telling other people what to do. It's a great gig if you can get it.

If your emergency fund isn't making money, it's losing value.

While that's true, it doesn't change the fact that the information is pretty sound advice. Keep your emergency fund liquid, but not TOO liquid. Keep it where you can get to it immediately in an emergency, but not so liquid that you spend it with your regular monthly expenses.

The bigger issue than if you are making .03% interest on your 3-6 month emergency fund or if you are making 1.3% on it is whether or not you are living on a credit card. It's hardly worth talking about a 1% margin if you are paying a credit card company 18+%. I'm not saying the original poster is, but it's a pretty common problem among a lot of the financial advisor talk shows. Suze Orman, Dave Ramsey, etc. all will typically point out credit card debt as the key problem first. When people talk about where to get the best investment, they rarely look at credit cards, but by getting rid of a card they are only paying minimums on that is charging them 18+% interest, they are actually saving at the same rate. A penny saved is a penny earned, but 18% interest saved...

Again, ideally, one should have an emergency fund AND an investment portfolio. Your investment portfolio shouldn't be your emergency fund and vice versa. If it is, and you have an emergency in a financial crisis (when it's most likely to occur in the first place!), then you are double screwed.

 

[strange1]

Again, ideally, one should have an emergency fund AND an investment portfolio. Your investment portfolio shouldn't be your emergency fund and vice versa. If it is, and you have an emergency in a financial crisis (when it's most likely to occur in the first place!), then you are double screwed.

I subscribe to this philosophy. I am more worried about having access in an emergency than I am about interest earned. I have other accounts for that.

 

[shawn]

While that's true, it doesn't change the fact that the information is pretty sound advice. Keep your emergency fund liquid, but not TOO liquid. Keep it where you can get to it immediately in an emergency, but not so liquid that you spend it with your regular monthly expenses.

No, it's not good advice. The OP would be better off keeping cash under the mattress. If you assume that inflation is going to run 2-4% on average, he's losing money either way.

Suze Orman, Dave Ramsey, etc. all will typically point out credit card debt as the key problem first. When people talk about where to get the best investment, they rarely look at credit cards, but by getting rid of a card they are only paying minimums on that is charging them 18+% interest, they are actually saving at the same rate. A penny saved is a penny earned, but 18% interest saved...

You're getting off in the weeds but I can't let this pass: Ramsey is an ideologue as far as "credit" is concerned. He says there is absolutely no good reason to ever have a credit card. He's wrong. He's completely and irrefutably wrong. If you doubt it, try this:

1. Put $10k in a money market account or a CD or whatever Ramsey thinks is a good idea.
2. Buy gas and groceries for the next year with a cash rewards credit card. Pay off the balance at the end of each month.

See which has a better return after twelve months.

 

[BigBody79]

When I read the title I thought that you wanted a real vehicle. Like a 69 Camaro SS or something like that.

That's what all the super rich folks are doing. Diversifying their portfolios with classic cars. Ha, to be super rich.

 

[ManglerYJ]

I subscribe to this philosophy. I am more worried about having access in an emergency than I am about interest earned. I have other accounts for that.

No, it's not good advice. The OP would be better off keeping cash under the mattress. If you assume that inflation is going to run 2-4% on average, he's losing money either way.



You're getting off in the weeds but I can't let this pass: Ramsey is an ideologue as far as "credit" is concerned. He says there is absolutely no good reason to ever have a credit card. He's wrong. He's completely and irrefutably wrong. If you doubt it, try this:

1. Put $10k in a money market account or a CD or whatever Ramsey thinks is a good idea.
2. Buy gas and groceries for the next year with a cash rewards credit card. Pay off the balance at the end of each month.

See which has a better return after twelve months.

I see what you are saying, and in a perfect world, option 2 would win. Problem is that most people - the people keeping credit card companies in business can't or won't do it. The idea sounds great - yes, I'll pay it off at the end of each month and never pay them a penny of interest and become a millionaire on Rewards Miles or whatever. Name one millionaire that got rich solely from Reward Miles...

On the contrary, people get a credit card with the best of intentions and then it becomes super easy to spend during the month and never put back for when the bill comes. I don't understand finance, but I do understand human nature. I may not know what works, but I know what doesn't. His main principle is that you can't, won't, shouldn't and mustn't spend what you don't have. If it's not in your hand (cash or visible in your checking account), you don't spend it. The idea being you don't run out of money before you run out of month and every dollar has a name and is accounted for in a budget.

