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Message
Moving emergency fund into investments with big life changes expected this year
Posted on 10/13/14 at 10:17 pm
Posted on 10/13/14 at 10:17 pm
All, I have mostly lurked on MT for a while now, and have taken the time to read through most of the stickied threads for beginners. Also I have a subscription to AAII.com, and have read through most of the Investor "Classroom" articles. While I have a good idea about what I want to do, I'm feeling nervous about pulling the trigger.
After starting our careers and buying a house in 2012, my wife and I got serious about building up our emergency fund in a bank savings account. During this time our only other method of saving was through a Simple IRA with a 3% company match.
While I now have an amount that I feel comfortable investing, I feel like our current situation may be too volatile to do too much at once. Our first child is due around Thanksgiving, and I may have to use a portion of that money to cover my wife's leave. I also plan to look for a better position with another company next summer, and I'll likely need cash to be able to handle moving expenses or for a new home.
While I realize that I'm losing money to inflation by not gaining real interest, I feel like perhaps I am still at a point that I need to stay liquid. Am I being overly cautious, or is there a better vehicle for saving my money without handcuffing me?
After starting our careers and buying a house in 2012, my wife and I got serious about building up our emergency fund in a bank savings account. During this time our only other method of saving was through a Simple IRA with a 3% company match.
While I now have an amount that I feel comfortable investing, I feel like our current situation may be too volatile to do too much at once. Our first child is due around Thanksgiving, and I may have to use a portion of that money to cover my wife's leave. I also plan to look for a better position with another company next summer, and I'll likely need cash to be able to handle moving expenses or for a new home.
While I realize that I'm losing money to inflation by not gaining real interest, I feel like perhaps I am still at a point that I need to stay liquid. Am I being overly cautious, or is there a better vehicle for saving my money without handcuffing me?
Posted on 10/14/14 at 3:02 am to Bmath
You should still do it, but you should do it in a staggered fashion. The key to using an invested emergency fund is for it to be in a highly balanced fund, and to DCA it.
The advantage of DCA, other than the obvious, that that the main principal of using an investment as an emergency fund is the assumption that even in the worst case scenario, you didn't lose your principal. And that takes time to gather the earnings to have that cushion.
So I would incrementally add up to ~20% of your emergency fund in investments....and once your life situation stablizes, slowly increase your allotment.
The advantage of DCA, other than the obvious, that that the main principal of using an investment as an emergency fund is the assumption that even in the worst case scenario, you didn't lose your principal. And that takes time to gather the earnings to have that cushion.
So I would incrementally add up to ~20% of your emergency fund in investments....and once your life situation stablizes, slowly increase your allotment.
Posted on 10/14/14 at 5:49 am to Bmath
Although you definitely need a way to raise cash in a hurry, a savings account isn't as good as a Roth IRA. With the Roth you can pull out whatever you put in with no penalty, just like with the savings account. The difference is that the Roth gives you tax-free earnings.
This won't matter much in the short term while you're focused on investing with an eye to preserving principal, but down the road when your situation is more settled and you can seek better returns this can matter. Since there's an annual contribution limit (and a AGI limit too) it's best to get the money in the Roth while you can.
This won't matter much in the short term while you're focused on investing with an eye to preserving principal, but down the road when your situation is more settled and you can seek better returns this can matter. Since there's an annual contribution limit (and a AGI limit too) it's best to get the money in the Roth while you can.
Posted on 10/14/14 at 8:28 am to foshizzle
The question I have about the Roth is how does the simple IRA I have through work affect my contribution limit? Are the caps considered seperate since they are different IRA types? One of my co-workers raised this concern, but I have never gotten a straight answer. He did suggest simply opening the account in my wife's name to avoid that potential complication.
Also, let's say tonight I start a Roth with the max dollar amount. Tomorrow I have an emergency and need to pull out $1000 of the contributions. Can I add back that $1000 before the end of the fiscal year, or am I limited because I already met the max dollar amount once?
Also, let's say tonight I start a Roth with the max dollar amount. Tomorrow I have an emergency and need to pull out $1000 of the contributions. Can I add back that $1000 before the end of the fiscal year, or am I limited because I already met the max dollar amount once?
Posted on 10/14/14 at 10:48 am to Bmath
As I understand it, contributions only become "locked in" on Apiril 15. You can withdraw that years contributions and reinvest it to your heart's content.
Posted on 10/14/14 at 10:51 am to Bmath
There will be plenty here who will disagree with this, but any additional money that you think that you need in the next 5 years should not be in stocks or long term bonds.
Posted on 10/14/14 at 11:28 am to Volvagia
What about this distribution:
Hold $10k cash for unforeseen baby costs, and to help with potential costs if I change jobs next year.
Start a Roth with a full $5500 buy in.
Put $3000 in individual blue chip drip stocks.
Hold $10k cash for unforeseen baby costs, and to help with potential costs if I change jobs next year.
Start a Roth with a full $5500 buy in.
Put $3000 in individual blue chip drip stocks.
