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About investing emergency fund in stocks

August 30th, 2014 at 02:39 am

This post is inspired by Snafu's question on my last blog entry. I posted this on a forum, but since I'm looking for arguments or possible scenarios that I am overlooking where this can be a problem, I also wanted to share it here and get your thoughts:

Investing emergency fund is a big no-no according to all financial advisers out there.

But is it really best advice for everyone?

The recommended wisdom is 3-6 month of expenses, in a super safe place like FDIC insured accounts, earning effectively nothing.

Dave Ramsey says "Emergency Fund is insurance, not investment."
Lets examine the cost of that insurance.
Say I have 80K emergency fund. (8K per month expenses). Losing 5% to inflation a year (I know official number is 2-3%, but it excludes many things we actually consume, like food(especially organic) and fuel, and other items). So that's $4,000 a year. Assuming, conservatively, that you can make 6% per year average in the market, that's another 4,800 it is costing you to have that as insurance. So overall, $8,800 per year for 80K of insurance. That is one expensive insurance! In comparison, it costs about 1/10th of that to buy 1 Million dollars of life insurance.

The argument is " what if at the same time you lose your job or need the money, the market happens to be tanking 40%, like at the height of the financial crisis? "

My strategy is to balance that risk by having 10 months of invested take home pay instead of 6 months of savings sitting in a savings account.. That way, on the unlikely chance of this convergence of bad luck, I still would have that 6 months to fall back on. And in the meantime, that money is utilized.

I am not a good saver, and most of the savings in our 10 month EF came from growth. I would not have that money to begin with if I was not investing. I think I would at best still have 3 month only.

This year, our EF increased by 23K YTD and is finally at 10 month of take-home pay. Only about 4-5K of this 23K came from new savings. The rest was growth and some trading. So assuming the worst case scenario of a 40% drop, overall, I would still be ahead of where I would be if I followed conventional wisdom of "no risk is allowed for Emergency Fund".

When the market goes down, and the balance of my accounts goes down, I try to add new money to keep it at the same level. [/b] That forces me to invest when market is going down, not when it is going up, which is a good long term strategy.[/b] And when it recovers, my fund grows.

There are other personal circumstances that contribute to this decision: we could cash flow minor emergencies such as car repairs or small medical bills, our jobs are very stable, we have 1-2 months of annual leave banked at any given time, and a little bit of cash in accounts. So we won't need to access that money unless the emergency is major.

"The Pipe Dream Challenge" part 1 - paying off our car

August 28th, 2014 at 09:46 pm

Instead of a $20 challenge, I now have a challenge of saving for our NYC expenses that would remain even if we lived someplace else for 1 year. Obligations and things that would need to be supported even if we did not live here.

After looking at a table below and seeing the total, you can understand why I named it "The pipe dream challenge." The amount is kind of unrealistic.

We may not choose to do it at the end, and so something else with it, but it would be great to have that money and to be able to have that choice.

It will take us a while to get there. I am starting fresh from 0, and money that are currently in our EF investments are not counted.

This month I was able to put away $1,800 towards the challenge (it cost us less to vacation in China than to live normally here). So I checked off my first item - Mortgage for 1 month! Yey. It is a big one.

Second column is car payment. 12 payments would be $3,000. But considering that the balance we owe on this car is now $4,050, I think we should just concentrate on paying it off totally and removing it from that chart altogether. It would be great to pay it off before the end of the year.

There might be steps backwards in this plan. For example, our EF is fully invested in stocks. (currently 10 month of our take-home salary). If market adjusts, we will be adding money to the EF in order to keep it at the same level.

Vacationing is cheaper than staying at home.

August 22nd, 2014 at 07:04 pm

That is how this worked out. (Of course, we paid for our flights and hotel rooms months before we left), so this was food, local travel, incidentals.

At the end of it all, we are left with surplus, which is not what happens when we stay at home.

Food was a lot cheaper in China and Singapore. We ate better, and we did have few very high end local experiences (as in $100 per dinner, which in those places can get you a really really nice dinner in a very gorgeous restaurant with impeccable service, much more than you can get for that price in NYC).

Plus we did not need to pay for our NYC commutes, including massive tolls, and did not need to buy groceries.

It is amazing to come back from a vacation with more money than you had before you left.

On the expat pipe dream front... In order for us to live abroad for 1 year, for example in Singapore, we would need.

1) get a job to pay for life there. Doable, for DH, his field is hot and he is in the "expert" category.

2) Get a leave of absence from both of our jobs.
Hard, but not impossible.

3) Have enough money to re-integrate. Check. We currently got to the 10 month emergency fund (10 months of current take home pay in investments).

4). Pay our US obligation that will still be there.
Even if we go away we will have to pay our

Mortgage (12 months) $21,770
Maintenance (12 months) $16,800
Life insurance me (yearly) $360
Life insurance DH (yearly) $958
Car payments (12) $3,000
Student loan payments (12) $1,692

Total $44,580

That is a lot to save "extra". Not sure how rational this whole thing is, but, if we want it, it is again, hard, but not impossible.

So, for now, I need to work on savings. Later on, we can decide if we want to take that leap or not. But, if we have the money, it will be our choice to make.
If we don't, there won't be a choice.

Work developments

August 19th, 2014 at 09:10 pm

For both DH and me, both last minute and all in one day.

For DH, he will teach another course on the side this semester (as in less than 2 weeks).

For me, I accepted a temporary lateral move. Not sure if it is a good idea (my current boss/team is better). But it is exposure of another sort, and opportunity to work with other people. No promotion potential there, but it is more prominent in some ways. (not really, it is complicated)

They won't be so flexible with my schedule, and I get a feeling that my boss is stressed out by this change but released me as he thinks it is best for me. Plus, I will need work on two fronts for a while, as they will need the support while our unit is short staffed. So much more work, and for no good reason.

And, for 2 weeks I have to do daily sitreps for a higher up colleague from another section who is away on leave. This task takes me solidly half a day. I really don't know how I will manage all this.

So next three months will be hard for both of us.

Back home after 40 days of vacation.

August 16th, 2014 at 08:12 pm

I intended to post while on vacation, but somehow could not find the time. I will post some photos/observations in the coming few weeks.

Monday will be my first day back at work. Exactly 40 days since I last went into the office. Wow. I'm a little scared to go back now.

The trip was awesome. Shanghai, Nanjing, Xi'an, Chengdu, Hong Kong and Singapore.
Lots of food, experiences, time alone with DH...

Financially we did well. In spite of doing a lot of luxury stuff, we managed to not only cash flow it, but will end up with a non-typical surplus at the end of the month, which we will add to investments.

I also got expat fever again. I would not mind moving to Singapore for a year or two. However, US expenses we would still have are pretty large- our co-op mortgage, maintenance, life insurance, student loans... this would need to be well planned out in order to pull this off. So for now, what we can do is save more aggressively, and see what we can do later.