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S&P Index Fund as an emergency fund savings vehicle?

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2StepsFwd1StepBack
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S&P Index Fund as an emergency fund savings vehicle?  Reply with quote  

This question is for oldguy (or anyone who can offer input).

I've seen several posts, including one to me I think, regarding using an index fund as a savings vehicle for an emergency fund. I understand the benefit of quicker/higher return on this than a standard savings acct or money market. But, I have a question about this.

What happens if my furnace breaks down during a week where the S&P index is down?

Seriously, what am I not understanding?
Post Mon Feb 20, 2012 11:29 pm
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fast
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Re: S&P Index Fund as an emergency fund savings vehicle?  Reply with quote  

quote:
Originally posted by 2StepsFwd1StepBack
This question is for oldguy (or anyone who can offer input).

I've seen several posts, including one to me I think, regarding using an index fund as a savings vehicle for an emergency fund. I understand the benefit of quicker/higher return on this than a standard savings acct or money market. But, I have a question about this.

What happens if my furnace breaks down during a week where the S&P index is down?

Seriously, what am I not understanding?


If I remember correctly, he calls it a fallback emergency fund, and I'm supposing that is a secondary fund that can be used in the event he has an emergency that cannot be covered by his primary savings account, which is his primary emergency fund. Boy, that's a lot of supposing.
Post Tue Feb 21, 2012 1:08 am
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2StepsFwd1StepBack
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Re: S&P Index Fund as an emergency fund savings vehicle?  Reply with quote  

quote:
Originally posted by fast
quote:
Originally posted by 2StepsFwd1StepBack
This question is for oldguy (or anyone who can offer input).

I've seen several posts, including one to me I think, regarding using an index fund as a savings vehicle for an emergency fund. I understand the benefit of quicker/higher return on this than a standard savings acct or money market. But, I have a question about this.

What happens if my furnace breaks down during a week where the S&P index is down?

Seriously, what am I not understanding?


If I remember correctly, he calls it a fallback emergency fund, and I'm supposing that is a secondary fund that can be used in the event he has an emergency that cannot be covered by his primary savings account, which is his primary emergency fund. Boy, that's a lot of supposing.


Ah...you're right! I misinterpreted his use of the word "fallback". I took it to mean his primary fund to "fall back" on in case of an emergency.
Post Tue Feb 21, 2012 1:14 am
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coaster
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Most people aren't comfortable with ANY probability of loss; the thought of putting funds they might need unexpectedly on short notice when its value might be negative is going to keep them awake nights. Thus financial advisors don't usually give that out as advice; they'd find their clientele disappearing.

If someone understands, accepts, and is comfortable with the idea that they might have to liquidate assets unexpectedly and take a loss .... ie if they're not going to be losing any sleep over it .... then I don't see why they shouldn't put half their emergency fund allocation in a mutual fund.

I'd never recommend ALL, because you can't get your money out of a fund immediately, whereas with a money market or bank account you can write a check and have those funds right now. Planning your emergencies seven to 10 business days in advance gets a little tricky. Laughing

And there's no reason you couldn't have your emergency funds --- which is a category, not an account --- held in several accounts of varying degrees of risk and ready availability.

~Tim~
Post Tue Feb 21, 2012 1:53 am
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2StepsFwd1StepBack
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quote:
Originally posted by coaster
Most people aren't comfortable with ANY probability of loss; the thought of putting funds they might need unexpectedly on short notice when its value might be negative is going to keep them awake nights. Thus financial advisors don't usually give that out as advice; they'd find their clientele disappearing.

If someone understands, accepts, and is comfortable with the idea that they might have to liquidate assets unexpectedly and take a loss .... ie if they're not going to be losing any sleep over it .... then I don't see why they shouldn't put half their emergency fund allocation in a mutual fund.

I'd never recommend ALL, because you can't get your money out of a fund immediately, whereas with a money market or bank account you can write a check and have those funds right now. Planning your emergencies seven to 10 business days in advance gets a little tricky. Laughing

And there's no reason you couldn't have your emergency funds --- which is a category, not an account --- held in several accounts of varying degrees of risk and ready availability.


