emergency fund and cash

Discussion of the Cash portion of the Permanent Portfolio

Moderator: Global Moderator

Post Reply
happyspec
Associate Member
Associate Member
Posts: 31
Joined: Wed Jun 12, 2013 4:43 pm

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  :)
We often underestimate what we can reach in the long term.
User avatar
smurff
Executive Member
Executive Member
Posts: 978
Joined: Mon Aug 16, 2010 2:17 am

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.
User avatar
Xan
Administrator
Administrator
Posts: 4144
Joined: Tue Mar 13, 2012 1:51 pm

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.
User avatar
l82start
Global Moderator
Global Moderator
Posts: 1291
Joined: Sun Apr 25, 2010 9:51 pm

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.. 
 
-Government 2020+ - a BANANA REPUBLIC - if you can keep it

-Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence
User avatar
smurff
Executive Member
Executive Member
Posts: 978
Joined: Mon Aug 16, 2010 2:17 am

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. 
User avatar
Xan
Administrator
Administrator
Posts: 4144
Joined: Tue Mar 13, 2012 1:51 pm

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.
User avatar
l82start
Global Moderator
Global Moderator
Posts: 1291
Joined: Sun Apr 25, 2010 9:51 pm

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....
-Government 2020+ - a BANANA REPUBLIC - if you can keep it

-Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence
User avatar
Xan
Administrator
Administrator
Posts: 4144
Joined: Tue Mar 13, 2012 1:51 pm

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.
User avatar
l82start
Global Moderator
Global Moderator
Posts: 1291
Joined: Sun Apr 25, 2010 9:51 pm

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"  :(
-Government 2020+ - a BANANA REPUBLIC - if you can keep it

-Belief is the death of intelligence. As soon as one believes a doctrine of any sort, or assumes certitude, one stops thinking about that aspect of existence
User avatar
KevinW
Executive Member
Executive Member
Posts: 945
Joined: Sun May 02, 2010 11:01 pm

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.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

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.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: emergency fund and cash

Post by buddtholomew » Fri Aug 23, 2013 11:36 am

"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."

I now realize that conservative investments outside of the PP could introduce more risk to the overall portfolio than simply diversifying into the HBPP. As mentioned recently, the investment earmarked for an emergency (IT-TE Municipal Bonds) has been liquidated with the proceeds reinvested into the 4x25 allocation. I do however maintain some additional cash to purchase lagging assets when a re-balancing band is breached as these funds are held in a taxable account and minimizing taxes is a priority.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
User avatar
sophie
Executive Member
Executive Member
Posts: 1902
Joined: Mon Apr 23, 2012 7:15 pm

Re: emergency fund and cash

Post by sophie » Fri Aug 23, 2013 7:08 pm

Juergen wrote: 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  :)
Getting back to the second part of your question....

If all the volatile assets are down, then the cash allocation will have increased relative to the entire portfolio.  Thus, it's unlikely you'll see cash dropping below 15% after a withdrawal.  See the following thread for backtests regarding portfolio performance during a "withdrawal" phase:

http://gyroscopicinvesting.com/forum/ot ... or-a-myth/

UNLESS, of course, your withdrawal constitutes a large portion of the cash allocation.  The problem would be compounded if part of your cash allocation is in tax-deferred accounts and difficult to access.  For this reason, it's probably better to keep your emergency fund separate from the PP until your PP has grown sufficiently large.

I'm wrestling with this very issue myself.  It's compounded by the fact that rebalancing might call for savings account cash to be used to buy gold, since cash in tax-advantaged accounts may only be able to buy stocks and bonds.  Thus, how about this for a rule of thumb:

Keep the e-fund separate until the taxable portion of the PP has built up to at least twice the amount needed for a generous emergency fund.  Note that "taxable portion of the PP" excludes savings for 529 accounts, new car, house down payment, etc.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
frugal
Executive Member
Executive Member
Posts: 930
Joined: Sat Nov 10, 2012 12:49 pm

Re: emergency fund and cash

Post by frugal » Sat Aug 24, 2013 3:58 am

WHAT % of our savings shall we have at home for emergency?

1% hidden at home ?


