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[johnny956]

On Traditional IRA vs. Roth IRA. If I assume my income now will be identical to my income later, would the tax deferred option be preferable on the basis that I'll have more money in the system benefiting from compound interest?

The income amounts may be identical for you but there is no guarantee that the tax rates will stay the same so it's a risk/reward you have to decide. I'm not taking the risk so I'm going with a Roth so I don't have to worry about the future tax rates

 

[Randolph Freelander]

Is it completely subjective what my first Vanguard move is between start a 401k with them personally, or drop a chunk a change into one of the favorite Index Funds?

For clarification, you would start an IRA at Vanguard, or a taxable investment account, or both. Your employer provides the 401K.

I'd go with the IRA before the taxable account due to its tax benefits. What you'll want to decide is based on your income level, whether you would want to contribute to it as a Roth or traditional. With Roth, you get no tax deduction now, but you pay no taxes on withdrawals after you reach 59.5. With traditional, you might be able to deduct your contributions now (reducing your current tax bill, depends on your income), and would pay ordinary income tax rates on withdrawals in retirement.

Just to repeat the standard advice, you would prioritize

1. 401K up to the full employer match
2. Fund your IRA up to the full IRS contribution limit
3. Return and fund your 401K up to the full IRS contribution limit
4. Independent taxable investments

You may prioritize differently based on your own situation.

 

[disillusion386]

I finally got around to opening a Roth IRA account through Vanguard (already have a 403b through work), and I'm a bit confused about how to invest in some of their index funds. I narrowed down to a few, but they all have a minimum investment of $10k. Will I not be able to invest in those until after a couple of years due to the max annual contribution of $5500?

Sorry if this is a dumb question.

 

[Randolph Freelander]

I finally got around to opening a Roth IRA account through Vanguard (already have a 403b through work), and I'm a bit confused about how to invest in some of their index funds. I narrowed down to a few, but they all have a minimum investment of $10k. Will I not be able to invest in those until after a couple of years due to the max annual contribution of $5500?

Sorry if this is a dumb question.

Their investor class shares have a lower requirement ($3000, I think), but you can also invest in their ETFs with no minimums beyond the share price (which you would need to buy in complete shares).

If you're on one of their pages for the admiral class funds, there will be links to their investor class fund and the ETF, when available.

 

[disillusion386]

Their investor class shares have a lower requirement ($3000, I think), but you can also invest in their ETFs with no minimums beyond the share price (which you would need to buy in complete shares).

If you're on one of their pages for the admiral class funds, there will be links to their investor class fund and the ETF, when available.

Perfect, I just found them. Thanks, that's really helpful.

 

[Amory]

Not really the thread for it, but how do you guys invest in the short or medium-term? For a down payment on a house or car, etc? Let's say you're planning to take the money out in 2-3 years. Still index funds?

 

[Charlatan]

Not really the thread for it, but how do you guys invest in the short or medium-term? For a down payment on a house or car, etc? Let's say you're planning to take the money out in 2-3 years. Still index funds?

With such a short timeframe before using that money, I would stick those funds into a money market. Say a big market crash happens a year from now. Do you really want your down payment fund to be reduced by 15 to 20% (or more)?

 

[tokkun]

Not really the thread for it, but how do you guys invest in the short or medium-term? For a down payment on a house or car, etc? Let's say you're planning to take the money out in 2-3 years. Still index funds?

My choice would be a corporate bond index fund like VCIT over that sort of timeframe. It returns about 4% a year, whereas the best CD rate my bank offers right now is 1.4%, and the amount of volatility seems reasonable for an investment term of a few years.

 

[Amory]

With such a short timeframe before using that money, I would stick those funds into a money market. Say a big market crash happens a year from now. Do you really want your down payment fund to be reduced by 15 to 20% (or more)?

Yeah that's the dilemma. I'd like to find a lower risk fund that will actually generate a return. For 1% or whatever I'd just leave the money in my checking account.

My choice would be a corporate bond index fund like VCIT over that sort of timeframe. It returns about 4% a year, whereas the best CD rate my bank offers right now is 1.4%, and the amount of volatility seems reasonable for an investment term of a few years.

This sounds more in line with what I'm looking for, just a conservative way to get 3-4% on my money would be ideal.