I understand that it's a category and not an account. In my narrow-minded view of personal finance, I've never really thought "out of the box" and beyond the general advice of having it only in a bank acct or MM.

My risk tolerance is moderate to high, so I am willing to take a chance on a portion of my EF being in a more volatile fund.

Great advice. Thanks!
Post Tue Feb 21, 2012 3:19 pm
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littleroc02us
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Exactly the reason I would never call that an emergency fund. An emergency fund is one that you keep in liquid form with easy access to in case of emergency. It's purpose is to keep you from borrowing money when you have a problem and it isn't for the purpose of making money. My wife and I have an emergency fund in a savings account making .08%, who cares we don't have the problems you mention because of it. People get this idea wrong IMO all the time.

Ronald Reagan once noted the basic difference between Democrats and Republicans. “Republicans believe every day is the Fourth of July,” he said. “Democrats believe every day is April 15th.”
Post Tue Feb 21, 2012 3:41 pm
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oldguy
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quote:
What happens if my furnace breaks down during a week where the S&P index is down?
Seriously, what am I not understanding?


Well, after doing thsi for over 40 years, I can tell you that it DOES happen. So you sell some stock at a loss and you buy a new furnace. Simple?

So, yes, it exacerbates the emergency, you have an emergency squared. But you will find that the longterm sffect of 11%/yr FAR outweighs the effect of an ocassional 'perfect storm' where the Market crashes in the same month that the furnace craps out. The difference between earning 1% and earning 11% will amount to several hundered thousand dollars longterm. Unless you are really really unlucky - or you are terrible at preventive maintenance on furnaces, cars, lawn mowers, appliances, yada.
Post Tue Feb 21, 2012 4:33 pm
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coaster
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Exactly.....it's the NET that counts.

~Tim~
Post Tue Feb 21, 2012 5:10 pm
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2StepsFwd1StepBack
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Thanks, all. Appreciate the feedback.

I gotta tellya, I'm getting pushback from folks on my end. Shot a quick e-mail to my Advisor, and he's questioning it but is willing to discuss. My co-worker thinks I'm crazy for considering it.

I don't think it's crazy. I would like to keep 3 months in a MM account and my remaining 3 of the 6-month EF in a index fund averaging 11%. I think that's do-able and not unreasonably risky. I've kept track of all of my "emergency fund" needs in last 10 years (most have been related to home maintenance but I realize it could be from a sudden job loss, too). I will doublecheck tonight, but I suspect that, historically, my average need is probably in the $3k for an emergency, which should be available in my MM so I don't think I would have to touch the index fund.

But, littleroc's comment made me think... If the MM EF is sufficient for most emergencies, then is the index EF really an EF or even a fallback EF? Isn't it simply just another investment?
Post Tue Feb 21, 2012 9:16 pm
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coaster
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It's BOTH!! How can you beat that?? Laughing

~Tim~
Post Wed Feb 22, 2012 12:13 am
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fast
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quote:
Originally posted by coaster
And there's no reason you couldn't have your emergency funds --- which is a category, not an account --- held in several accounts of varying degrees of risk and ready availability.
I took notice to this the first time I read it, and I think it's such a great idea that it deserves to be brought up again.

We don't truly know the extent of our next upcoming emergency. It could be a $20 problem that our checking account can handle. It may be a $700 emergency that our savings can cover. It may be a $7,200 OMG what the hell is wrong with my crazy family emergency. If the emergency is such that we are unwilling to let it go unattended, then we're going to do what we have to do, and if that involves selling stocks at a loss, then to many us, so be it if necessary, but meanwhile with no emergency in our immediate sights, we're not going to set aside large sums of money and forbid it to have a chance of making us some gains just because something MIGHT happen.