Posted on 10/14/14 at 12:44 pm to Bmath
quote:
Start a Roth with a full $5500 buy in.
I would highly suggest not to do this. It's best to buy in over the course of a year or even weekly. For example, currently I put in about $110 four times a month. This way you catch more of the market than just putting in a chunk at one time and the market take a hit.
Posted on 10/14/14 at 1:22 pm to Throbinhood
I guess this would be an example of DCA?
I've been pretty sold on Vanguard, so perhaps just put in the initial $3,000, and spread out the remaining $2500 until April?
I've been pretty sold on Vanguard, so perhaps just put in the initial $3,000, and spread out the remaining $2500 until April?
Posted on 10/14/14 at 1:38 pm to Bmath
Correct, that sounds like a much better plan, especially since you are starting late in the year which I didn't figure into before, putting in $3000 now and contribute the additional $2500 by April 15th
$10,000 set aside seams like enough. Remember most hospitals won't make you pay a huge $8000 bill right away. I know several people who had big hospital bills (children in NICU after birth) and waited several months (paid like $50 a month) than called the hospital and settled for sometimes half their original bill. They will work with you for sure, they would rather most of the money at one time in bulk than wait for you to pay a tons of $30 bills
$10,000 set aside seams like enough. Remember most hospitals won't make you pay a huge $8000 bill right away. I know several people who had big hospital bills (children in NICU after birth) and waited several months (paid like $50 a month) than called the hospital and settled for sometimes half their original bill. They will work with you for sure, they would rather most of the money at one time in bulk than wait for you to pay a tons of $30 bills
Posted on 10/14/14 at 2:51 pm to Throbinhood
quote:
Remember most hospitals won't make you pay a huge $8000 bill right away.
My wife's doctor offered us a pre birth payment plan. It should cover most everything, with exception of any complications or extra care needed.
I'm more worried about adjusting my monthly spending to now include health insurance and baby stuff. Kids are crazy expensive...
I appreciate your input. Everyone has been really helpful.
Posted on 10/14/14 at 4:12 pm to foshizzle
quote:
Although you definitely need a way to raise cash in a hurry, a savings account isn't as good as a Roth IRA. With the Roth you can pull out whatever you put in with no penalty, just like with the savings account. The difference is that the Roth gives you tax-free earnings.
Or, in a market like we are currently in, tax free losses.
In my opinion, emergency funds should be:
-liquid, meaning the money can be withdrawn (transferred) same day
-should never have the ability to lose value (aside from inflation)
-enough to cover 4-6 months of living expenses.
Posted on 10/14/14 at 5:06 pm to Bmath
quote:
Tomorrow I have an emergency and need to pull out $1000 of the contributions. Can I add back that $1000 before the end of the fiscal year
Yes. The annual limit is *net* contributions.
Posted on 10/14/14 at 11:27 pm to TigerDeBaiter
quote:
-enough to cover 4-6 months of living expenses.
This is where I am at. So essentially I should just keep that cash under my mattress, and start saving new earnings?
Why not just invest some of my money in lower risk blue chip stocks or mutual funds. Then keep enough cash for say two months, and have a credit card for back up if I need to make a payment while waiting for access to my money from the stocks? I'm not talking about then accruing interest on the card, but my card would just hold that balance until after the money gets wired over.
Posted on 10/15/14 at 12:44 am to Bmath
quote:
Put $3000 in individual blue chip drip stocks.
No.
For an emergency fund, you really want there to be some bond exposure. Furthermore, you wan't it to be highly diversified. "Blue chip drip stocks" aren't. Just because they are value stocks, that doesn't mean they will save you if you need them in a recession.
Full equities is a little too far up on the risk pole for something you might need at anytime.
I do the same thing you are looking to do....I don't like having a large nest egg sitting there doing very little. But don't get too greedy there.
If you are looking at Vanguard, STAR and Wellesley Income are good choices.
This post was edited on 10/15/14 at 12:48 am
Posted on 10/15/14 at 7:01 am to Bmath
That's certainly an reasonable option. And really it's up to you and you're risk tolerance. If you're comfortable with that, go for it.
My only point was that earnings seem to be assumed when people tout one vehicle vs another for an emergency fund. The market has been great the last 5 years, but who knows where it's headed?
My only point was that earnings seem to be assumed when people tout one vehicle vs another for an emergency fund. The market has been great the last 5 years, but who knows where it's headed?
Posted on 10/15/14 at 12:06 pm to TigerDeBaiter
Ultimately I'd like to diversify my holdings. Right now I'm just trying to read as much as possible while also directly seeking out advice. Friends and family have offered various tips, but everything that rings loud and clear is that I just need to get started.
I don't want to rush into anything at the moment, so perhaps I might start by putting a small amount of money in one vehicle. Once I get comfortable with it I can then put another chunk of money into something else.
I don't want to rush into anything at the moment, so perhaps I might start by putting a small amount of money in one vehicle. Once I get comfortable with it I can then put another chunk of money into something else.
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