 

[Soroc]

My choice would be a corporate bond index fund like VCIT over that sort of timeframe. It returns about 4% a year, whereas the best CD rate my bank offers right now is 1.4%, and the amount of volatility seems reasonable for an investment term of a few years.

I'm interested in this as well as I'm saving for a down payment for a house and was also curious where best to put my money besides a savings acct. If I were to invest in a corporate bond index fund like VCIT, if in 2 years I was ready to take the money out, I would get his on a big tax, not sure how taxes work when withdrawing money from the market as I actually ahven't withdrawn money like that. For example I will eventually withdraw around 45k for a down payment on a house, how would withdrawing that from VCIT by selling work with taxes?

 

[GodParticle]

So I did a roth ira last year and need to do my tax return. Do I need to fill out any special forms and what kind of info will I need to provide?

 

[Walter White Walker]

So I did a roth ira last year and need to do my tax return. Do I need to fill out any special forms and what kind of info will I need to provide?

Assuming you're using a tax program or website it will just ask you how much you contributed and do the calculations and form for you. It's really not complicated.

 

[GodParticle]

Assuming you're using a tax program or website it will just ask you how much you contributed and do the calculations and form for you. It's really not complicated.

Yeah, I'm just doing one of those free programs. I was worried I needed some kind of forms. Thanks

 

[Piecake]

I'm interested in this as well as I'm saving for a down payment for a house and was also curious where best to put my money besides a savings acct. If I were to invest in a corporate bond index fund like VCIT, if in 2 years I was ready to take the money out, I would get his on a big tax, not sure how taxes work when withdrawing money from the market as I actually ahven't withdrawn money like that. For example I will eventually withdraw around 45k for a down payment on a house, how would withdrawing that from VCIT by selling work with taxes?

You are taxed on your capital gains

A capital gain refers to profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.

So, if you invest 40k and turn that into 45k, you will be taxed on that 5k.

The rate that you will be taxed depends on your income and how long it has been invested.

Short-term gains (held for a year or less) are taxed like regular income. Long-term gains are taxed from 0-20% depending on your income bracket.

capital gains do count towards your AGI and can can push you into a higher bracket

https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States#Current_.282016.29_law

 

[tokkun]

I'm interested in this as well as I'm saving for a down payment for a house and was also curious where best to put my money besides a savings acct. If I were to invest in a corporate bond index fund like VCIT, if in 2 years I was ready to take the money out, I would get his on a big tax, not sure how taxes work when withdrawing money from the market as I actually ahven't withdrawn money like that. For example I will eventually withdraw around 45k for a down payment on a house, how would withdrawing that from VCIT by selling work with taxes?

Most of the return on a bond fund comes as a dividend. If you are used to how taxes on interest in a savings account works, dividends are basically the same as that. You will get a 1099-DIV form each year instead of the 1099-INT. Like interest, a dividend is taxed in the year when it is earned. It is not based on when you withdraw the money.

You may have to pay some capital gains tax when you sell, but it probably won't be very large, because bond funds tend not to return much of a capital gain over short time periods.

 

[nillapuddin]

For clarification, you would start an IRA at Vanguard, or a taxable investment account, or both. Your employer provides the 401K.

I'd go with the IRA before the taxable account due to its tax benefits. What you'll want to decide is based on your income level, whether you would want to contribute to it as a Roth or traditional. With Roth, you get no tax deduction now, but you pay no taxes on withdrawals after you reach 59.5. With traditional, you might be able to deduct your contributions now (reducing your current tax bill, depends on your income), and would pay ordinary income tax rates on withdrawals in retirement.

Just to repeat the standard advice, you would prioritize

1. 401K up to the full employer match
2. Fund your IRA up to the full IRS contribution limit
3. Return and fund your 401K up to the full IRS contribution limit
4. Independent taxable investments

You may prioritize differently based on your own situation.

Thanks for the reply Randolph

I have it all set up now, Im going to go ahead and drop the 5500 dollar hammer into my Vanguard IRA, I will probably look into getting in on these index funds a bit later in the year.

Much appreciated

 

[Late Flag]

Not really the thread for it, but how do you guys invest in the short or medium-term? For a down payment on a house or car, etc? Let's say you're planning to take the money out in 2-3 years. Still index funds?