I have to imagine that if everyone that owns one of those rewards credit cards were able to do what you suggest - because it sounds REALLY SIMPLE, and it is - that the credit card companies would stop offering them because they would lose all sorts of money. Instead, they keep offering them so that people will fall into the trap. Are credit card companies evil? No. They are just smart business people that understand human nature and have done so for decades.

 

[Ron]

No, it's not good advice. The OP would be better off keeping cash under the mattress. If you assume that inflation is going to run 2-4% on average, he's losing money either way.



You're getting off in the weeds but I can't let this pass: Ramsey is an ideologue as far as "credit" is concerned. He says there is absolutely no good reason to ever have a credit card. He's wrong. He's completely and irrefutably wrong. If you doubt it, try this:

1. Put $10k in a money market account or a CD or whatever Ramsey thinks is a good idea.
2. Buy gas and groceries for the next year with a cash rewards credit card. Pay off the balance at the end of each month.

See which has a better return after twelve months.

While I agree, to be fair even Ramsey would say your math is right.
The issue is self discipline. Too many folks use the CC for bills, then NEED a new couch, coach purse or coil over shocks and end up paying interest in that CC>

Besides. At best your are gettin 1.5% cash back.
Spend 100k a year on that CC and you are netting $1,500. You arent moving the needle.

Your emergency fund isnt an investment its just that.
I have a set amount that stays in a money market fund that draws 1.25% It aint much,but if the SHTF and I need lawyers guns and money I can have that cash in my hand in an hour. That is a big point if your e fund is over $10k talk to your bank make sure you can draw cash without notice.

The e fund isnt about making money its about covering your ass.

To be honest if you are intelligent and disciplined you dont even need an efund possibly.


BTW keep switching those credit cards Chase cancels you at 23 months of no interest

 

[jeepinmatt]

I keep mine in cash. And instead of letting it sit, I reinvest portions of it in tools and equipment, then sell them when I'm done. I have lots of tools right now, and just enough cash. If the dollar flops, I've still got the tools. I bought a Genie lift a couple months ago for $800, used it on my building for 4 months, then sold it for $1700. I've bought chainsaws for less than $100, and sold them for more than $300. This approach doesn't work for everyone, but the return on investment can be very good. The key is that all of the money is made up front. If I'd paid $2000 for that genie lift, I'd have lost money. The key is to know what stuff is worth. "Sold Listings" on ebay is a good way to judge the market. Just pick something you either need (tools/equipment) or are going to buy anyway (flipping vehicles or guns), and keep an eye out.

 

[shawn]

I see what you are saying, and in a perfect world, option 2 would win.

I'm not talking about a perfect world. I'm talking about the world that we actually live in, and how you can make or lose money in it.

The idea sounds great - yes, I'll pay it off at the end of each month and never pay them a penny of interest and become a millionaire on Rewards Miles or whatever. Name one millionaire that got rich solely from Reward Miles...

That's a hell of a straw man, but I can turn it around: Name one millionaire that got rich on CDs and money market accounts. No? There aren't any? That's right -- because people become millionaires by buying and selling stocks and options.

We have several rewards credit cards. They all get paid off at the end of the month. Just looking at the balance from one of them, they have paid me over $150 in the last year, over $450 since I got the card. I don't know what Discover has paid us, but I know it's several thousand dollars.

Ramsey conflates a real problem -- spending what you can't afford -- and lays responsibility at the presence of credit. He has some sound suggestions for people that are incapable of controlling their urges, but misses the opportunity to lay blame firmly and effectively where it belongs -- at personal responsibility.

While I agree, to be fair even Ramsey would say your math is right.

Actually, he wouldn't. His argument is that there is no good reason to ever have a credit card and that even if you get one and pay it off every month, the credit card companies will "lose" your payment in order to charge you late fees and stuff to get their money back. He's saying the entire enterprise is corrupt and regularly engages in fraud and other illegal activities.

 

[drkelly]

This is a good thread. Not long after my wife and I got married, we set up an ‘Emergency Fund account’ that is just a standard savings account at our bank. We originally set it up to cover unexpected costs like replacing the house HVAC unit, a car transmission, or any unexpected life emergency expense. Since setting it up though we have used it more as just a savings account to dip into when needed for house improvements when we were selling our old house, moving expenses, and stuff for our new house. We have a set amount drawn from our checking account and deposited into the emergency fund account on the first day of every month. When the value of the emergency fund account hits a certain amount, we turn off the automatic draw/deposit. Long term I think we will stop using it just as a general savings account, and start using it more for true emergencies. I have been wondering about having that much money sitting there earning nothing though. We each have an E-trade account which almost always have some amount of cash available. That money is accessible within days, so I’ve been thinking about talking to the wife about reducing the amount we keep in the emergency account.