emergency fund and cash

Discussion of the Cash portion of the Permanent Portfolio

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happyspec
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emergency fund and cash

Post by happyspec » Wed Jun 19, 2013 9:09 am

I just wanted to get something clear in my mind: Is the money I saved as an emergency fund (say the living expenses for one year) part of the cash portion of the PP? If so, any withdrawal in a case of emergency would mean that one could be forced to sell assets like stocks and gold even if there are in the red when the cash portion drops below 15%. Is this correct? And if so, wouldn't it be better to keep the emergency fund outside of the PP? appreciate eery answer  :)
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TennPaGa
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Re: emergency fund and cash

Post by TennPaGa » Wed Jun 19, 2013 9:43 am

Some good responses in this thread:

Separate Emergency Fund?
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Re: emergency fund and cash

Post by smurff » Fri Jun 21, 2013 4:50 pm

Years ago, what we now call "emergency funds" used to be simply known as "savings."  I guess that term was not specific enough, hence the new term.

Initially I considered emergency funds to be a completely separate stash from the permanent portfolio, then I said, okay, let the cash portion be the emergency fund.  Now, I'm back to where I started:  keep the emergency fund separate and don't comingle.

People define "emergency" differently, based on their own past experiences and current situation. (I'm talking about emergencies that affect your money.)  For some people, having to cough up $500 to pay the deductible on a car repair after a covered fender-bender is an emergency; for others in different circumstances, that's something to be paid out of a generous monthly budget, traded, perhaps, for a few evening's entertainment that month.  Some people's definition of emergency is so fluid that it can include having to cough up $500 they forgot to allow in their calculations, to cover tips on a cruise.  Then there's bail for the brother-in-law or ex-husband's uncle. (Whose emergency it belongs to is also something to consider.)  Other people limit their definition of "emergency" to things that directly impact life and death of themselves and their immediate dependents.  Losing a job may or may not be an emergency, depending how much unemployment and severance you get, the jobs economy--meaning a new job sooner rather than later is a possibility, if your children are toddlers or adults, whether your mortgage and car are paid off, whether you have a spouse who is doing paid work, etc.  As you can see, it's all over the map, and all of these examples of emergencies can be rationalized into or out of validity.  Your permanent portfolio, however, needs more certainty than this.

Harry Browne spoke often about the difference between "investments" and "speculations."  An investment is long term, covering many years, if not  decades.  The PP is an investment. 

A speculation can last seconds, or it can last years.  The VP, if you choose to have one, is for speculation.

There is another category, however, called "savings."  We don't often talk about savings--maybe we should, considering the angst in this forum over recent market corrections, and the confusion about Harry Browne's stated criterion for inclusion in the PP, "money you cannot afford to lose."

He was speaking from an investment standpoint when describing money you cannot afford to lose, not a savings standpoint.  "Lose," in an investor's case, means the the real value of the asset declines substantially or even evaporates over a long period of time, for whatever reason.  Savings, however, are generally not intended for investment and are not part of a portfolio.  Savings are to cover the day to day activities of life, including unforseen events.  Emergencies are unforseen events that are a part of life.  Emergencies are not part of the permanent portfolio (except for end of world situations that are underway).  Emergency funds, therefore, don't belong in the permanent portfolio, they belong in savings--where you can get to them in an emergency.
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Re: emergency fund and cash

Post by Xan » Fri Jun 21, 2013 5:46 pm

For what it's worth, I don't see any problem with having the cash portion of the portfolio serve as the emergency fund.
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l82start
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Re: emergency fund and cash

Post by l82start » Sat Jun 22, 2013 9:59 am

its a bit of a paradox if your portfolio is small then combining is the most necessary/sensible, but doing so may make you more susceptible to the OP's concerns.. if your portfolio is larger then combining becomes less necessary but the risk involved with having them combined decreases as well..

for what its worth, i count emergency cash as PP cash and just hope for the best, i often find my contributions end up replacing cash used for unexpected extra expenses.. 
 
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Re: emergency fund and cash

Post by smurff » Sat Jun 22, 2013 11:44 am

Xan and 182start, keeping permanent portfolio cash as emergency fund may be good to do at an early stage of the PP, and at the retirement phases. 

I remembered one of the things Harry Browne said about the permanent portfolio and the variable portfolio:  Investment funds went uni-directional (in) for the PP, whereas the VP was designed to be multi-directional (in, out, status quo).  Funds  could go from the VP to the PP, but not from PP to VP.  With that, it seemed clear that the PP was intended for funds that were to remain for the long term, something close to your working/laboring life plus however long you have in retirement.

With a definition of "emergency" that includes critical but ordinary events for which funds could have been, but were not, set aside ("My car needs a new battery!" or, "Those raccoons are coming in through a hole in the roof!" etc.), it's likely that the person will be dipping into the permanent portfolio quite often to meet such emergencies. 