For me, personally, that's cash territory. Sure, I lose a few bucks in interest that I theoretically could have squeezed out with a money market or something, but I truly don't care about that and a savings account works for me. I say that as a 44 year old who is 100% in stock index funds for long term investments.

 

[Stuggernaut]

Bleah... I am one of those dummies that has no "plan"...I have some property that will net me a nice return vs what I bought it for, and that's about it.

Mid 40's... so kinda late to be rethinking this, but as I get older I am.

My wife has a healthy 401k and that is about it for her too.

Too late?

 

[Earthstrike]

Bleah... I am one of those dummies that has no "plan"...I have some property that will net me a nice return vs what I bought it for, and that's about it.

Mid 40's... so kinda late to be rethinking this, but as I get older I am.

My wife has a healthy 401k and that is about it for her too.

Too late?

It's never too late to start. Will you have as much as if you started earlier? Nope, But that's true for every person on earth. It's something that is mathematically always true. And make sure you don't use "I'm too old now" as an excuse. You are only harming your own future by doing so.

 

[ZackieChan]

It's never too late to start. Will you have as much as if you started earlier? Nope, But that's true for every person on earth. It's something that is mathematically always true. And make sure you don't use "I'm too old now" as an excuse. You are only harming your own future by doing so.

Yep. He needs to start yesterday. No excuses!

 

[therealist]

hey guys, i'm 26 and finally deciding to get serious about investing. I have been putting money into my work 401k but the rest of my money has just gone straight to my bank savings. Looking back I feel like I lost a lot of money but not investing that 4 years ago.

I plan on opening up a Roth IRA and contributing the maximum each year. Rest of my money probably goes into those index funds as OP mentioned. My question is, how much money should I still keep in my savings account? Is $30k too much to just set aside?

 

[ascii42]

Is $30k too much to just set aside?

Probably, unless you are saving up for something in particular, like a downpayment. 3-6 months worth of expenses is a general rule of thumb for emergency funds.

 

[UraMallas]

hey guys, i'm 26 and finally deciding to get serious about investing. I have been putting money into my work 401k but the rest of my money has just gone straight to my bank savings. Looking back I feel like I lost a lot of money but not investing that 4 years ago.

I plan on opening up a Roth IRA and contributing the maximum each year. Rest of my money probably goes into those index funds as OP mentioned. My question is, how much money should I still keep in my savings account? Is $30k too much to just set aside?

You probably have too much. I would say take $5500.00 of that and open that Roth IRA now (before April 15) so you can put that towards 2016 contributions and then take another $5500.00 of it and add that to 2017 contributions. Then, you're done for the year and can contribute all the money you planned to put in your Roth IRA into your 401k.

Never too late.

 

[RumblingRosco]

-

 

[therealist]

You probably have too much. I would say take $5500.00 of that and open that Roth IRA now (before April 15) so you can put that towards 2016 contributions and then take another $5500.00 of it and add that to 2017 contributions. Then, you're done for the year and can contribute all the money you planned to put in your Roth IRA into your 401k.

Never too late.

Nice tip, will definitely open up my roth asap.

 

[tokkun]

I have said it before, but large cash-based emergency funds do not make much sense to me.

A corporate bond index fund historically returns about 3-4% more annually than current money market account interest rates, and the volatility on bonds is not that bad; the largest peak-to-trough decrease in VICSX in the last 7 years of data is ~9%. If that is too much volatility, you can sacrifice a little return and go down the line to Total Bond Market instead. Liquidity is not that bad - worst case, it takes you a week to sell and transfer money to a different account if you need to liquidate. That seems perfectly reasonable for an emergency fund in a world where you can pay for most things with a credit card and delay payment by 30 days.

For every $10K you have in cash, you are paying like $250 / year in opportunity cost compared to putting it in bonds instead. That is not trivial, so hopefully you really need that same-day liquidity or absolute non-volatility to pay the price for it. I'd encourage people to try to write a list of hypothetical scenarios where you have a $10K+ emergency and need to come up with the cash that same day. I can't come up with any that don't sound like movie plots.