Regards
Live healthy, live actively and live life!
gizmo_rat
Executive Member
Executive Member
Posts: 302
Joined: Mon Jan 17, 2011 5:25 am

Re: emergency fund and cash

Post by gizmo_rat » Sat Aug 24, 2013 4:30 am

frugal wrote: WHAT % of our savings shall we have at home for emergency?
1 months expenses is a popular choice, but check your home contents insurance for it's coverage of cash in the home.
User avatar
smurff
Executive Member
Executive Member
Posts: 978
Joined: Mon Aug 16, 2010 2:17 am

Re: emergency fund and cash

Post by smurff » Sun Oct 13, 2013 4:08 pm

Here's an interesting take on where you should put you emergency fund--in stocks:

https://www.betterment.com/blog/2013/08 ... -is-wrong/

The (moderated) comments are as interesting as the blog article.  And this topic seems to have gotten the most comments of any I've seen there.

A lot depends on one's definition of emergency.  I found it interesting when one of the bloggers said IHO repairs for a busted transmission do not constitute an emergency.  That response must have something to do with the company being HQ in a region (NYC) fertile with an egalitarian mass transit infrastructure of subways, suburban trains, light rail, buses, coaches, and shuttles for getting around.

BTW, Betterment is a new, set-it-and-forget-it online investment/advisory service with automated asset allocations and investment schedules based on customers specific goals.  The computer algorithms do all the work.  I don't know anymore about them (not a customer) but what I read on their website.  Their fees seem to average about 0.25% annually, and they seem to have a couple of  family office divisions as their advisors and startup investors.
User avatar
sophie
Executive Member
Executive Member
Posts: 1902
Joined: Mon Apr 23, 2012 7:15 pm

Re: emergency fund and cash

Post by sophie » Tue Oct 15, 2013 2:35 pm

There is an entry in the Boglehead wiki about using stocks in taxable as an emergency fund:

http://www.bogleheads.org/wiki/Placing_ ... ed_account

It works by keeping an equal amount of cash in a retirement account.  If you need money, you can sell stocks in taxable, and buy an equal amount in the retirement account with the cash you have saved in there.  It's purely to take advantage of favorable tax treatment of stocks, including tax loss harvesting, but it doesn't make a whole lot of sense with the current low interest rates.

Outside of an arrangement like this, the suggestion to keep emergency funds in stocks is totally irresponsible.  It would be a disaster in a recession, and certainly would have been in 2008-2009.  One more reason to steer clear of "services" like Betterment.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
User avatar
smurff
Executive Member
Executive Member
Posts: 978
Joined: Mon Aug 16, 2010 2:17 am

Re: emergency fund and cash

Post by smurff » Tue Oct 15, 2013 4:57 pm

Sophie and Rye, the folks at Betterment seem a bit smug and naive.  Apparently they have not lived through many recent stock market corrections, otherwise I can't see how they can give such advice.  It was just in 1998 that a bunch of algorithm geniuses at Long Term Capital nearly imploded the world's economies, and proved that even Nobel Prize-winning economists can't think of every contingency.

It's a good point you made, Rye, about emergency funds which (by intent, use, and necessity) are made of money you CAN afford to lose.  That would disqualify them from being in the Permanent Portfolio.
User avatar
mortalpawn
Full Member
Full Member
Posts: 91
Joined: Tue Aug 13, 2013 11:06 pm

Re: emergency fund and cash

Post by mortalpawn » Wed Oct 16, 2013 11:25 pm

I think it depends on the size of your taxable portfolio.  If you have a small taxable portfolio, then having a separate emergency cash fund is probably more appropriate to avoid having to constantly rebalance, which can have bad tax implications in a taxable PP.  Also if your portfolio is small, you are more susceptible to needing that emergency fund (at least in my experience!).

However, as your portfolio gets larger and the emergency fund becomes a smaller percentage of the total, then it probably matters a lot less as the loss of some emergency funds to handle life's unexpected moments is much less likely to trigger a rebalance event or subsequent tax bill. 

Also I've found as the portfolio size (and income) goes up, the emergency fund gets dipped into less anyways because you have more money in your monthly budget to absorb life's unexpected events.

The key, as always, is to grow your income faster than you grow your spending!
Post Reply