So, I think spreading money over a few select accounts is an exceptional way to wisely prepare for what our future may hold.
Post Wed Feb 22, 2012 12:33 am
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fast
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quote:
Originally posted by littleroc02us
Exactly the reason I would never call that an emergency fund. An emergency fund is one that you keep in liquid form with easy access to in case of emergency. It's purpose is to keep you from borrowing money when you have a problem and it isn't for the purpose of making money. My wife and I have an emergency fund in a savings account making .08%, who cares we don't have the problems you mention because of it. People get this idea wrong IMO all the time.

If you call a tail a leg, how many legs does a dog have?
Post Wed Feb 22, 2012 12:36 am
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oldguy
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quote:
I gotta tellya, I'm getting pushback from folks on my end. Shot a quick e-mail to my Advisor, and he's questioning it but is willing to discuss. My co-worker thinks I'm crazy for considering it.


When I started doing that, I doubt that the term "emergency fund" had been invented - altho the elders talked of 'saving for a rainy day'. No computers so no advisors putting a number on a recommended 'rainy day fund' and putting it on a blog. Slide rules were used to compute compound interest - same answers, it just took a lot longer.

And no 401k's, no IRA's, they were invented in the 80's. No index funds, no discount brokers, no ETF's, they came along in the 90's.

And people didn't talk about money - so, no push backs, you invented it as you went and didn't tell anyone, lol. Actually, very few people even owned equities, didn't know how to buy them, many of my co-workers considered stocks as gambling. Very Happy
Post Wed Feb 22, 2012 1:01 am
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2StepsFwd1StepBack
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Out of curiousity, I've run my thoughts by more individuals here, on my end....co-workers, friends, family. And just like the responses in this thread, I've gotten mixed results.

This just proves to me that investing is, truly, about risk tolerance and personal choice.

I still plan to do this. My monthly expenses are about $4000/month, and I'd like to eventually maintain 6 months of expenses as an EF. That's nearly $25,000. Why on earth would I keep that much money in a MM earning 2.5% when the cost of most true "emergencies" run a few thousand, if that? I think $5000 in the MM and $20k in the index fund earning 10% is a no brainer.
Post Thu Feb 23, 2012 1:52 am
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fast
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quote:
Originally posted by 2StepsFwd1StepBack
Out of curiousity, I've run my thoughts by more individuals here, on my end....co-workers, friends, family. And just like the responses in this thread, I've gotten mixed results.

This just proves to me that investing is, truly, about risk tolerance and personal choice.

I still plan to do this. My monthly expenses are about $4000/month, and I'd like to eventually maintain 6 months of expenses as an EF. That's nearly $25,000. Why on earth would I keep that much money in a MM earning 2.5% when the cost of most true "emergencies" run a few thousand, if that? I think $5000 in the MM and $20k in the index fund earning 10% is a no brainer.

Not three months. Not six months. Three to six months. That's the common advice given. Some will even say nine. I've heard twelve before. I've even heard of less than three. But, all in all, three to six is what we tend to hear.

What jumps out at me is that it's told to us as if it's on a scale. In other words, we are left to choose for ourselves what's right for us. You seem to have chosen six. Earlier, however, you mentioned three to six. I wonder what other factors should go into our thinking when making the decision--and should it change when circumstances change?

For example, it may make more sense for a person that's deeply in debt to choose to earmark less money as an emergency fund since the funds would be better off going towards debt. A person with no debt may choose to earmark more money but not too much because the funds would be better off going towards investing.

I’m just guessing here, but I think that maybe we should look at it categorically between retirement funds and non-retirement funds. In other words, what’s the maximum amount of money would you like in non-retirement funds—where all else could be earmarked as retirement funds.

I figure at least nine months of expenses should be accessible outside of retirement money (and I'm just talking out loud). That would include checking, savings, non-retirement brokerage accounts—even the money in the mason jar underneath the plant in the backyard—which outperforms the S&P 500 on occasion, I might add. Of course, that’s not going to work for everyone (not even me), for a few may insist on playing the market with non-retirement money, but hey, it’s food for thought I guess.
Post Thu Feb 23, 2012 3:14 am
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