 

[Unknown Soldier]

T. Rowe Price has finally released an Android app.

https://play.google.com/store/apps/details?id=com.trp.and.personal

 

[Ether_Snake]

I have said it before, but large cash-based emergency funds do not make much sense to me.

A corporate bond index fund historically returns about 3-4% more annually than current money market account interest rates, and the volatility on bonds is not that bad; the largest peak-to-trough decrease in VICSX in the last 7 years of data is ~9%. If that is too much volatility, you can sacrifice a little return and go down the line to Total Bond Market instead. Liquidity is not that bad - worst case, it takes you a week to sell and transfer money to a different account if you need to liquidate. That seems perfectly reasonable for an emergency fund in a world where you can pay for most things with a credit card and delay payment by 30 days.

For every $10K you have in cash, you are paying like $250 / year in opportunity cost compared to putting it in bonds instead. That is not trivial, so hopefully you really need that same-day liquidity or absolute non-volatility to pay the price for it. I'd encourage people to try to write a list of hypothetical scenarios where you have a $10K+ emergency and need to come up with the cash that same day. I can't come up with any that don't sound like movie plots.

Yep you are totally right, people shouldn't keep large sums of emergency cash, just put it in a safe investment like bonds (and not some stupid GICs)

 

[UraMallas]

I have said it before, but large cash-based emergency funds do not make much sense to me.

A corporate bond index fund historically returns about 3-4% more annually than current money market account interest rates, and the volatility on bonds is not that bad; the largest peak-to-trough decrease in VICSX in the last 7 years of data is ~9%. If that is too much volatility, you can sacrifice a little return and go down the line to Total Bond Market instead. Liquidity is not that bad - worst case, it takes you a week to sell and transfer money to a different account if you need to liquidate. That seems perfectly reasonable for an emergency fund in a world where you can pay for most things with a credit card and delay payment by 30 days.

For every $10K you have in cash, you are paying like $250 / year in opportunity cost compared to putting it in bonds instead. That is not trivial, so hopefully you really need that same-day liquidity or absolute non-volatility to pay the price for it. I'd encourage people to try to write a list of hypothetical scenarios where you have a $10K+ emergency and need to come up with the cash that same day. I can't come up with any that don't sound like movie plots.

Okay, then. What's your goto? I never thought about the CC thing and you're absolutely right on that, so you've sold me on the idea.

 

[tokkun]

Okay, then. What's your goto? I never thought about the CC thing and you're absolutely right on that, so you've sold me on the idea.

Personally I don't have a separate emergency fund. I keep my accessible savings in a Vanguard Total Stock Market index. I didn't mention this option in the previous post because it's something a lot of people don't feel comfortable about at a gut level, but that I think is the rational strategy for the following reasons:

1. My after-tax investments are already large enough that I could handle what I consider to be reasonable emergency expenses even if the market crashed and was down 50% (even though such crashes are exceedingly rare).
2. I believe that true emergencies should be also rare, so the higher expected value of stock investments will win out in the long run, even if I end up having to sell stocks for a loss at some point.
3. I am not all that worried about longterm unemployment through a mix of good job security and low living expenses.

Although I think it's a good strategy, I know a lot of people feel a sense of anxiety about not having a designated emergency fund or having all their money in high volatility assets like stocks. So for them I'd advise a corporate bond fund like VCIT instead.

 

[CoolOff]

Personally I don't have a separate emergency fund. I keep my accessible savings in a Vanguard Total Stock Market index. I didn't mention this option in the previous post because it's something a lot of people don't feel comfortable about at a gut level, but that I think is the rational strategy for the following reasons:

1. My after-tax investments are already large enough that I could handle what I consider to be reasonable emergency expenses even if the market crashed and was down 50% (even though such crashes are exceedingly rare).
2. I believe that true emergencies should be also rare, so the higher expected value of stock investments will win out in the long run, even if I end up having to sell stocks for a loss at some point.
3. I am not all that worried about longterm unemployment through a mix of good job security and low living expenses.

Although I think it's a good strategy, I know a lot of people feel a sense of anxiety about not having a designated emergency fund or having all their money in high volatility assets like stocks. So for them I'd advise a corporate bond fund like VCIT instead.

