Volenti & EFUNDS

[isabel]

I'd actually be really curious to hear this as well.

Our financial advisor (who we follow pretty much to a "T") also does not agree with a lot of the folks here. His basic idea is that you need roughly a month's worth of income for emergencies. In his mind, losing your job is not an emergency, it's a catastrophe, and calls for much bigger action than having a massive amount of funds to keep you afloat for a few months.

[Deleted]

I think our views are pretty similar. It seems a little ridiculous IMHO to keep 3-6 mos of income in a savings account that isn't earning any money. Any emergency greater than probably 5k I'm going to have time to "plan" for and be able to liquidate other investments.

I'm comfortable only having about $20k in cash savings and the rest the rest of what would be considered "efund" in stocks and mutual funds (I wouldn't tie it up in RE or othe non-liquid assets).

[ssmjlm]

Sarajoy also has a similar perspective to what pp wrote.

Their idea is why have tens of thousands of dollar sitting in a saving account earing .8% interest when you could open something like a vanguard fund and see returns above the meager rates of savings accounts.

[barefootcontessa]

Right now I am holding more cash because the market is down, but when the market is an uptrend, I put most of my e-fund in liquid investments. We keep around $10-15K in money market and also have a whole life policy which we can "borrow" against.

[SJ]

I'm not volenti, but I do feel like I am in the minority on this board when it comes to e-funds.

Basically, I try to go strictly by interest rates. If the option is to hold money in a savings account or pay down debt, I would rather pay down debt. But if the option is to hold the money in a savings account or invest, I'd almost always rather invest. Especially if you are not taking advantage of retirement options and other tax-advantaged methods.

In the current environment, I just do not think it makes sense in many cases to hoard cash that is earning less than 1%. That is less than inflation.

I do save cash for short-term purchases, and we are finally at a point where I think we might start saving up for a home purchase. However, we prioritized a lot of other things before starting to stock up on cash (paying down debt, maxing out retirement, buying an income property, setting up taxable investments, etc.)

It is hard for me to imagine a situation so dire that I could not use a credit card (which I like to get points anyway) or access a line of credit while waiting to sell investments. I do save, but I don't save much in cash. I am not saying it never makes sense to hold cash, and when interest rates rise, I may adjust our personal strategy.

It is worth noting that I am not inherently afraid of debt. It doesn't cause me to lose one wink of sleep carrying debt that is under 5% or so (maybe a little higher?) It would cause me to worry if I had massive amounts of cash sitting around doing NOTHING for me. However, this really comes down to personal comfort levels. If you are the kind of person who truly worries and frets and stresses out without xx in the bank, by all means, keep xx in the bank. It's not a BAD idea, but I just don't feel it is the wisest plan looking strictly at the numbers. Life isn't strictly about the numbers though.

I feel like I am doing a terrible job this morning of explaining my thoughts and I apologize for that.

[nygalinpa]

Seeing others with this idea makes me feel better about what we do. We did have a fully funded efund and one day it just struck me as odd. I took a big chunk of it and put it in stocks. I know I can get it it in a few days if something happened plus we do have access to cash and even credit if a true emergency would arise.

[dr.girlfriend]

This makes a lot of sense for people who have non-retirement investments, because they can always liquidate investments (even if it means a short-term loss) to cover real emergencies. However, for someone whose next line of defense for an emergency would be a cash advance from their credit card or a withdrawal from their 401k, it doesn't make sense.

We had an efund of $30k, and then tapped into it three times last year (two new car purchases and my MIL's funeral). It's pretty low right now, but I've prioritized funding our Roth IRAs instead of rebuilding it, because I can always withdraw from the Roth in an emergency but I can never go back and fund it, and in a perfect world we may no longer be eligible for them in awhile.

[pamela]

The amount we keep liquid is for things we can't use a card for - mortgage, car payment, SLs, deposits if we were to have to move for work, etc.

[SJ]

May 14, 2012 8:00:59 GMT -5 dr.girlfriend said:

This makes a lot of sense for people who have non-retirement investments, because they can always liquidate investments (even if it means a short-term loss) to cover real emergencies. However, for someone whose next line of defense for an emergency would be a cash advance from their credit card or a withdrawal from their 401k, it doesn't make sense.

I agree with this. I'm not against e-funds, I would just argue that they don't need to be excessively large. Maybe 3 months of cash and then start to invest after that (these would be non-retirement investments with no penalty to use).

I also fully realize that every household has a unique and individual set of needs, priorities, goals, and tolerance for risk. By no means do I think our personal strategy is the best one for everyone and I apologize if I made it sound that way.

[Deleted]

Our financial advisor told us we needed $30k liquid because "there are very few emergencies in life that can't be solved with $30k" but when I repeated that quote to another one of his clients they said he told them the same line but with 20k. So we sort of merge our e-fund with our moving away fund and we feel comfortable with where we are at.