What to do savings account

[AlaskaHunter]

If your older than 59 1/2 you can withdrawal from a 401k,IRAs, etc. so no need for us old farts to have a great amount in
low interest yielding emergency funds.

 

[X13]

For those that have 6+ months of income saved what are you guys doing with it.

As some have mentioned, I agree that 6+ months of income is likely far more than you need for an emergency fund from what I've seen and read.

6+ months of essential expenses is what me and my wife set aside. That's about $20k to cover food, rent, gas, taxes, utilities, car payment, etc.

Ours sits in a savings account opened through the same company that my wife has her student loans through. There was a promotion that dropped her loan interest rate for opening an account.

I don't think a bare bones essential emergency fund should be in a brokerage account. If your particular emergency is unfortunately timed around a stock market downturn you'll be doubly screwed

 

[Benjamins]

As some have mentioned, I agree that 6+ months of income is likely far more than you need for an emergency fund from what I've seen and read.

6+ months of essential expenses is what me and my wife set aside. That's about $20k to cover food, rent, gas, taxes, utilities, car payment, etc.

Ours sits in a savings account opened through the same company that my wife has her student loans through. There was a promotion that dropped her loan interest rate for opening an account.

I don't think a bare bones essential emergency fund should be in a brokerage account. If your particular emergency is unfortunately timed around a stock market downturn you'll be doubly screwed

I agree there is always the potential for the stock market to take a Down turn. But with insane inflation going on these days, keeping cash or a savings account with an interest rate of 1% is literally automatically making you lose money.

 

[Deleted member 18333]

We can agree to disagree, insurance always costs me money. It’s about transferring some risk and I’m ok with the cost. I have seen people invest that emergency savings during a good market and refuse to take it out to cover an emergency and resort to a credit card. That’s a hard pass for me but to each their own.

Fair enough. Admittedly I run a higher risk level than many are comfortable with. I hate insurance of all kinds. I keep bare minimum required insurance levels and high deductibles. Understand not all are comfortable with this approach.

 

[Deleted member 28227]

If your older than 59 1/2 you can withdrawal from a 401k,IRAs, etc. so no need for us old farts to have a great amount in
low interest yielding emergency funds.

With probably the exception of those on fixed pensions.

I agree there is always the potential for the stock market to take a Down turn. But with insane inflation going on these days, keeping cash or a savings account with an interest rate of 1% is literally automatically making you lose money.

High APYs are .55%, YTD S&P 500 is down -10%, it’s not really about inflation it’s about what are your other options + your acceptable risk.

 

[TimeOnTarget]

$10,000 per person through Treasury Direct. 7.12% if purchased by 4/22. Also adjusts for inflation. You lose 3 months interest if redeemed before 5 years. Wish I could buy more in these times.

These are 7.12% annually? Which compound for up to 30 years? How do they adjust for inflation?

 

[Benjamins]

With probably the exception of those on fixed pensions.

High APYs are .55%, YTD S&P 500 is down -10%, it’s not really about inflation it’s about what are your other options + your acceptable risk.

I definitely agree that stocks aren't for everyone, and that it can be tough to watch your money fluctuate, but i don't think taking a 2 month snap shot of the markets is a fair representation. Go back a year and the s&p is up 9%. In the long run the stock market will go up. But I do agree, not everyone can handle the risk, just explaining why I invest my emergency funds vs keep them in a savings account.

 

[Deleted member 18333]

High APYs are .55%, YTD S&P 500 is down -10%, it’s not really about inflation it’s about what are your other options + your acceptable risk.

True, but given the OP's stated scenario, half a years income is a bunch of money. Lets just say its $25000. A downturn of 10% still leaves a bunch of money for an unplanned expense. The upside is just too much for me to pass up on. Particularly for funds that more than likely wont be touched in any one given year.

 

[nontyp]

These are 7.12% annually? Which compound for up to 30 years? How do they adjust for inflation?

The rate adjusts every six months based on inflation. Im likely not in for the long term. I plan to just monitor it for a couple years and keep an eye on the rate.

 

[TimeOnTarget]

The rate adjusts every six months based on inflation. Im likely not in for the long term. I plan to just monitor it for a couple years and keep an eye on the rate.

Gotcha. Seemed to good to be true. Which it is.

 

[MarvB]

So with the electronic treasury (non-paper) purchase is that $10k per year for each spouse and the I-bonds then held separately in the individuals name/social? Just asking since it would seem the $5k paper would be held jointly (if purchased via a joint tax return)?

 

[nontyp]

Gotcha. Seemed to good to be true. Which it is.

Yeah it’s not perfect, but in a inflationary environment like we are in, and will be in for quite some time, it’s a decent place to park some emergency savings.

 

[rustednuts]

I break my emergency fund into 3 catagories
1) Need money today. This is stored in cash.
2) Unexpected major expense. I keep this in a separate high yield savings account. If needed we would put the expense on a CC for the points and move the money to pay it off or move it into checking if needed.
3) Longer emergency situation. I put this into our ROThs to max them out when would have not had otherwise. They are in a conservative mutual fund that is heavy bonds. This certainly carries risk, but in our situation should we need the money we can pull it penalty-free. I like the idea of trying to at least keep up with inflation with the potential award of tax-free growth.