This has pretty much always been how I feel about it. 3-6 months of salary just sitting somewhere in cash seemed super conservative to me, but I guess living in Sweden creates different expectations regarding sudden expenditures on healthcare (I can afford 100 dollars a year...) or loss of income from unemployment.

 

[vypek]

I'm trying to "tighten my belt" on unnecessary spending as much as I can this year and I was wondering if something like Acorns is worth using. I have had some growth on what I have put in but I'm not certain it is worth the time to do this spare change things. It isn't a large sum of money but I have to think it would be better served elsewhere like my savings account or invested.

Could I get your thoughts on this? I'm very unsure of this app at this point.

 

[TMC]

Personally I don't have a separate emergency fund. I keep my accessible savings in a Vanguard Total Stock Market index. I didn't mention this option in the previous post because it's something a lot of people don't feel comfortable about at a gut level, but that I think is the rational strategy for the following reasons:

1. My after-tax investments are already large enough that I could handle what I consider to be reasonable emergency expenses even if the market crashed and was down 50% (even though such crashes are exceedingly rare).
2. I believe that true emergencies should be also rare, so the higher expected value of stock investments will win out in the long run, even if I end up having to sell stocks for a loss at some point.
3. I am not all that worried about longterm unemployment through a mix of good job security and low living expenses.

Although I think it's a good strategy, I know a lot of people feel a sense of anxiety about not having a designated emergency fund or having all their money in high volatility assets like stocks. So for them I'd advise a corporate bond fund like VCIT instead.

I also have a little over 6 months of expenses ($10k) in a savings account. I have been thinking about how it could be wasteful sitting in a savings account rather than earning me more money (Only earning about 1% on it). Those funds are in the event that I get laid off and have a hard time finding work which would be pretty rare in my industry. If this happened, I obviously wouldn't need the entire 10k at once either. Is it better to transfer these into my taxable account? I wasn't sure what account you are playing your emergency funds in so I was curious.

Thanks!

 

[johnny956]

I also have a little over 6 months of expenses ($10k) in a savings account. I have been thinking about how it could be wasteful sitting in a savings account rather than earning me more money (Only earning about 1% on it). Those funds are in the event that I get laid off and have a hard time finding work which would be pretty rare in my industry. If this happened, I obviously wouldn't need the entire 10k at once either. Is it better to transfer these into my taxable account? I wasn't sure what account you are playing your emergency funds in so I was curious.

Thanks!

If your okay with your savings fund dropping during a crash then by all means go for it. Bonds aren't safe from a market crash (look up many bonds from 2008 and see how much they dropped). I keep about 4 months spending in a 1% savings account as it's liquid as I don't want to touch my investments (taxable included). You'll pay taxes on those sells and odds are stacked that you'll end up needing those during a market downturn (layoffs etc)

 

[PflargBlarg]

Yes, it's really about what you're comfortable with. Although 6 months expenses in cash seems almost outrageously conservative. I keep $2000 in chequing for cash flow purposes and a minimum of about $5000 in savings account as the emergency fund (monthly expenses generally between 2000 and 2300-ish).

I think I may drop that savings buffer to $3000 though.

 

[TMC]

If your okay with your savings fund dropping during a crash then by all means go for it. Bonds aren't safe from a market crash (look up many bonds from 2008 and see how much they dropped). I keep about 4 months spending in a 1% savings account as it's liquid as I don't want to touch my investments (taxable included). You'll pay taxes on those sells and odds are stacked that you'll end up needing those during a market downturn (layoffs etc)

Yes, it's really about what you're comfortable with. Although 6 months expenses in cash seems almost outrageously conservative. I keep $2000 in chequing for cash flow purposes and a minimum of about $5000 in savings account as the emergency fund (monthly expenses generally between 2000 and 2300-ish).

I think I may drop that savings buffer to $3000 though.

Thanks guys! Really appreciate your input. I think I will drop it down to 3 months worth of expenses.

 

[GhaleonEB]

Yes, it's really about what you're comfortable with. Although 6 months expenses in cash seems almost outrageously conservative. I keep $2000 in chequing for cash flow purposes and a minimum of about $5000 in savings account as the emergency fund (monthly expenses generally between 2000 and 2300-ish).

I think I may drop that savings buffer to $3000 though.

