More dumb questions from me (Emergency Funds, where to put them)

[TheMetetron]

What is the generally accepted amount to be kept in emergency funds available for immediate access? Up until now I've just been keeping about $10k in my Emigrant Direct account + $10k or so spread across my checking accounts. This can't be correct, however.

1) Should my emergency funds be equal to my average salary times X number of months or my average expenses times X number of months?

2) How many months should X be?

3) Which choice makes the most sense of the following:

- 4.00% APY Electric Orange Account
- 5.05% APY Emigrant Direct Savings Account
- 3.87% Compound Yield Vanguard Tax-Exempt Money Market
- 5.16% Compound Yield Vanguard Federal Money Market
- Vanguard Short-Term Tax-Exempt Bond Fund (Current Yield 3.59%, average return 4.74% since inception in 1977)
- Vanguard Short-Term Treasury Bond Fund (Current Yield 4.59%, average return 5.32% since 1991)
- Vanguard Intermediate-Term Tax-Exempt Bond Fund (Current Yield 3.77%, average return 5.92% since 1977)
- Vanguard Intermediate-Term Treasury Bond Fund (Current Yield 4.51%, average return 6.80% since 1991)

4) Is there any reason to get involved with the bonds instead of just sticking the money in a money market fund?


I will probably just put this money in one time and assume it will last as emergency funds for the rest of my life (or until an emergency happens) or until I get married, have kids, or some other life situation occurs which would require more emergency funds. In that case, I'd just add more money into the fund.

Obviously, the fund needs to keep place with inflation at the very minimum. The problem is I know very little about how bonds and money-markets have historically had their returns. I can almost immediately throw out the Emigrant Direct account and the Electric Orange account, as well as the federal money market account. The Tax-Exempt Money Market Fund is a better deal since my tax bracket is 33%. The tax-exempt bond funds offer equal tax savings that make them better choices than their taxable counterparts.

So really, the choice narrows down to the following three options:

- 3.87% Compound Yield Vanguard Tax-Exempt Money Market
- Vanguard Short-Term Treasury Bond Fund
- Vanguard Intermediate-Term Tax-Exempt Bond Fund

Looking at the past performance of the tax-exempt intermediate term it doesn't look like it has ever really lost more than even 2% in a quarter, which is completely acceptable. I'm willing to accept up to 10% loss per year in an emergency fund. How good of an indicator is the past performance average return of the future 30 years? Seems like if the risk of an intermediate-term bond is acceptable, then I shouldn't even bother with the short-term bond.

I guess either the Money Market Account or the Intermediate-Term Bond Fund beat inflation at their current yields. Lifetime, the tax-exempt money market is returning 3.92% vs 5.92% for the inter-term bond fund.

Is there any compelling reason not to choose the bond fond that I have overlooked? Short-term variance is fine, but obviously losing 50% of its value isn't. And while both will beat inflation, having the money grow over time is always preferable to just barely beating inflation.

Also, I'd prefer an answer to questions 1 & 2, even though question 3 seems to have taken up the bulk of the post. Personally, I feel that 6-12 months of highest possible living expenses is fine. In my case this would probably be $25,000-$50,000 (assuming $4k per month) though I obviously feel I can live on less. For 2007, I spend under $2,000/mo while I'm in Argentina, but after traveling, presents, etc I will spend about $40,000 this year. If we go by my salary, I need a crap load in emergency funds and that just doesn't seem right.


My answer to all of this:

1) I should put $50,000 into an emergency funds account 100% invested in the Vanguard Inter-Term Tax-Exempt Bond Fund.

2) I should invest the money I will be using to pay taxes into the Vanguard Tax-Exempt Money Market.

3) I should keep $10k in my Emigrant account to get my rewards $$$.

4) I should keep around $5k-$10k spread between various checking accounts for purchases that could possibly be made in 1-2 months.

5) The rest of my money should first go into my SEP-IRA until that is maxed out, then the rest into my Tax-Managed Vanguard Funds.

Look good? I think I've made the last financial/investing post I'm going to have for a while (I hope).

[IdealFugacity]

6 months salary in VMMXXX (Prime money market fund) works too.

basically 6 months salary anywhere stable won't do you wrong.

[TheMetetron]

[ QUOTE ]
6 months salary in VMMXXX (Prime money market fund) works too.

basically 6 months salary anywhere stable won't do you wrong.

[/ QUOTE ]

6 months salary????

I make almost 10x as much as I spend. Does that still apply?

Also, how stable are bond funds?

[wdcbooks]

I would avoid the bond funds for your emergency savings. I just don't see you getting enough (if any) additional yield from the minor increased risk. Given your tax bracket I think the tax-exempt money market makes the most sense, and will continue to do so. Depending on your state you might see if they offer an Federal and State tax free bond fund, which could be a good alternative.

The emergency fund question is a lot harder to answer. I am finding that the old metrics for figuring this out don't make a lot of sense any more. The traditional answer would be six months of expenses. I thought about that for my wife and I though and realized that with good credit and a stable dual income we didn't need that much. We had credit cards and a HELOC to back us if necessary. Someone without as many credit alternatives and with a less stable source of income might need more than six months. I would think about the types of emergencies that could occur and write down how much you would need. That should help you come to a number, but there is no magic number that is 'right'.

[gull]

Rule of thumb is six months living expenses, often in a tax-exempt money market account.

(I personally don't agree with blindly following arbitrary rules of thumb, but I don't have a better formula. I don't have an emergency fund of my own. I am comfortable selling long-term investments in case of emergency. It would suck if I have to withdraw right after a 50% market crash, but that's a risk I am willing to take. My approach may be wrong, but my sense is that people are incorrect to compartmentalize their wealth when thinking about money needs.)

[TheMetetron]

Agreed, to an extent. I think I'll just go with the intermediate-term bonds which should offer some more growth than the money market accounts with only slightly more risk. I'm comfortable with that.

[wdcbooks]

I think that would actually be fine, but I think that given your tax bracket you are clearly better off with one of the tax exempt choices.

[TheMetetron]

[ QUOTE ]
I think that would actually be fine, but I think that given your tax bracket you are clearly better off with one of the tax exempt choices.

[/ QUOTE ]

Yeah I meant the tax-exempt intermediate-term bonds.

I can handle small swings for emergency funds, but I cry when I cut EV for no reason even if it is only on $25-50k.

I will still keep money I need to pay taxes with in the tax-exempt money market account.

[IdealFugacity]

I'm sorry I definitely meant six months EXPENSES! Not Salary! Whoa total brain fart, I apologize!

[Big Boiler Dawg]

I currently have my EF at Emigrant Direct (only about 1.5 months of expenses). I'm thinking about moving it to FNBO Direct, savings curently offering 6% APR.

www.fnbodirect.com/

I've applied, waiting for the micro-deposits to hit my checking account.