 

[Deleted member 28227]

True, but given the OP's stated scenario, half a years income is a bunch of money. Lets just say its $25000. A downturn of 10% still leaves a bunch of money for an unplanned expense. The upside is just too much for me to pass up on. Particularly for funds that more than likely wont be touched in any one given year.

I find myself agreeing mathematically but disagreeing practically because we have different risk tolerances.

Realized returns are very different from projected returns. I'm personally fine, to some extent, with forgoing hypothetical money, to protect against risk.

I take an approach similar to @rustednuts, and that approach as grown as I've gotten older and my financial situation has grown more stable.

Further, I find the upside argument problematic because it assumes you never recalculate and leave the $25,000 in a savings account for 20-30 years, but I think in a real world scenario one's circumstances change and you will adjust... either become more stable and be able to take on more risk or less stable and need less risk.

 

[Deleted member 28227]

In the long run the stock market will go up.

Here's the thing... let's say your invested in VTI.

You miss out on the best year because you don't invest your emergency money ouch... could have been up 33.51%, you missed out on upside. But you still have your emergency money and your job, so you're doing fine.

You invest your emergency fund hit 2008, you lose -36.97% of your money and then you lose your job, and the value of your house craters, and.... and...

It's an emergency fund. The entire point is to be there in catastrophic circumstances.

 

[Mooretitan]

Just a little more information. I have roughly over $50,000 in this account and more than likely will try and find a high yield savings account and move others over to my ROTH account. My wife and I are more of a pay cash type people and are debt free besides the house. We have roughly $40,000 in our ROTH accounts and also will have a rental paid off in in a few years. The problem is being in our early 40's we missed why to many years not maxing out the ROTH account because we paid everything in cash when we could. We had some medical stuff come up in our 20's that cost us about $50,000 and were grateful to have the cash to pay for it. We are not to risky with our money and have good government jobs with a good retirement built in. We just don't feel we are using our money to make money. Anyways that's the background.

Thanks

 

[BenInMT]

All ya’ll talking about an “emergency fund” should consider funding a pre-tax HSA if you are not. There‘s a max on that, and once you hit a certain age it acts more like a retirement savings account, but for the time being you are diverting pre-tax money that you can spend on all medical needs and that is really what I consider emergency.

 

[JAG]

I'm in a group that has been pooling our money for a Motley Fool subscription since the early 2000's. Right now we just have the Stock Advisor and Rule Breakers. By purchasing our own set of stocks from their recommendations, we have all beat the SP 500 every year since then. My wife and I share a savings account for expenses and we both have ROTH's.

We did the six-month savings thing suggested by 'the one who must not be named'. After 20+ years of job changes and life, this is too much for us, but we still have a discretionary/fluid amount that we think is enough.

The stock market is your best hedge against inflation. When stocks plummet, it's still hard to fight the urge to sell- just DONT!

Buffett the financial sage, - 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'

 

[Deleted member 28227]

True, but given the OP's stated scenario, half a years income is a bunch of money. Lets just say its $25000. A downturn of 10% still leaves a bunch of money for an unplanned expense. The upside is just too much for me to pass up on. Particularly for funds that more than likely wont be touched in any one given year.

Was thinking this would be an interesting comparison.

Case 1
Individual makes 85k, 2% increase salary a year, start 2000 go to 2045. Max out 401k + 5k a year in a brokerage ever year. At years 2008 and 2020, individual loses job for six months. Take $25000 out of investments at both of those points, obviously no added investments.
What is their net worth at 2045.

Case 2
Individual makes 85k, 2% increase salary a year, start 2000 go to 2045. Max out 401k, $5000 a year into a 0% savings account until 40k, after that allocate the $5000 to a brokerage. At years 2008 and 2020, individual loses their job for six months, they don't sell anything from their portfolio but use their cash reserves. $25000 lost for living with $15000 used to buy the down of the market. So 15,000 in their 401k.
What is their net work at 2045

Run cases known market return rates for SP500 and then average 7.5% for 2022-2045.

My question by the model is does the cash reserve, not having to sell securities at their lowest value, and then being able to buy the down offset the $40,000 in reserve not in the market.



Someone posted a good article about what happens if you miss the best days a while back in the market and that got me thinking about this case.

I wonder if the correct amount of Emergency, is actually expenses + what you would invest otherwise for that 6 months.

 

[Deleted member 18333]

Too much homework for me.

I'm going to go with the far more likely scenario that this individual never loses their job in either of those years and only takes out a small fraction of their emergency fund to pay for a new furnace. Keeps rolling with the remainder in either a brokerage account or savings. Retires early because they were prudent and mindful with their saving and spending and eventually uses that emergency money fund a week long bender with Cushman. That week would be way better had they put the money in a brokerage account rather than a savings account but either way they are in for good times.