This is about where we are at. We keep a padding of $5000 above what we're planning to spend in the near-term in savings, and the rest in index funds. I can think of three times in the past 10 years that we've had to tap into that $5,000, but each time I've been glad it was there. One was last year when a combination of events meant we had a large expense land at a time when we'd maxed the credit card (bunch of summer home projects), and we had to dip into our overflow. We just topped it back up last month.

While infrequent, it's worked out well to have that on hand, and I'm comfortable with the small opportunity cost we're paying. As others have said, this is very much a 'do what you are comfortable' space, so long as you're not hoarding large swaths of cash for the long term.

 

[BumRush]

Yes, it's really about what you're comfortable with. Although 6 months expenses in cash seems almost outrageously conservative. I keep $2000 in chequing for cash flow purposes and a minimum of about $5000 in savings account as the emergency fund (monthly expenses generally between 2000 and 2300-ish).

I think I may drop that savings buffer to $3000 though.

6 months is the number many advisers, sites etc will throw out there to account for loss of work or being unable to provide. I don't think it's outrageous at all. Definitely conservative but I can definitely see the reasoning.

 

[RumblingRosco]

-

 

[TMC]

It might seem outrageously conservative, but I mean, it's irreplaceable peace of mind. My wife and I are nearing having 6 months of after-tax earnings banked. Since we don't live paycheck to paycheck, that 6 months of earnings probably would last us around 8-9 months without changing our spending habits, but if we hunkered down, I bet we could stretch it to a full year.

It gives us the ease of not falling into a situation where we lose our jobs in the midst of an economic recession/depression, where our non-liquid assets would be losing value and thus threaten our ability to make ends meet while we look for work. Going from 1% interest (savings account) to 3-4% interest (bonds/some sort of mutual fund) is certainly a nice jump up, but the 2-3% difference isn't needed for us to meet our overall savings/retirement goals.

Is it recommended to save 6 months of expenses or 6 months of income? I have 6 months of expenses. My actual expenses are less than 50% of what my income is.

 

[tokkun]

I also have a little over 6 months of expenses ($10k) in a savings account. I have been thinking about how it could be wasteful sitting in a savings account rather than earning me more money (Only earning about 1% on it). Those funds are in the event that I get laid off and have a hard time finding work which would be pretty rare in my industry. If this happened, I obviously wouldn't need the entire 10k at once either. Is it better to transfer these into my taxable account? I wasn't sure what account you are playing your emergency funds in so I was curious.

Thanks!

I don't really have a designated emergency fund, but in the event of an emergency, I would tap funds in roughly this order:

1. Credit cards
2. Temporary funds in my checking account
3. Taxable investments
4. 401K loan
5. Apply for a short-term bank loan
6. Roth IRA principal
7. Roth IRA gains

As for what is "best", you need to judge that for yourself. I happen to think that keeping a lot of money in cash doesn't make much sense from a purely financial standpoint, but I'm not going to judge people negatively if keeping months worth of cash gives them a warm fuzzy feeling inside. I've said it many times in this thread, but the point of investing is improve your life satisfaction, not to run up the score on your balance sheet.

(look up many bonds from 2008 and see how much they dropped).

OK, I looked up Vanguard Total Bond Market, and the drop from peak to trough in 2008 was 7%. That is assuming you bought at the worst possible time and sold at the worst possible time, and it ignores the dividend yield you would have earned in the interim. And furthermore, you could probably end up getting that 7% back eventually via tax loss harvesting.

It doesn't seem to me that an emergency fund that is 7% larger is hugely more robust to emergencies. And more to the point, it only takes 2 years for the bond-based fund to have already earned 7% more than a cash fund would. So the scenario where the cash fund performs better requires incredible bad luck - not only do you need to have a major emergency in the next two years, but it also has to coincide with you happening to both buy and sell at the worst possible time. And even then, it is not winning by much.

 

[SourBear]

Personally I have saved 4 months of income. I'm working on getting 6 months of income. Currently it is sitting in a 1% savings account, but I am planning on moving it to a Vanguard brokerage account and doing something similar to what tokkun is doing.

 

[BumRush]

Is it recommended to save 6 months of expenses or 6 months of income? I have 6 months of expenses. My actual expenses are less than 50% of what my income is.