If an investor uses the definition of "emergency" as akin to life vs. death events for themselves and the people they are responsible for, then yes, I can see having a portion of the emergency fund in the PP.  With a life/death definition, it's not likely that funds will go out of it often.  (Generally speaking, the consequences to your family of your own death, should be covered by term life, whole life,  or a combination of term and whole life insurance.)

The problem with having all the emergency fund in the PP cash is that emergencies have an uncanny way of happening during holidays, weekends, and at night, when brokerage firms, banks, and coin dealers are closed.

If one uses the definition of "emergency" to include events that could have been planned for but were not (for whatever reason--including being new at saving/investing and therefore not having lots of funds), then it might be useful to set aside a small savings account and/or home stash outside the PP for the unplanned, everyday but important events, and reserve PP cash that might be used as an emergency fund for life-shattering emergencies. 
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Xan
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Re: emergency fund and cash

Post by Xan » Sat Jun 22, 2013 12:00 pm

It's a good idea to keep some currency at home for emergencies when banks are closed, etc.  I wouldn't consider that part of the PP, mostly because it can't earn interest.

My income varies month-to-month.  I keep a savings account which I consider a part of (not all) the cash portion of the PP.  I regularly dip into that savings account to make ends meet one month, fill it back up and then some the next month, etc.

I keep track of what the amount "should" be for rebalancing purposes.  But I do use this part of the PP cash as a sort of buffer.

I see your point about the PP being unidirectional, but I see the cash portion of the PP as the gateway to the rest of the world.  I have some flexibility with how I handle that.  Perhaps this is only true when cash is earning approximately zero...  But for now at least, that's the case.

Of course it really comes down to what each investor is comfortable with.
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l82start
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Re: emergency fund and cash

Post by l82start » Sat Jun 22, 2013 12:14 pm

  i consider my pp cash emergency cash due to the "not having lots of funds" problem, but that emergency cash is also separated into big emergency's 'life and death events" held in the portfolio with a broker which i thankful haven't needed, and savings (small emergency's) for unexpected but more mundane events like dental emergency's, held in a savings account,  as the portfolio grows savings can be counted separate from the pp and from emergency funds, and ultimately (hopefully) it will grow to the point where how it gets counted becomes insignificant because the value of a 1 year emergency fund will be such a small percentage of the 25% cash position.

as much as i hate making withdraws for "life happens" and then using contributions to replace them, i don't see a much better option than this for accounting....
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Re: emergency fund and cash

Post by Xan » Sat Jun 22, 2013 12:32 pm

l82start wrote:as much as i hate making withdraws for "life happens" and then using contributions to replace them, i don't see a much better option than this for accounting....
That does sound ugly.  When I "pay myself back", I don't consider that to be a contribution.  I contribute to the PP, x% of income, completely separately from the borrowing-and-paying-back cycle.
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l82start
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Re: emergency fund and cash

Post by l82start » Sat Jun 22, 2013 1:02 pm

from a linguistic or accounting perspective you are correct! they aren't contributions until they go over the amount taken out...
i suppose i technically view them as "would have been contributions"  :(
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Re: emergency fund and cash

Post by KevinW » Sat Jun 22, 2013 3:16 pm

The thing is, if push really came to shove and you were in a life-or-death situation, and had used up all of your designated emergency fund, and all you had left were your non-emergency portfolio, you'd spend down the portfolio even though it wasn't designated "emergency fund." So really all of your assets are part of one big pool of wealth. You can say that only a small part is reserved for emergencies, but really all of it is potentially available for catastrophic emergencies. So I think one might as well put all their liquid wealth into one portfolio system, which is what the PP and its cash component does.
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Re: emergency fund and cash

Post by buddtholomew » Sat Jun 22, 2013 5:46 pm

KevinW wrote: The thing is, if push really came to shove and you were in a life-or-death situation, and had used up all of your designated emergency fund, and all you had left were your non-emergency portfolio, you'd spend down the portfolio even though it wasn't designated "emergency fund." So really all of your assets are part of one big pool of wealth. You can say that only a small part is reserved for emergencies, but really all of it is potentially available for catastrophic emergencies. So I think one might as well put all their liquid wealth into one portfolio system, which is what the PP and its cash component does.
If you include the emergency fund in the cash portion of the PP and are required to re-balance into the other assets, then you run the risk of reducing your cash position below the amount earmarked for emergencies. I keep a separate EF in IT-TE municipals and would draw down PP cash (non-taxable event) in the event of an emergency and replace with the bonds dollar for dollar. That way I know how much I have at risk in the portfolio at all times and don't mentally have to carve out what is EF or PP cash.

This approach could be considered counter-productive as the bonds may end up being more risky than having all of the funds invested in the PP portfolio.
Last edited by buddtholomew on Sat Jun 22, 2013 5:51 pm, edited 1 time in total.
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