If you have no other money saved, then start by putting some in a money market (cash). Once you have plenty of money in other vehicles (stocks, mutual funds, etc.), you can have less cash. But I'd still aim to have some of my net worth in cash, maybe 1-5 percent. Minimum of $20k in cash is what makes me feel comfortable.

Anonymous wrote:

Anonymous wrote:Yeah OP, you're on the right track. It's too much to keep 6-12 months worth of income in cash like some financial planners recommend, especially if your expenses are well below your income (that is to say, if you are high-income and currently saving a lot). If your "emergency fund" could lose 30% of its value and still cover 3+ months of expenses, or whatever your comfort timeline is, go ahead and put it in ETFs. Roth is a good option if you qualify and it's not maxed out, the rest in a taxable account I guess.

So ETFs are a better option that money market funds? Can you please explain more? Thanks

Sure, money market funds are designed to never lose value in nominal terms, meaning that every dollar you put in, you are supposed to get a dollar out, whenever you want, regardless of what is happening in the markets. The fund manager pursues a very conservative fixed income strategy that results in a very small return on your money, with very low risk of loss of principal.

In high interest rate environments holding cash in these funds will give you a small return, which is better than no return. But in the current environment the returns are so low that it's basically the same as holding cash in a checking account, for the average family. If you are an insurance company or Bill Gates with $500m in these funds, that's a different story.

In other words they are a "cash management" vehicle for people/institutions holding mountains of cash. They are not an investment vehicle.

So hold some cash in a checking or savings account and put the rest of your funds to work for higher returns in a vehicle that is still very liquid. For most people this means stock ETFs or mutual funds in a brokerage account (Roth, if available, or a taxable account). ETFs are usually better for passively tracking an index of domestic stocks, and can be sold any moment during trading hours. Mutual funds can be bought or sold once per day, so almost as liquid, but the fees are not worth it if you are tracking an index. The fees are sometimes worth it for active management (the manager picks stocks).

Note that liquid means you can sell them quickly and easily. But as discussed above the value can still rise and fall. If you need to withdraw the money in a market crash, you'll be withdrawing less money, no question about it.

You could also do fixed income (bonds, treasuries), but be aware of the limited upside if you believe, as many do, that interest rates will soon rise.

Hope that helps. You might consider hiring a financial advisor...

The general reason not to do it is this: If the economy tanks, that's exactly the time you can lose your job and need your fund. But then, you have no savings since it all just went down the toilet in stocks, and your house is also under water. When it rains, it pours.

Anonymous wrote:Yeah OP, you're on the right track. It's too much to keep 6-12 months worth of income in cash like some financial planners recommend, especially if your expenses are well below your income (that is to say, if you are high-income and currently saving a lot). If your "emergency fund" could lose 30% of its value and still cover 3+ months of expenses, or whatever your comfort timeline is, go ahead and put it in ETFs. Roth is a good option if you qualify and it's not maxed out, the rest in a taxable account I guess.

So ETFs are a better option that money market funds? Can you please explain more? Thanks

Yeah OP, you're on the right track. It's too much to keep 6-12 months worth of income in cash like some financial planners recommend, especially if your expenses are well below your income (that is to say, if you are high-income and currently saving a lot). If your "emergency fund" could lose 30% of its value and still cover 3+ months of expenses, or whatever your comfort timeline is, go ahead and put it in ETFs. Roth is a good option if you qualify and it's not maxed out, the rest in a taxable account I guess.

That's where our emergency fund is.

How about a Roth? Whatever funds you put in yourself you can take out at any time with no penalty. It's just the capital gains that you can't take out.

Anonymous wrote:FYI, many mutual funds have withdrawal penalty fees if funds are withdrawn in a relatively short period of time. If withdrawing money on short notice is a possibility, you may want to consider ETFs, which do not have early redemption fees.

This is a 60 day period from buying and then selling, which I assume most likely would not be an issue here. And the funds with these fees are those funds with more sensitivities to large constant withdrawals - such as small cap funds and international funds. Not the funds you would typically have emergency funds invested in anyway.

We do this as well, but you need to understand how the fee structure works. You usually "pay" for easy withdrawals by higher upfront or recurring fees. (Which is fine, if the average rate of return is more than a MMA and the fund is pretty conservative).

One risk here is that a lot of investment vehicles that people think of as cash equivalents aren't really. People used to treat the municipal bond market as a cash equivalent and that turned out to be a terrible idea.

I don't buy this "6 months of living expenses in a checking account" nonsense. We keep two months or so and the rest in ETFs etc.

I'm very risk averse and right now we have close to 6mos worth of expenses sitting in a money market account, basically earning about 1% interest. Our financial advisor is pushing us to put half of that in mutual funds instead. Somehow I feel anxious knowing that I couldn't put my hands on that money "today".

This is essentially what we do, in that we don't keep a chunk of money outside our investments and label it "emergency fund." If we needed a lot of cash, we would simply cash out mutual funds.

However, we have a lot of money invested outside retirement accounts, so we know there will always be enough there to meet a need. If your emergency fund is your only money saved outside retirement accounts, it should be in a cash equivalent to protect principal.

FYI, many mutual funds have withdrawal penalty fees if funds are withdrawn in a relatively short period of time. If withdrawing money on short notice is a possibility, you may want to consider ETFs, which do not have early redemption fees.

If you can stomach losing half of your emergency fund and think that the remainder would be sufficient for you to make it through you and/or spouse being unemployed, go for it. It is very unlikely that the market would tank and lose much more than half its value, so you should be fine putting it in an index fund.

I would not do this, however, but that's me.

Every piece of advice I have read says not to put your 3-6 months of emergency money in a mutual fund, but in a money market fund or something else that is reasonable stable and can be accessed quickly. I understand the rationale for this: it ensures that a specific amount of money will be available to you when the emergency hits.

However, this is a lot of money - money that could be growing. I'm wondering if it simply makes more sense to put it in an index fund and let the value shoot around wildly. If I don't have to pull the funds, they grow. If I do have the pull the funds, I may be forced to withdraw when the market is poor and my 6 month supply could be only 3 months. But... I'm still going to have some savings, and I am not overly terrified of both DH and I becoming unemployed simultaneously or unemployed for an extended period.

Would this be crazy?