Expenses. You want to be able to cover living costs . It doesn't really mean 6 months of how you currently spend, more the necessities (housing, food, etc, rather than going out, new clothes, etc)

 

[johnny956]

OK, I looked up Vanguard Total Bond Market, and the drop from peak to trough in 2008 was 7%. That is assuming you bought at the worst possible time and sold at the worst possible time, and it ignores the dividend yield you would have earned in the interim. And furthermore, you could probably end up getting that 7% back eventually via tax loss harvesting.

It doesn't seem to me that an emergency fund that is 7% larger is hugely more robust to emergencies. And more to the point, it only takes 2 years for the bond-based fund to have already earned 7% more than a cash fund would. So the scenario where the cash fund performs better requires incredible bad luck - not only do you need to have a major emergency in the next two years, but it also has to coincide with you happening to both buy and sell at the worst possible time. And even then, it is not winning by much.

Bond funds are terrible in after-tax accounts. After tax returns on dividends and sales of funds isn't that impressive

 

[Ultramantaro1]

I only keep about 2-3k in a chequing account, everything else is in RRSPs or TFSAs. Every scenario is different; this is enough for me.

Health care is covered by the government and my employer, I rent so there are no major unforeseen living expenses there, and I have no pets or dependents. If I lost my job/apartment, my family would take me back without a second thought. I'm not in a highly specialized industry, but I have a good enough resume that I would be unlikely to stay unemployed for more than a month unless I'm being super picky.

Worst case scenario, the money in my TFSA is easily accessible with no tax penalty, and I have credit cards I can load up. So, I don't have much of a reason to keep as much as 6 months of living expenses. Once again, every situation is unique.

 

[BumRush]

Bond funds are terrible in after-tax accounts. After tax returns on dividends and sales of funds isn't that impressive

Aren't municipal bond funds an exception to that rule, to an extent?

 

[TMC]

I don't really have a designated emergency fund, but in the event of an emergency, I would tap funds in roughly this order:

1. Credit cards
2. Temporary funds in my checking account
3. Taxable investments
4. 401K loan
5. Apply for a short-term bank loan
6. Roth IRA principal
7. Roth IRA gains

As for what is "best", you need to judge that for yourself. I happen to think that keeping a lot of money in cash doesn't make much sense from a purely financial standpoint, but I'm not going to judge people negatively if keeping months worth of cash gives them a warm fuzzy feeling inside. I've said it many times in this thread, but the point of investing is improve your life satisfaction, not to run up the score on your balance sheet.



OK, I looked up Vanguard Total Bond Market, and the drop from peak to trough in 2008 was 7%. That is assuming you bought at the worst possible time and sold at the worst possible time, and it ignores the dividend yield you would have earned in the interim. And furthermore, you could probably end up getting that 7% back eventually via tax loss harvesting.

It doesn't seem to me that an emergency fund that is 7% larger is hugely more robust to emergencies. And more to the point, it only takes 2 years for the bond-based fund to have already earned 7% more than a cash fund would. So the scenario where the cash fund performs better requires incredible bad luck - not only do you need to have a major emergency in the next two years, but it also has to coincide with you happening to both buy and sell at the worst possible time. And even then, it is not winning by much.

Thanks! What you're saying makes total sense.

Expenses. You want to be able to cover living costs . It doesn't really mean 6 months of how you currently spend, more the necessities (housing, food, etc, rather than going out, new clothes, etc)

That's what I thought. Thank you!

 

[tokkun]

Bond funds are terrible in after-tax accounts. After tax returns on dividends and sales of funds isn't that impressive

We're comparing cash and bonds, right? You have the exact same tax rates on the interest generated in a cash account as you do on bond dividends, so that's not really a disadvantage, right?

 

[RumblingRosco]

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[BumRush]

You know, my wife and I had saved based on 6 months of post-tax income, not expenses. It wasn't until your post that I looked into it further and realized conventional wisdom was for "expenses" not for "income" sooooo we're set for the damn world's greatest depression/economic crisis at this point.

We just quickly chatted and decided to just keep the money we have banked up rather than invest it, at least for now. We'll re-assess our overly-saved-savings situation from time-to-time though.

It's not a bad idea to keep that aside and invest future excess income instead. I'm a big proponent of 6 months of expenses in cash.